FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2020


☐			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 every Interactive Data File required to be submitted 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 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 November 5, 2020, was 96,132,751.

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)	8
	Notes to the Unaudited Consolidated Financial Statements	9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	72

ITEM 4.	Controls and Procedures	72

PART II.	Other Information

ITEM 1.	Legal Proceedings	73

ITEM 1A.	Risk Factors	73

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73

ITEM 3.	Defaults Upon Senior Securities	73

ITEM 4.	Mine Safety Disclosures	73

ITEM 5.	Other Information	73

ITEM 6.	Exhibits	74

	Signatures	75

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)


	September 30, 2020		December 31, 2019

	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	97,060	$	102,346
Interest-bearing bank deposits	283,037		19,510
Securities available for sale, at fair value	908,236		902,292
Securities held to maturity, at amortized cost (Fair value of $276,988 and $338,718 at September 30, 2020 and December 31,2019, respectively)	268,638		337,123
Other investments	12,966		16,761
Loans held for sale	37,998		15,989
Loans:
Portfolio loans	6,949,716		6,189,148
Allowance for credit losses	(88,307)		(51,637)
Net loans	6,861,409		6,137,511
Premises and equipment, net(1)	128,041		137,268
Other real estate owned	1,079		2,228
Goodwill	303,328		303,328
Amortizing intangibles, net	14,095		16,366
Bank owned life insurance	224,660		220,723
Other assets	148,819		97,328
Total assets	$	9,289,366	$	8,308,773
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	2,301,821	$	1,690,247
Interest-bearing	5,402,086		4,987,368
Total deposits	7,703,907		6,677,615
Short-term borrowings	122,356		201,853
Subordinated debentures	170,572		170,450
Other long-term debt	56,424		56,917
Capital lease obligation	6,494		6,815
Total long-term debt	233,490		234,182
Other liabilities	156,782		139,458
Total liabilities	8,216,535		7,253,108
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 September 30, 2020 and December 31, 2019, and 96,924,781 and 98,311,840 shares outstanding at September 30, 2020 and December 31, 2019, respectively	113,915		113,915
Additional paid-in capital	494,682		493,737
Retained earnings	592,704		577,348
Accumulated other comprehensive income, net	19,111		5,579
Treasury stock (16,990,121 and 15,603,062 shares at September 30, 2020 and December 31, 2019, respectively)	(147,581)		(134,914)

Total shareholders’ equity	1,072,831		1,055,665
Total liabilities and shareholders’ equity	$	9,289,366	$	8,308,773

(1)September 30, 2020 balance includes $2.6 million in available for sale assets as a result of the branch consolidation initiative.

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				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	67,474	$	74,714	$	207,290	$	218,524
Interest and dividends on investments:
Taxable interest	5,598		6,995		19,064		22,871
Interest exempt from federal income taxes	268		398		850		1,231
Dividends	159		387		536		1,419
Interest on bank deposits	94		81		163		181
Total interest income	73,593		82,575		227,903		244,226
Interest Expense
Interest on deposits	4,621		9,846		18,756		27,298
Interest on short-term borrowings	35		1,620		670		8,075
Interest on subordinated debentures	2,146		2,232		6,434		6,930
Interest on other long-term debt	356		362		1,065		656
Interest on lease obligations	66		70		199		210

Total interest expense	7,224		14,130		27,124		43,169
Net Interest Income	66,369		68,445		200,779		201,057
Provision for credit losses	11,212		2,708		49,038		9,638
Net Interest Income after Provision for Credit Losses	55,157		65,737		151,741		191,419
Noninterest Income



Net securities gains	20		9		47		15
Trust income	2,554		2,325		6,774		6,221
Service charges on deposit accounts	4,035		4,954		12,066		13,792
Insurance and retail brokerage commissions	2,156		1,912		5,982		5,887
Income from bank owned life insurance	1,547		1,540		4,963		4,408
Gain on sale of mortgage loans	6,437		2,599		13,226		6,101
Gain on sale of other loans and assets	1,871		970		3,151		3,831
Card-related interchange income	6,441		5,629		17,589		15,800
Derivatives mark to market	(160)		(45)		(2,122)		(88)

Swap fee income	41		421		864		1,634
Other income	1,827		1,865		5,314		5,356
Total noninterest income	26,769		22,179		67,854		62,957
Noninterest Expense
Salaries and employee benefits	28,823		28,674		87,573		83,205
Net occupancy	4,609		4,521		13,979		13,878
Furniture and equipment	4,033		3,904		11,468		11,396
Data processing	2,741		2,825		7,804		7,988
Advertising and promotion	1,115		1,140		3,800		3,611
Pennsylvania shares tax	1,254		1,189		3,246		3,365
Intangible amortization	939		865		2,792		2,364

Other professional fees and services	937		969		2,755		2,755
FDIC insurance	876		35		1,637		1,164
Loss on sale or write-down of assets	63		152		416		1,398

Litigation and operational losses	329		308		1,038		1,264

Merger and acquisition related	—		3,738		—		3,772
COVID-19 related	125		—		567		—
Voluntary early retirement	3,304		—		3,304		—
Branch consolidation	2,544		—		2,544		—
Other operating	6,555		6,577		18,351		20,696
Total noninterest expense	58,247		54,897		161,274		156,856
Income Before Income Taxes	23,679		33,019		58,321		97,520
Income tax provision	4,493		6,375		10,557		19,007
Net Income	$	19,186	$	26,644	$	47,764	$	78,513
Average Shares Outstanding	97,917,096		98,267,229		97,990,749		98,363,539
Average Shares Outstanding Assuming Dilution	98,160,143		98,547,898		98,224,506		98,615,787

Per Share Data: Basic Earnings per Share	$	0.20	$	0.27	$	0.49	$	0.80
Diluted Earnings per Share	$	0.20	$	0.27	$	0.49	$	0.80
Cash Dividends Declared per Common Share	$	0.11	$	0.10	$	0.33	$	0.30

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				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Net Income	$	19,186	$	26,644	$	47,764	$	78,513
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period	(3,256)		3,152		22,069		22,055

Less: reclassification adjustment for gains on securities included in net income	(20)		(9)		(47)		(15)
Unrealized holding gains (losses) on derivatives arising during the period	225		(124)		(4,892)		9

Total other comprehensive (loss) income, before tax benefit (expense)	(3,051)		3,019		17,130		22,049
Income tax benefit (expense) related to items of other comprehensive (loss) income	640		(635)		(3,598)		(4,631)
Total other comprehensive (loss) income	(2,411)		2,384		13,532		17,418
Comprehensive Income	$	16,775	$	29,028	$	61,296	$	95,931

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, 2019	98,311,840	$	113,915	$	493,737	$	577,348	$	5,579	$	(134,914)	$	1,055,665


Net income						47,764						47,764
Other comprehensive income								13,532				13,532
Cash dividends declared ($0.33 per share)						(32,408)						(32,408)




Treasury stock acquired	(1,638,812)									(14,373)		(14,373)
Treasury stock reissued	158,453			458		—				1,358		1,816
Restricted stock	93,300	—		487		—				348		835

Balance at September 30, 2020	96,924,781	$	113,915	$	494,682	$	592,704	$	19,111	$	(147,581)	$	1,072,831


	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						78,513						78,513
Other comprehensive income								17,418				17,418
Cash dividends declared ($0.30 per share)						(29,562)						(29,562)




Treasury stock acquired	(482,608)									(6,200)		(6,200)
Treasury stock reissued	205,021			1,014		—				1,729		2,743
Restricted stock	78,000	—		450		—				279		729

Balance at September 30, 2019	98,319,081	$	113,915	$	493,737	$	560,360	$	6,077	$	(135,059)	$	1,039,030

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 June 30, 2020	98,132,697	$	113,915	$	494,682	$	584,312	$	21,522	$	(138,726)	$	1,075,705


Net income						19,186						19,186
Other comprehensive loss								(2,411)				(2,411)
Cash dividends declared ($0.11 per share)						(10,794)						(10,794)




Treasury stock acquired	(1,207,916)									(9,153)		(9,153)
Treasury stock reissued	—			—		—				—		—
Restricted stock	—	—		—		—				298		298
Common stock issued	—	—		—								—
Balance at September 30, 2020	96,924,781	$	113,915	$	494,682	$	592,704	$	19,111	$	(147,581)	$	1,072,831




	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 June 30, 2019	98,499,937	$	113,915	$	493,737	$	543,566	$	3,693	$	(133,080)	$	1,021,831


Net income						26,644						26,644
Other comprehensive income								2,384				2,384
Cash dividends declared ($0.10 per share)						(9,850)						(9,850)




Treasury stock acquired	(180,856)			—						(2,240)		(2,240)
Treasury stock reissued	—			—		—				—		—
Restricted stock	—	—		—		—				261		261
Common stock issuance	—	—		—		—						—
Balance at September 30, 2019	98,319,081	$	113,915	$	493,737	$	560,360	$	6,077	$	(135,059)	$	1,039,030

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 Nine Months Ended
	September 30,
	2020		2019
Operating Activities	(dollars in thousands)
Net income	$	47,764	$	78,513
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	49,038		9,638
Deferred tax (benefit) expense	(5,059)		2,613
Depreciation and amortization	8,676		7,777
Net gains on securities and other assets	(12,608)		(8,545)
Net amortization of premiums and discounts on securities	4,662		2,871

Income from increase in cash surrender value of bank owned life insurance	(4,699)		(4,405)
Increase in interest receivable	(13,105)		(110)
Mortgage loans originated for sale	(287,196)		(178,911)
Proceeds from sale of mortgage loans	281,424		173,961
Increase in interest payable	575		1,180
Decrease in income taxes payable	(536)		(556)

Other-net	1,888		(7,193)
Net cash provided by operating activities	70,824		76,833
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	76,841		35,163
Purchases	(9,621)		(200)
Transactions with securities available for sale:

Proceeds from maturities and redemptions	272,544		134,453
Purchases	(282,461)		(17,401)
Purchases of FHLB stock	(21,903)		(29,538)
Proceeds from the redemption of FHLB stock	25,698		50,103
Proceeds from bank owned life insurance	1,147		—
Proceeds from sale of loans	25,534		28,098
Proceeds from sale of other assets	4,875		5,390
Acquisition, net of cash acquired	—		332,465

Net increase in loans	(798,377)		(256,168)

Purchases of premises and equipment and other assets	(6,570)		(14,060)
Net cash (used in) provided by investing activities	(712,293)		268,305
Financing Activities
Net decrease in federal funds purchased	—		(4,000)
Net decrease in other short-term borrowings	(79,497)		(634,088)
Net increase in deposits	1,026,580		308,976
Repayments of other long-term debt	(493)		(473)
Repayments of capital lease obligation	(321)		(300)
Proceeds from issuance of other long-term debt	—		50,000


Dividends paid	(32,408)		(29,562)
Proceeds from reissuance of treasury stock	222		211
Purchase of treasury stock	(14,373)		(6,200)

Net cash provided by (used in) financing activities	899,710		(315,436)
Net increase in cash and cash equivalents	258,241		29,702
Cash and cash equivalents at January 1	121,856		98,947
Cash and cash equivalents at September 30	$	380,097	$	128,649

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

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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year of 2020. These interim financial statements should be read in conjunction with First Commonwealth’s 2019 Annual Report on Form 10-K.

Note 2 Acquisition

Santander Branch Acquisition

On September 6, 2019, the Company's banking subsidiary, First Commonwealth Bank, completed its acquisition of 14 full service branches from Santander Bank N.A. ("Santander") receiving $329.5 million in cash. This acquisition further expands the Company's market into State College, Lock Haven, Williamsport and Lewisburg, Pennsylvania and included the purchase of $101.2 million in loans and $471.4 million in deposits.

The table below summarizes the final purchase price allocation and the net assets acquired (at fair value) and consideration transferred in connection with the Santander acquisition (dollars in thousands):


Consideration received
Cash received	$	329,533

Total consideration received			$	329,533

Fair Value of Assets Acquired
Cash and cash equivalents	2,935


Loans	99,956
Premises and other equipment	3,637
Core deposit intangible	5,615


Other assets	770
Total assets acquired	112,913

Fair Value of Liabilities Assumed

Deposits	471,386

Other Liabilities	186
Total liabilities assumed	471,572

Total Fair Value of Identifiable Net Assets			(358,659)
Goodwill			$	29,126

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company determined that this acquisition constitutes a business combination as defined in FASB ASC Topic 805, “Business Combinations.” Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” Acquired loans were recorded at fair value with no carryover of the related allowance for loan losses. At the date of acquisition, none of the loans were accounted for under the guidance of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The fair value of acquired loans and certificate of deposits is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments. The $100.0 million fair value of acquired loans is the result of $101.2 million in loans acquired from Santander and the recognition of a net combined yield and credit mark adjustment of $1.2 million. The $471.4 million fair value of acquired deposits is the result of $471.0 million in deposits acquired and the recognition of a yield mark adjustment of $0.4 million on the certificate of deposits. A $5.6 million core deposit intangible was recognized for core deposits acquired.

The goodwill of $29.1 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with the branches acquired from Santander. The goodwill for this transaction is expected to be deducted over a 15-year period for income tax purposes.

Costs related to the acquisition totaled $3.7 million. These amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the Consolidated Statements of Income.

Note 3 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the unaudited 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" line in the unaudited Consolidated Statements of Income.


	For the Nine Months Ended September 30,
	2020						2019
	Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	22,069	$	(4,635)	$	17,434	$	22,055	$	(4,632)	$	17,423

Reclassification adjustment for gains on securities included in net income	(47)		10		(37)		(15)		3		(12)
Total unrealized gains on securities	22,022		(4,625)		17,397		22,040		(4,629)		17,411
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period	(4,892)		1,027		(3,865)		9		(2)		7
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized (losses) gains on derivatives	(4,892)		1,027		(3,865)		9		(2)		7




Total other comprehensive income	$	17,130	$	(3,598)	$	13,532	$	22,049	$	(4,631)	$	17,418

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 September 30,
	2020						2019
	Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on securities arising during the period	$	(3,256)	$	684	$	(2,572)	$	3,152	$	(663)	$	2,489

Reclassification adjustment for gains on securities included in net income	(20)		4		(16)		(9)		2		(7)
Total unrealized (losses) gains on securities	(3,276)		688		(2,588)		3,143		(661)		2,482
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period	225		(48)		177		(124)		26		(98)
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized gains (losses) on derivatives	225		(48)		177		(124)		26		(98)




Total other comprehensive (loss) income	$	(3,051)	$	640	$	(2,411)	$	3,019	$	(635)	$	2,384

The following table details the change in components of OCI for the nine months ended September 30:


	2020								2019
	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	$	4,580	$	365	$	634	$	5,579	$	(11,697)	$	461	$	(105)	$	(11,341)


Other comprehensive income before reclassification adjustment	17,434		—		(3,865)		13,569		17,423		—		7		17,430
Amounts reclassified from accumulated other comprehensive (loss) income	(37)		—		—		(37)		(12)		—		—		(12)
Net other comprehensive income during the period	17,397		—		(3,865)		13,532		17,411		—		7		17,418
Balance at September 30	$	21,977	$	365	$	(3,231)	$	19,111	$	5,714	$	461	$	(98)	$	6,077

The following table details the change in components of OCI for the three months ended September 30:




	2020								2019
	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 June 30	$	24,565	$	365	$	(3,408)	$	21,522	$	3,232	$	461	$	—	$	3,693


Other comprehensive (loss) income before reclassification adjustment	(2,572)		—		177		(2,395)		2,489		—		(98)		2,391
Amounts reclassified from accumulated other comprehensive (loss) income	(16)		—		—		(16)		(7)		—		—		(7)
Net other comprehensive (loss) income during the period	(2,588)		—		177		(2,411)		2,482		—		(98)		2,384
Balance at September 30	$	21,977	$	365	$	(3,231)	$	19,111	$	5,714	$	461	$	(98)	$	6,077

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4 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 nine months ended September 30:


	2020		2019
	(dollars in thousands)
Cash paid during the period for:
Interest	$	26,687	$	42,195
Income taxes	16,207		16,994
Non-cash investing and financing activities:

Loans transferred to other real estate owned and repossessed assets	3,206		2,754
Loans transferred from held to maturity to held for sale	27,391		21,620

Loans transferred from available for sale to held to maturity	1,908		—
Gross increase in market value adjustment to securities available for sale	22,022		22,041
Gross (decrease) increase in market value adjustment to derivatives	(4,892)		9
Investments committed to purchase, not settled	22,644		—
Noncash treasury stock reissuance	1,594		2,531
Net (liabilities) assets acquired through acquisition	—		(361,895)

Proceeds from death benefit on bank owned life insurance not received	(384)		486

Note 5 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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Weighted average common shares issued	113,914,902		113,914,902		113,914,902		113,914,902
Average treasury stock shares	(15,821,469)		(15,496,941)		(15,761,114)		(15,396,215)
Average deferred compensation shares	(45,454)		(37,411)		(41,790)		(37,411)
Average unearned nonvested shares	(130,883)		(113,321)		(121,249)		(117,737)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	97,917,096		98,267,229		97,990,749		98,363,539
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	197,545		243,258		188,255		214,837
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share	45,502		37,411		45,502		37,411

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	98,160,143		98,547,898		98,224,506		98,615,787
Per Share Data: Basic Earnings per Share	$	0.20	$	0.27	$	0.49	$	0.80
Diluted Earnings per Share	$	0.20	$	0.27	$	0.49	$	0.80

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 nine months ended September 30 because to do so would have been antidilutive.


	2020					2019
		Price Range					Price Range
	Shares	From		To		Shares	From		To

Restricted Stock	110,068	$	13.72	$	15.44	95,054	$	12.99	$	15.44
Restricted Stock Units	102,844	$	12.43	$	15.37	24,782	$	16.62	$	16.62

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 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:


	September 30, 2020		December 31, 2019
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	2,080,476	$	1,981,275
Financial standby letters of credit	13,879		16,630
Performance standby letters of credit	17,914		23,293
Commercial letters of credit	470		783

The notional amounts outstanding as of September 30, 2020 include amounts issued in 2020 of $245 thousand in performance standby letters of credit and $641 thousand in financial standby letters of credit. There were no commercial letters of credit issued in 2020. A liability of $0.1 million has been recorded as of both September 30, 2020 and December 31, 2019, 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 $3.4 million and $4.5 million as of September 30, 2020 and December 31, 2019, respectively. This liability is reflected in "Other liabilities" in the unaudited 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 September 30, 2020, 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.

First Commonwealth Bank was named a defendant in an action that commenced on October 14, 2020 in the Court of Common Pleas of Allegheny County, Pennsylvania. The plaintiffs allege that the Bank violated the Pennsylvania Commercial Code by failing to provide accurate and complete notices of repossession and post-sale notices to certain Pennsylvania customers whose motor vehicles were repossessed and later sold at public sales. Plaintiffs seek to pursue the action as a statewide class action on behalf of themselves and other allegedly similarly situated defaulting borrowers who had their motor vehicles repossessed and seeks to recover statutory damages. The Bank intends to vigorously defend the plaintiffs’ claims and any request for class

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

certification. The plaintiffs have not made any formal or specific financial demand and due to the preliminary status of this case any possible loss cannot be reasonably estimated at this time and is not included in the range set forth in the preceding paragraph.

Note 7 Investment Securities

Securities Available for Sale

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


	September 30, 2020								December 31, 2019
	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	$	6,778	$	763	$	—	$	7,541	$	7,745	$	596	$	—	$	8,341
Mortgage-Backed Securities – Commercial	209,175		9,377		—		218,552		186,316		2,983		(166)		189,133
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	527,570		15,977		(4)		543,543		660,777		4,113		(2,943)		661,947

Other Government-Sponsored Enterprises	100,993		2		(2)		100,993		1,000		—		—		1,000
Obligations of States and Political Subdivisions	12,965		208		(6)		13,167		17,738		171		—		17,909
Corporate Securities	22,935		1,505		—		24,440		22,919		1,043		—		23,962



Total Securities Available for Sale	$	880,416	$	27,832	$	(12)	$	908,236	$	896,495	$	8,906	$	(3,109)	$	902,292

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 September 30, 2020, by contractual maturity, are shown below.


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	104,991	$	105,041
Due after 1 but within 5 years	20,225		21,260
Due after 5 but within 10 years	7,127		7,749
Due after 10 years	4,550		4,550
	136,893		138,600
Mortgage-Backed Securities (a)	743,523		769,636
Total Debt Securities	$	880,416	$	908,236

(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $216.0 million and a fair value of $226.1 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $527.6 million and a fair value of $543.5 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 nine months ended September 30:


	2020		2019
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities
Gross gains	47		15
Gross losses	—		—

	47		15
Net gains and impairment	$	47	$	15

Securities available for sale with an estimated fair value of $865.1 million and $584.8 million were pledged as of September 30, 2020 and December 31, 2019, 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:


	September 30, 2020								December 31, 2019
	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	$	2,937	$	151	$	—	$	3,088	$	3,392	$	57	$	—	$	3,449
Mortgage-Backed Securities- Commercial	41,334		1,537		—		42,871		51,291		18		(184)		51,125
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	171,100		5,646		(19)		176,727		229,667		1,377		(294)		230,750
Mortgage-Backed Securities – Commercial	10,334		375		—		10,709		12,081		67		—		12,148

Obligations of States and Political Subdivisions	42,133		661		(1)		42,793		40,092		554		—		40,646
Debt Securities Issued by Foreign Governments	800		—		—		800		600		—		—		600




Total Securities Held to Maturity	$	268,638	$	8,370	$	(20)	$	276,988	$	337,123	$	2,073	$	(478)	$	338,718

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2020, 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	$	4,949	$	4,974
Due after 1 but within 5 years	11,195		11,310
Due after 5 but within 10 years	19,760		20,232
Due after 10 years	7,029		7,077
	42,933		43,593
Mortgage-Backed Securities (a)	225,705		233,395
Total Debt Securities	$	268,638	$	276,988

(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $44.3 million and a fair value of $46.0 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $181.4 million and a fair value of $187.4 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 $257.6 million and $306.8 million were pledged as of September 30, 2020 and December 31, 2019, respectively, to secure public deposits and for other purposes required or permitted by law.

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 September 30, 2020 and December 31, 2019, our FHLB stock totaled $11.3 million and $15.1 million, respectively, and is included in “Other investments” on the unaudited Consolidated Statements of Financial Condition.

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 and nine months ended September 30, 2020.

As of both September 30, 2020 and December 31, 2019, "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 nine-months ended September 30, 2020 and 2019, 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.

Impairment of Investment Securities

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 nine months ended September 30, 2020 and 2019, 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 September 30, 2020 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-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	10,777	$	(23)	$	—	$	—	$	10,777	$	(23)

Other Government-Sponsored Enterprises	998		(2)		—		—		998		(2)
Obligations of States and Political Subdivisions	2,207		(7)		—		—		2,207		(7)





Total Securities	$	13,982	$	(32)	$	—	$	—	$	13,982	$	(32)

At September 30, 2020, fixed income securities issued by U.S. Government-sponsored enterprises comprised 78% of total unrealized losses due to changes in market interest rates. At September 30, 2020, there are ten 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, 2019 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 - Commercial	$	54,501	$	(201)	$	16,365	$	(149)	$	70,866	$	(350)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	111,969		(436)		219,015		(2,801)		330,984		(3,237)





Total Securities	$	166,470	$	(637)	$	235,380	$	(2,950)	$	401,850	$	(3,587)

As of September 30, 2020, our corporate securities had an amortized cost and an estimated fair value of $22.9 million and $24.4 million, respectively. As of December 31, 2019, our corporate securities had an amortized cost and estimated fair value of $22.9 million and $24.0 million, respectively. Corporate securities are comprised of debt issued by large regional banks. There were no corporate securities in an unrealized loss position as of both September 30, 2020 and December 31, 2019. 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.

Note 8 Loans and Allowance for Credit Losses

1The following table provides outstanding balances related to each of our loan types:


	September 30, 2020						December 31, 2019
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,711,614	$	25,122	$	1,736,736	$	1,212,026	$	29,827	$	1,241,853
Real estate construction	450,589		2,400		452,989		442,777		6,262		449,039
Residential real estate	1,534,949		209,071		1,744,020		1,415,808		265,554		1,681,362
Commercial real estate	2,088,217		127,094		2,215,311		1,958,346		159,173		2,117,519
Loans to individuals	790,471		10,189		800,660		685,416		13,959		699,375
Total loans	$	6,575,840	$	373,876	$	6,949,716	$	5,714,373	$	474,775	$	6,189,148

In the table above, originated Commercial, financial, agricultural and other loans at September 30, 2020 includes $573.5 million in Paycheck Protection Program ("PPP") loans for small businesses who meet the necessary eligibility requirements. PPP loans are 100% guaranteed by the Small Business Administration ("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the PPP requirements. Because PPP loans are fully guaranteed by the SBA, there is no allowance for credit losses recognized for these loans. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program.

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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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.

The following tables represent our credit risk profile by creditworthiness:


	September 30, 2020
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,649,458	$	450,513	$	1,527,225	$	1,977,234	$	790,222	$	6,394,652
Non-Pass
OAEM	37,033		22		915		69,450		—		107,420
Substandard	25,123		54		6,809		41,533		249		73,768
Doubtful	—		—		—		—		—		—
Total Non-Pass	62,156		76		7,724		110,983		249		181,188
Total	$	1,711,614	$	450,589	$	1,534,949	$	2,088,217	$	790,471	$	6,575,840

Acquired loans
Pass	$	23,405	$	1,588	$	207,233	$	123,703	$	10,178	$	366,107
Non-Pass
OAEM	196		504		511		136		—		1,347
Substandard	1,521		308		1,327		3,255		11		6,422
Doubtful	—		—		—		—		—		—
Total Non-Pass	1,717		812		1,838		3,391		11		7,769
Total	$	25,122	$	2,400	$	209,071	$	127,094	$	10,189	$	373,876

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 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	$	1,171,363	$	442,751	$	1,406,845	$	1,918,690	$	685,108	$	5,624,757
Non-Pass
OAEM	29,359		26		475		13,533		—		43,393
Substandard	11,304		—		8,488		26,123		308		46,223
Doubtful	—		—		—		—		—		—
Total Non-Pass	40,663		26		8,963		39,656		308		89,616
Total	$	1,212,026	$	442,777	$	1,415,808	$	1,958,346	$	685,416	$	5,714,373

Acquired loans
Pass	$	27,696	$	5,697	$	262,630	$	153,814	$	13,947	$	463,784
Non-Pass
OAEM	2,009		565		537		2,072		—		5,183
Substandard	122		—		2,387		3,287		12		5,808
Doubtful	—		—		—		—		—		—
Total Non-Pass	2,131		565		2,924		5,359		12		10,991
Total	$	29,827	$	6,262	$	265,554	$	159,173	$	13,959	$	474,775

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 September 30, 2020. 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 September 30, 2020 and December 31, 2019. 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.


	September 30, 2020
	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	$	1,978	$	67	$	17	$	4,389	$	6,451	$	1,705,163	$	1,711,614
Real estate construction	—		—		—		54		54		450,535		450,589
Residential real estate	2,022		1,554		458		5,960		9,994		1,524,955		1,534,949
Commercial real estate	517		122		—		30,112		30,751		2,057,466		2,088,217
Loans to individuals	1,986		902		725		247		3,860		786,611		790,471
Total	$	6,503	$	2,645	$	1,200	$	40,762	$	51,110	$	6,524,730	$	6,575,840

Acquired loans
Commercial, financial, agricultural and other	$	38	$	—	$	—	$	74	$	112	$	25,010	$	25,122
Real estate construction	—		—		—		308		308		2,092		2,400
Residential real estate	397		459		—		1,262		2,118		206,953		209,071
Commercial real estate	—		136		—		233		369		126,725		127,094
Loans to individuals	34		47		49		11		141		10,048		10,189
Total	$	469	$	642	$	49	$	1,888	$	3,048	$	370,828	$	373,876

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 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	$	391	$	57	$	140	$	8,780	$	9,368	$	1,202,658	$	1,212,026
Real estate construction	198		—		9		—		207		442,570		442,777
Residential real estate	3,757		749		736		6,646		11,888		1,403,920		1,415,808
Commercial real estate	227		114		—		6,609		6,950		1,951,396		1,958,346
Loans to individuals	4,070		1,020		931		307		6,328		679,088		685,416
Total	$	8,643	$	1,940	$	1,816	$	22,342	$	34,741	$	5,679,632	$	5,714,373

Acquired loans
Commercial, financial, agricultural and other	$	1	$	—	$	1	$	74	$	76	$	29,751	$	29,827
Real estate construction	—		—		—		—		—		6,262		6,262
Residential real estate	304		207		221		1,949		2,681		262,873		265,554
Commercial real estate	—		107		—		298		405		158,768		159,173
Loans to individuals	87		89		35		12		223		13,736		13,959
Total	$	392	$	403	$	257	$	2,333	$	3,385	$	471,390	$	474,775

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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

criteria and in response to COVID-19, do not need to be accounted for as a troubled debt restructured loans. Additionally, short-term loan modifications that are not accounted for as a troubled debt restructured loan, in accordance with the CARES Act, would remain classified as current during the deferral period and therefore are not reflected in the past due loan tables provided on the prior page. During the first and second quarters of 2020, the Company granted approximately 6,500 short-term loan modifications to its customers with aggregate principal balances of $1.4 billion. Most of these deferrals were for a 90-day period, which expired during the second and third quarters. Additional 90-day payment deferrals were granted to 136 customers with aggregate principal balances of $244.1 million during the second and third quarters. As of September 30, 2020, the balance of loans in deferral status had fallen to $65.4 million. It is likely that some customers that are no longer in the deferral period will be granted an additional 90 day deferral in order to provide support for the continued impact of COVID-19. The decision to grant an additional forbearance will be credit driven and will be based on a complete evaluation of the customer's financial circumstances.

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 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 September 30, 2020 and December 31, 2019, there were no impaired loans held for sale. During the nine months ended September 30, 2020, there were no gains recognized on the sale of impaired loans. During the nine months ended September 30, 2019, there were $0.4 million in gains recognized on the sale 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 September 30, 2020 and December 31, 2019. 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.


	September 30, 2020						December 31, 2019
	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	$	795	$	987			$	1,848	$	6,997
Real estate construction	54		53				—		—
Residential real estate	9,962		11,965				10,372		12,437
Commercial real estate	14,228		14,523				3,015		3,210
Loans to individuals	495		808				406		640
Subtotal	25,534		28,336				15,641		23,284
With an allowance recorded:
Commercial, financial, agricultural and other	4,750		12,778		$	1,497	8,290		10,032		$	1,580
Real estate construction	—		—		—		—		—		—
Residential real estate	—		—		—		474		498		1
Commercial real estate	17,389		17,442		5,921		5,293		5,308		851
Loans to individuals	—		—		—		—		—		—
Subtotal	22,139		30,220		7,418		14,057		15,838		2,432
Total	$	47,673	$	58,556	$	7,418	$	29,698	$	39,122	$	2,432

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	September 30, 2020						December 31, 2019
	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	$	74	$	74			$	73	$	73
Real estate construction	308		308				—		—
Residential real estate	1,429		1,794				2,136		2,585
Commercial real estate	233		257				298		320
Loans to individuals	11		14				12		15
Subtotal	2,055		2,447				2,519		2,993
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—		$	—
Real estate construction	—		—		—		—		—		—
Residential real estate	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Loans to individuals	—		—		—		—		—		—
Subtotal	—		—		—		—		—		—
Total	$	2,055	$	2,447	$	—	$	2,519	$	2,993	$	—


	For the Nine Months Ended September 30,
	2020								2019
	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	$	4,062	$	15	$	74	$	—	$	2,129	$	10	$	2,255	$	—
Real estate construction	6		—		137		—		—		—		—		—
Residential real estate	10,380		235		1,772		18		10,751		280		1,966		6
Commercial real estate	13,994		90		1,453		76		3,854		129		636		18
Loans to individuals	469		9		11		—		356		11		14		—
Subtotal	28,911		349		3,447		94		17,090		430		4,871		24
With an allowance recorded:
Commercial, financial, agricultural and other	4,569		45		—		—		4,064		36		—		—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	—		—		—		—		347		6		—		—
Commercial real estate	13,830		9		—		—		5,357		2		160		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	18,399		54		—		—		9,768		44		160		—
Total	$	47,310	$	403	$	3,447	$	94	$	26,858	$	474	$	5,031	$	24

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 September 30,
	2020								2019
	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	$	1,918	$	10	$	74	$	—	$	1,902	$	3	$	4,697	$	—
Real estate construction	18		—		308		—		—		—		—		—
Residential real estate	10,198		72		1,473		1		10,254		86		1,950		1
Commercial real estate	14,312		23		1,440		76		3,582		28		666		—
Loans to individuals	494		3		11		—		389		4		13		—
Subtotal	26,940		108		3,306		77		16,127		121		7,326		1
With an allowance recorded:
Commercial, financial, agricultural and other	6,423		16		—		—		4,677		8		—		—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	—		—		—		—		740		1		—		—
Commercial real estate	17,407		3		—		—		6,443		1		155		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	23,830		19		—		—		11,860		10		155		—
Total	$	50,770	$	127	$	3,306	$	77	$	27,987	$	131	$	7,481	$	1

Unfunded commitments related to nonperforming loans were $0.1 million at September 30, 2020 and $1.7 million at December 31, 2019. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $23 thousand and $12 thousand was established for these off balance sheet exposures at September 30, 2020 and December 31, 2019, respectively.

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


	September 30, 2020		December 31, 2019
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	7,078	$	7,542
Nonaccrual status	4,511		6,037
Total	$	11,589	$	13,579
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	21		163
Total	$	81	$	223

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Nine Months Ended September 30, 2020
		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	$	—	$	629	$	—	$	629	$	625	$	489

Residential real estate	16	$	—	$	33	$	844	$	877	$	729	$	—
Commercial real estate	2	—		—		12		12		8		—
Loans to individuals	14	—		114		149		263		245		—
Total	33	$	—	$	776	$	1,005	$	1,781	$	1,607	$	489


	For the Nine Months Ended September 30, 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	2	$	—	$	—	$	156	$	156	$	157	$	—

Residential real estate	14	17		149		842		1,008		933		1
Commercial real estate	3	—		—		6,119		6,119		5,740		397
Loans to individuals	7	—		—		98		98		87		—
Total	26	$	17	$	149	$	7,215	$	7,381	$	6,917	$	398

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 a re-amortization of the principal and an extension of the maturity. For the nine months ended September 30, 2020 and 2019, $766 thousand and $149 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 2020 and 2019 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.


	For the Three Months Ended September 30, 2020
		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	$	—	$	629	$	—	$	629	$	625	$	489

Residential real estate	12	$	—	$	33	$	580	$	613	$	477	$	—

Loans to individuals	4	—		43		24		67		63		—
Total	17	$	—	$	705	$	604	$	1,309	$	1,165	$	489

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 September 30, 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	$	—	$	—	$	95	$	95	$	96	$	—

Residential real estate	3	$	—	$	32	$	53	$	85	$	85	$	—

Loans to individuals	2	—		—		37		37		34		—
Total	6	$	—	$	32	$	185	$	217	$	215	$	—

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 a re-amortization of the principal and an extension of the maturity. For the three months ended September 30, 2020 and 2019, $694 thousand and $32 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 2020 and 2019, 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 nine months ended September 30:



	2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)


Residential real estate	1	$	50	3	$	70
Commercial real estate	1	112		—	—
Loans to individuals	2	78		—	—
Total	4	$	240	3	$	70

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 September 30:



	2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)


Residential real estate	—	$	—	2	$	49
Commercial real estate	1	112		—	—
Loans to individuals	2	78		—	—
Total	3	$	190	2	$	49

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Nine Months Ended September 30, 2020
	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	$	20,221	$	2,558	$	4,091	$	19,731	$	4,984	$	51,585
Charge-offs	(5,166)		—		(720)		(2,415)		(4,958)		(13,259)
Recoveries	161		26		274		154		702		1,317
Provision (credit)	9,936		924		4,607		23,132		8,087		46,686
Ending balance	25,152		3,508		8,252		40,602		8,815		86,329
Acquired loans:
Beginning balance	13		—		2		37		—		52
Charge-offs	—		—		(213)		(2)		(287)		(502)
Recoveries	28		—		38		—		10		76
Provision (credit)	295		—		173		1,607		277		2,352
Ending balance	336		—		—		1,642		—		1,978
Total ending balance	$	25,488	$	3,508	$	8,252	$	42,244	$	8,815	$	88,307
Ending balance: individually evaluated for impairment	$	1,497	$	—	$	—	$	5,921	$	—	$	7,418
Ending balance: collectively evaluated for impairment	23,991		3,508		8,252		36,323		8,815		80,889
Loans:
Ending balance	1,736,736		452,989		1,744,020		2,215,311		800,660		6,949,716
Ending balance: individually evaluated for impairment	5,048		308		1,226		30,387		—		36,969
Ending balance: collectively evaluated for impairment	1,731,688		452,681		1,742,794		2,184,924		800,660		6,912,747

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	For the Nine Months Ended September 30, 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	(1,584)		—		(617)		(305)		(4,049)		(6,555)
Recoveries	180		158		190		160		419		1,107
Provision (credit)	2,109		250		409		790		4,310		7,868
Ending balance	19,940		2,410		3,916		19,027		4,713		50,006
Acquired loans:
Beginning balance	139		—		35		4		—		178
Charge-offs	(601)		—		(46)		(1,376)		(9)		(2,032)
Recoveries	53		—		46		—		14		113
Provision (credit)	416		—		(34)		1,393		(5)		1,770
Ending balance	7		—		1		21		—		29
Total ending balance	$	19,947	$	2,410	$	3,917	$	19,048	$	4,713	$	50,035
Ending balance: individually evaluated for impairment	$	1,054	$	—	$	4	$	488	$	—	$	1,546
Ending balance: collectively evaluated for impairment	18,893		2,410		3,913		18,560		4,713		48,489
Loans:
Ending balance	1,210,936		420,281		1,666,220		2,124,240		677,884		6,099,561
Ending balance: individually evaluated for impairment	10,417		—		4,102		10,825		—		25,344
Ending balance: collectively evaluated for impairment	1,200,519		420,281		1,662,118		2,113,415		677,884		6,074,217

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 September 30, 2020
	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	$	24,812	$	3,067	$	9,239	$	33,130	$	9,334	$	79,582
Charge-offs	(3,395)		—		(161)		—		(1,149)		(4,705)
Recoveries	44		—		153		110		226		533
Provision (credit)	3,691		441		(979)		7,362		404		10,919
Ending balance	25,152		3,508		8,252		40,602		8,815		86,329
Acquired loans:
Beginning balance	332		171		—		1,356		—		1,859
Charge-offs	—		—		(122)		—		(80)		(202)
Recoveries	13		—		13		—		2		28
Provision (credit)	(9)		(171)		109		286		78		293
Ending balance	336		—		—		1,642		—		1,978
Total ending balance	$	25,488	$	3,508	$	8,252	$	42,244	$	8,815	$	88,307


	For the Three Months Ended September 30, 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	$	20,678	$	2,491	$	4,133	$	19,287	$	4,407	$	50,996
Charge-offs	(742)		—		(383)		(6)		(1,571)		(2,702)
Recoveries	41		74		6		81		162		364
Provision (credit)	(37)		(155)		160		(335)		1,715		1,348
Ending balance	19,940		2,410		3,916		19,027		4,713		50,006
Acquired loans:
Beginning balance	15		—		25		25		—		65
Charge-offs	(49)		—		—		(1,376)		(3)		(1,428)
Recoveries	21		—		11		—		—		32
Provision (credit)	20		—		(35)		1,372		3		1,360
Ending balance	7		—		1		21		—		29
Total ending balance	$	19,947	$	2,410	$	3,917	$	19,048	$	4,713	$	50,035

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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 right of-use ("ROU") assets of $38.5 million and a lease liability of $41.8 million on January 1, 2019.

The following table represents the unaudited Consolidated Statements of Condition classification of the Company’s ROU assets and lease liabilities, lease costs and other lease information.


					September 30, 2020			December 31, 2019
Balance sheet:
Operating lease asset classified as premises and equipment					$	43,180		$	48,642
Operating lease liability classified as other liabilities					47,791			52,894
	For the Three Months Ended				For the Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020			September 30, 2019
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	1,545	$	1,275	$	4,281		$	3,959

Weighted average lease term, in years					15.10			15.44
Weighted average discount rate					3.42		%	3.42		%
Operating cash flows					$	2,007		$	3,351

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.

In July 2020, the Company announced the consolidation of 29 branch locations, including 12 leased locations, into nearby offices prior to December 31, 2020. As a result, during the third quarter, the Company paid $0.7 million in lease termination fees and decreased the ROU asset and lease liability by $3.8 million and $3.6 million, respectively.

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2020 were as follows (dollars in thousands):


For the twelve months ended:
September 30, 2021	$	4,823
September 30, 2022	4,600
September 30, 2023	4,490
September 30, 2024	4,427
September 30, 2025	4,312
Thereafter	39,752
Total future minimum lease payments	62,404
Less remaining imputed interest	14,613
Operating lease liability	$	47,791

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10 Income Taxes

In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” at September 30, 2020 and December 31, 2019, 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, 2017 are no longer open to examination by federal and state taxing authorities.

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 unaudited Consolidated Statements of Financial Condition or in the “Other assets” category of the unaudited 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 observable inputs 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 source price 100% of the securities on a monthly basis, 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 unaudited 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, “Investment Securities.”

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans held for sale 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 also include the Small Business Administration guaranteed portion of small business loans. The estimated fair value of these loans is based on the contract with the third party investor.

During the third quarter of 2020, the company announced the consolidation of 29 branch locations into nearby offices prior to December 31, 2020. As a result, 17 owned locations were moved to held for sale and are being carried at the lower of cost or fair value. Four of these locations are carried at fair value, determined by an independent market-based appraisal less estimated costs to sell, and are classified as Level 2.

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' and/or 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 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 estimated 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 2020, 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 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).

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Fair Value (dollars
in thousands)

Valuation
Technique

Unobservable Inputs

Range /
(weighted average)

September 30, 2020

Other Investments

1,670

CarryingValue

N/A

Impaired Loans

758

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$1.46 - $1.48 (b)

Oil per BBL/d

$36.00 - $36.00 (b)

Limited Partnership Investments

6,546

Par Value

N/A

December 31, 2019

Other Investments

1,670

CarryingValue

N/A

Impaired Loans

884

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$2.61 - $3.49 (b)

Oil per BBL/d

$47.09 - $53.14 (b)

2,239

Discounted Cash Flow

Discount Rate

$3.84 - $9.50

Limited Partnership Investments

5,795

Par Value

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.

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


	September 30, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	7,541	$	—	$	7,541
Mortgage-Backed Securities - Commercial	—		218,552		—		218,552
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		543,543		—		543,543

Other Government-Sponsored Enterprises	—		100,993		—		100,993
Obligations of States and Political Subdivisions	—		13,167		—		13,167
Corporate Securities	—		24,440		—		24,440



Total Securities Available for Sale	—		908,236		—		908,236
Other Investments	—		11,296		1,670		12,966
Loans Held for Sale	—		37,998		—		37,998
Premises and Equipment, net	—		442		—		442
Other Assets(a)	—		60,563		6,546		67,109
Total Assets	$	—	$	1,018,535	$	8,216	$	1,026,751
Other Liabilities(a)	$	—	$	67,241	$	—	$	67,241
Total Liabilities	$	—	$	67,241	$	—	$	67,241

(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)


	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	8,341	$	—	$	8,341
Mortgage-Backed Securities - Commercial	—		189,133		—		189,133
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		661,947		—		661,947

Other Government-Sponsored Enterprises	—		1,000		—		1,000
Obligations of States and Political Subdivisions	—		17,909		—		17,909
Corporate Securities	—		23,962		—		23,962



Total Securities Available for Sale	—		902,292		—		902,292
Other Investments	—		15,091		1,670		16,761
Loans Held for Sale	—		15,989		—		15,989
Other Assets(a)	—		21,894		5,795		27,689
Total Assets	$	—	$	955,266	$	7,465	$	962,731
Other Liabilities(a)	$	—	$	21,469	$	—	$	21,469
Total Liabilities	$	—	$	21,469	$	—	$	21,469

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

For the nine months ended September 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	2020
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	5,795	$	7,465
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		751		751
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	6,546	$	8,216

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	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	—		198		198
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		1,237		1,237
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	4,131	$	5,801

During the nine months ended September 30, 2020 and 2019, 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 September 30, 2020 and 2019.

For the three months ended September 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	2020
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	6,406	$	8,076
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		140		140
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	6,546	$	8,216

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	2019
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	3,312	$	4,982
Total gains or losses
Included in earnings	—		245		245
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		574		574
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	4,131	$	5,801

During the three months ended September 30, 2020 and 2019, 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 September 30, 2020 and 2019.

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


	September 30, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	28,793	$	13,517	$	42,310
Other real estate owned	—		1,183		—		1,183
Total Assets	$	—	$	29,976	$	13,517	$	43,493


	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	12,267	$	17,518	$	29,785
Other real estate owned	—		2,608		—		2,608
Total Assets	$	—	$	14,875	$	17,518	$	32,393

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Impaired loans2	$	(3,695)	$	(954)	$	(9,940)	$	(2,606)
Other real estate owned	(4)		(42)		(4)		(51)
Total losses	$	(3,699)	$	(996)	$	(9,944)	$	(2,657)

Impaired loans over $250 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. Other real estate owned has a current carrying value of $1.1 million as of September 30, 2020 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, core deposit intangibles and customer list 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 nine months ended September 30, 2020.

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.

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. 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 estimated fair value for standby letters of credit was $0.1 million at both September 30, 2020 and December 31, 2019. See Note 6, “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 and long-term debt: 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.

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:


	September 30, 2020
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	97,060	$	97,060	$	97,060	$	—	$	—
Interest-bearing deposits	283,037		283,037		283,037		—		—
Securities available for sale	908,236		908,236		—		908,236		—
Securities held to maturity	268,638		276,988		—		276,988		—
Other investments	12,966		12,966		—		11,296		1,670
Loans held for sale	37,998		37,998		—		37,998		—
Loans	6,949,716		7,391,037		—		28,793		7,362,244
Financial liabilities
Deposits	7,703,907		7,707,618		—		7,707,618		—
Short-term borrowings	122,356		121,828		—		121,828		—
Subordinated debt	170,572		164,565		—		—		164,565
Long-term debt	56,424		58,372		—		58,372		—
Capital lease obligation	6,494		6,494		—		6,494		—


	December 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	$	102,346	$	102,346	$	102,346	$	—	$	—
Interest-bearing deposits	19,510		19,510		19,510		—		—
Securities available for sale	902,292		902,292		—		902,292		—
Securities held to maturity	337,123		338,718		—		338,718		—
Other investments	16,761		16,761		—		15,091		1,670
Loans held for sale	15,989		15,989		—		15,989		—
Loans	6,189,148		6,393,872		—		12,267		6,381,605
Financial liabilities
Deposits	6,677,615		6,677,595		—		6,677,595		—
Short-term borrowings	201,853		201,151		—		201,151		—
Subordinated debt	170,450		171,772		—		—		171,772
Long-term debt	56,917		58,051		—		58,051		—
Capital lease obligation	6,815		6,815		—		6,815		—

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 38 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 14 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 August 2019, the Company entered into two interest rate swap contracts that are designated as cash flow hedges. These contracts mature on August 15, 2024 and August 15, 2026 and have notional amounts of $30.0 million and $40.0 million, respectively. The Company's risk management objective for these hedges is to reduce its exposure to variability in expected future cash flows related to interest payments made on subordinated debentures benchmarked to the 3-month LIBOR rate. Therefore, the interest rate swaps convert the interest rate benchmark on the first $70.0 million of 3-month LIBOR based subordinated debentures to a fixed rate.

The periodic net settlement of these interest rate swaps are recorded as an adjustment to "Interest on subordinated debentures" in the unaudited Consolidated Statements of Income. For the three and nine months ended September 30, 2020 there was a negative impact of $208 thousand and $219 thousand, respectively, on net interest income as a result of these interest rate swaps. Changes in the fair value of the cash flow hedges are reported on the balance sheet and in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in "Interest on subordinated debentures," the same line item in the unaudited Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at September 30, 2020, and changes in the fair value attributed to hedge ineffectiveness were not material.

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 "Noninterest income" in the unaudited Consolidated Statements of Income. The impact to noninterest income for the three and nine months ended September 30, 2020 was an increase of $0.3 and $1.5 million, respectively.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 September 30, 2020, the underlying funded mortgage loan commitments had a carrying value of $21.2 million and a fair value of $24.5 million, while the underlying unfunded mortgage loan commitments had a notional amount of $49.1 million. At December 31, 2019, the underlying funded mortgage loan commitments had a carrying value of $9.8 million and a fair value of $10.7 million, while the underlying unfunded mortgage loan commitments had a notional amount of $25.5 million. The interest rate lock commitments decreased noninterest income by $0.1 million and increased other noninterest income by $0.1 million for the three and nine months ended September 30, 2020, respectively.

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 operating expense" in the unaudited Consolidated Statements of Income. The increase in other noninterest expense for the three and nine months ended September 30, 2020 totaled $3 thousand and $15 thousand, respectively. At September 30, 2020 and December 31, 2019, the underlying loans had a carrying value of $2.4 million and $4.8 million, respectively, and a fair value of $2.4 million and $4.8 million, respectively.

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


	September 30, 2020		December 31, 2019
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(2,394)	$	(272)
Notional amount:
Interest rate derivatives	610,994		587,275
Interest rate caps	75,685		87,188
Interest rate collars	35,354		35,354
Risk participation agreements	228,853		164,632
Sold credit protection on risk participation agreements	(78,656)		(69,011)
Interest rate options	49,105		25,460
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	(4,091)		801
Notional amount	70,000		70,000
Interest rate forwards:
Fair value adjustment	(195)		(63)
Notional amount	42,000		30,000
Foreign exchange forwards:
Fair value adjustment	2		(41)
Notional amount	2,362		4,789

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below presents the change in the fair value of derivative assets and derivative liabilities attributable to credit risk or fair value changes included in "Other income," 'Other expense," "Interest on subordinated debentures" or "Interest and fees on loans" in the unaudited Consolidated Statements of Income:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Non-hedging interest rate derivatives
Increase (decrease) in other income	$	142	$	(33)	$	(611)	$	420
Increase in other expense	—		—		—		—
Hedging interest rate derivatives
Decrease in interest and fees on loans	—		—		—		(118)
Increase (decrease) in interest from subordinated debentures	208		(70)		219		(70)
Increase in other expense	—		—		—		7
Hedging interest rate forwards
(Decrease) increase in other income	(102)		201		132		122
Increase in other expense	—		—		—		—
Hedging foreign exchange forwards
Increase in other expense	3		3		15		4

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.”

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 circumstances indicate that it is more likely than not that fair value is less than carrying value, a triggering event has occurred and a quantitative impairment test would be performed.

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as both of September 30, 2020 and December 31, 2019 was $303.3 million. No impairment charges on goodwill or other intangible assets were incurred in 2020 or 2019.

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 a result of the COVID-19 pandemic and its impact on the Company's stock price as well as the potential impact on future earnings, Management evaluated whether a triggering event had occurred as of September 30, 2020. The evaluation concluded that it was more likely than not that First Commonwealth's fair value exceeded its book value and therefore there was no triggering event. 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14 Subordinated Debentures

Subordinated debentures outstanding are as follows:


		September 30, 2020			December 31, 2019
	Due	Amount		Rate	Amount		Rate
		(dollars in thousands)
Owed to:

First Commonwealth Bank	2028	$	49,291	4.875% until June 1, 2023, then LIBOR + 1.845%	$	49,222	4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank	2033	49,114		5.50% until June 1, 2028, then LIBOR + 2.37%	49,061		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		$	170,572		$	170,450

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 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 September 30, 2020 and December 31, 2019, 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.

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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $2.2 million and $2.3 million in commission expense as of September 30, 2020 and 2019, 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.

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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income	$	2,554	$	2,325	$	6,774	$	6,221
Service charges on deposit accounts	4,035		4,954		12,066		13,792
Insurance and retail brokerage commissions	2,156		1,912		5,982		5,887
Card-related interchange income	6,441		5,629		17,589		15,800
Gain on sale of other loans and assets	520		181		853		861
Other income	945		937		2,713		2,789
Noninterest Income (in-scope of Topic 606)	16,651		15,938		45,977		45,350
Noninterest Income (out-of-scope of Topic 606)	10,118		6,241		21,877		17,607
Total Noninterest Income	$	26,769	$	22,179	$	67,854	$	62,957

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 and nine months ended September 30, 2020 and 2019, and should be read in conjunction with the unaudited 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, including uncertainties regarding the impact of the COVID-19 pandemic, and could be affected by many factors, including, but not limited to: (1) the length and extent of the economic contraction as a result of the COVID-19 pandemic and the impact of such contraction 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. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us.

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 that is useful to investors in understanding our underlying operational performance and our business and performance trends as

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 51 and page 58 for the nine and three months ended September 30, 2020 and 2019, 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 unaudited Consolidated Financial Statements and related notes.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
	(dollars in thousands, except per share data)
Net Income	$	19,186		$	26,644		$	47,764		$	78,513
Per Share Data:
Per Share Data: Basic Earnings per Share	$	0.20		$	0.27		$	0.49		$	0.80
Diluted Earnings per Share	0.20			0.27			0.49			0.80
Cash Dividends Declared per Common Share	0.11			0.10			0.33			0.30
Average Balance:
Total assets	$	9,389,965		$	8,050,052		$	8,925,315		$	7,972,438
Total equity	1,088,101			1,033,903			1,077,030			1,010,227
End of Period Balance:
Net loans (1)							$	6,899,407		$	6,069,814
Total assets							9,289,366			8,152,027
Total deposits							7,703,907			6,677,996
Total equity							1,072,831			1,039,030
Key Ratios:
Return on average assets	0.81		%	1.31		%	0.71		%	1.32		%
Return on average equity	7.01		%	10.22		%	5.92		%	10.39		%
Dividends payout ratio	55.00		%	37.04		%	67.35		%	37.50		%
Average equity to average assets ratio	11.59		%	12.84		%	12.07		%	12.67		%
Net interest margin	3.11		%	3.76		%	3.34		%	3.75		%
Net loans to deposits ratio							89.56		%	90.89		%

(1) Includes loans held for sale.

Results of Operations

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Net Income

For the nine months ended September 30, 2020, First Commonwealth had net income of $47.8 million, or $0.49 diluted earnings per share, compared to net income of $78.5 million, or $0.80 diluted earnings per share, in the nine months ended September 30, 2019. The decline in net income was primarily the result of $49.0 million provision for credit losses recognized in order to provide for estimated probable losses related to the COVID-19 pandemic. This was partially offset by a $8.5 million decrease in the income tax provision due to lower income before income taxes.

For the nine months ended September 30, 2020, the Company’s return on average equity was 5.92% and its return on average assets was 0.71%, compared to 10.39% and 1.32%, respectively, for the nine months ended September 30, 2019.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $201.9 million in the first nine months of 2020, compared to $202.4 million for the same period in 2019. Despite growth in average interest-earning assets of $869.4 million, net interest income declined because of a lower interest rate environment in 2020, which resulted in a 41 basis point decrease in the net interest margin, on a fully taxable equivalent basis. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 74.7% and 76.2% for the nine months ended September 30, 2020 and 2019, respectively.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The net interest margin on a fully taxable equivalent basis, was 3.34% and 3.75% for the nine months ended September 30, 2020 and September 30, 2019, respectively. The decline in the net interest margin is primarily attributable to the lower level of interest rates largely offset by the amount and composition of interest-earning assets and interest-bearing liabilities.

The taxable equivalent yield on interest-earning assets was 3.79% for the nine months ended September 30, 2020, a decrease of 76 basis points compared to the 4.55% yield for the same period in 2019. This decrease is primarily due to loan portfolio yield, which decreased by 78 basis points when compared to the nine months ended September 30, 2019. Contributing to this decrease was the yield on our adjustable and variable rate commercial loan portfolio, which declined 97 basis points as a result of the Federal Reserve decreasing short-term interest rates. During the first quarter of 2020, the Federal Reserve decreased the Federal Funds target rate by 150 basis points in addition to the 75 basis point rate decreases made during 2019. Although the impact of the 2020 rate decreases are not fully reflected in the comparison of the periods presented, such decreases in rates have the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing liabilities, and any additional rate decreases would be expected to have a similar effect.

The loan yield for the nine months ended September 30, 2020, was impacted by $573.5 million in PPP loans originated under the CARES Act which have a stated loan rate of 1% and a yield of 2.69%. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $4.0 million. These amounts are recognized in interest income as a yield adjustment over the life of the loan. As of September 30, 2020, we expect to recognize additional PPP related deferred processing fees, net of origination costs, of approximately $14.8 million as an adjustment to yield over the remaining terms of the loans. PPP loans increased the average balance of loans by $327.0 million during the nine months ended September 30, 2020 decreasing the yield on loans by 8 basis points and the net interest margin by 3 basis points.

The investment portfolio yield decreased 49 basis points in comparison to the prior year primarily due the decrease in the Federal Reserve short-term rates. Investment portfolio purchases during the nine months ended September 30, 2020 have been primarily in obligations of U.S. government agencies, obligations of other government-sponsored enterprises and obligations of states and political subdivisions with durations of approximately 4 to 11 years. Additionally, as a result of excess liquidity caused by significant growth in deposits during 2020, the average balance of interest bearing deposits with banks has increased from $5.6 million in 2019 to $173.1 million in 2020. The impact of the level and rate paid on interest bearing deposits with banks decreases the yield on earning assets by 8 basis points for the nine months ended September 30, 2020.

The cost of interest-bearing liabilities decreased to 0.64% for the nine months ended September 30, 2020, from 1.08% for the same period in 2019, primarily due to a decrease in the cost of short-term borrowings and the cost of interest-bearing deposits as well as the cost of long-term debt. Deposit growth due to the retention of PPP loan proceeds and the deposit of Federal stimulus checks, as well as deposits acquired in our third quarter 2019 acquisition of Santander branches, combined to contribute to a decline in average short-term borrowings of $343.3 million for the nine months ended September 30, 2020 compared to the same period in 2019. Decreases in the Federal Funds target rate impacted the cost of long-term debt, decreasing the cost by 56 basis points. Lower market interest rates and management's efforts to reduce deposit costs resulted in the cost of interest-bearing deposits decreasing 43 basis points and short-term borrowings decreasing 160 basis points in comparison to the same period last year.

For the nine months ended September 30, 2020, changes in interest rates negatively impacted net interest income by $35.3 million when compared with the same period in 2019. The lower yield on interest-earning assets negatively impacted net interest income by $48.5 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $13.2 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $34.8 million for the nine months ended September 30, 2020, as compared to the same period in 2019. Higher levels of interest-earning assets resulted in an increase of $31.9 million in interest income, and changes in the volume and mix of interest-bearing liabilities decreased interest expense by $2.9 million, primarily due to a decrease in short-term borrowings. Average earning assets for the nine months ended September 30, 2020 increased $869.4 million, or 12.1%, compared to the same period in 2019. Average loans for the comparable period increased $735.4 million, or 12.4%.

Net interest income also benefited from a $551.6 million increase in average net free funds at September 30, 2020 as compared to September 30, 2019. 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 $522.5 million, or 34.7%, in noninterest-bearing demand deposit average balances, primarily due to deposit growth related to PPP loan proceeds as well as $86.6 million in deposits attributed to the Santander branch acquisition completed in the third quarter of 2019. Average time deposits for the nine months ended September 30, 2020 decreased by

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

$100.6 million compared to the comparable period in 2019, while the average rate paid on time deposits decreased 19 basis points compared to the same period in 2019.

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 nine months ended September 30:


	2020		2019
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	227,903	$	244,226
Adjustment to fully taxable equivalent basis	1,129		1,341
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	229,032		245,567
Interest expense	27,124		43,169
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	201,908	$	202,398

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 nine months ended September 30:


	2020						2019
	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	$	173,058	$	163	0.13	%	$	5,591	$	181	4.33	%
Tax-free investment securities	47,197		1,075		3.04		67,158		1,557		3.10
Taxable investment securities	1,187,354		19,600		2.20		1,200,845		24,290		2.70
Loans, net of unearned income (b)(c)(e)	6,670,819		208,194		4.17		5,935,427		219,539		4.95
Total interest-earning assets	8,078,428		229,032		3.79		7,209,021		245,567		4.55
Noninterest-earning assets:
Cash	98,345						91,954
Allowance for credit losses	(72,256)						(51,192)
Other assets	820,798						722,655
Total noninterest-earning assets	846,887						763,417
Total Assets	$	8,925,315					$	7,972,438
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,534,147	$	1,702	0.15	%	$	1,272,065	$	5,511	0.58	%
Savings deposits (d)	3,000,925		8,494		0.38		2,524,703		10,906		0.58
Time deposits	766,106		8,560		1.49		866,746		10,881		1.68
Short-term borrowings	146,270		670		0.61		489,562		8,075		2.21
Long-term debt	233,818		7,698		4.40		210,353		7,796		4.96
Total interest-bearing liabilities	5,681,266		27,124		0.64		5,363,429		43,169		1.08
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	2,030,364						1,507,826
Other liabilities	136,655						90,956
Shareholders’ equity	1,077,030						1,010,227
Total Noninterest-Bearing Funding Sources	3,244,049						2,609,009
Total Liabilities and Shareholders’ Equity	$	8,925,315					$	7,972,438
Net Interest Income and Net Yield on Interest-Earning Assets			$	201,908	3.34	%			$	202,398	3.75	%

(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 nine months ended September 30, 2020 and 2019.

(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.

(e)Includes held for sale loans.

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 nine months ended September 30, 2020 compared with September 30, 2019:


	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	$	(18)	$	5,424	$	(5,442)
Tax-free investment securities	(482)		(463)		(19)
Taxable investment securities	(4,690)		(272)		(4,418)
Loans	(11,345)		27,227		(38,572)
Total interest income (b)	(16,535)		31,916		(48,451)
Interest-bearing liabilities:
Interest-bearing demand deposits	(3,809)		1,137		(4,946)
Savings deposits	(2,412)		2,066		(4,478)
Time deposits	(2,321)		(1,265)		(1,056)
Short-term borrowings	(7,405)		(5,674)		(1,731)
Long-term debt	(98)		871		(969)
Total interest expense	(16,045)		(2,865)		(13,180)
Net interest income	$	(490)	$	34,781	$	(35,271)

(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 nine months ended September 30:


	2020				2019
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	10,231	21	%	$	2,525	26	%
Real estate construction	924		2		250		2
Residential real estate	4,780		10		375		4
Commercial real estate	24,739		50		2,183		23
Loans to individuals	8,364		17		4,305		45

Total	$	49,038	100	%	$	9,638	100	%

The provision for credit losses for the nine months ended September 30, 2020 increased in comparison to the nine months ended September 30, 2019 by $39.4 million. The level of provision expense in the first nine months of 2020 is primarily to build the allowance for loan loss in order to provide for estimated credit risks related to the COVID-19 pandemic. Contributing to the higher provision in nine months ended September 30, 2020 was $5.7 million in specific reserves related to loans for four commercial real estate borrowers that were placed on nonaccrual status during the first nine months of 2020. Additionally, $27.9 million of the provision expense is attributable to higher qualitative reserves due to the uncertain economic environment, additional risks related to accrued interest on loan forbearances and the large volume of consumer forbearances, and consideration of the estimated probable losses incurred in certain loan categories that may be affected by COVID-19, such as hospitality and retail. Additional qualitative reserves resulted in provision expense of $4.6 million for commercial, financial, agricultural loans, $4.1 million for residential real estate loans, $15.2 million for commercial real estate loans and $3.0 million for loans to individuals. Net charge-offs during the first nine months of 2020 totaled $12.4 million.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The level of provision expense in the first nine months of 2019 was primarily a result of $7.4 million in net charge-offs, growth in the loan portfolio and an increase in qualitative reserves as a result of a higher probability of slightly less favorable economic conditions.

The allowance for credit losses was $88.3 million, or 1.27%, of total loans outstanding and 1.34% of total originated loans outstanding at September 30, 2020, compared to $51.6 million, or 0.83%, and 0.90%, respectively, at December 31, 2019 and $50.0 million, or 0.82%, and 0.90%, respectively, at September 30, 2019. Nonperforming loans as a percentage of total loans increased to 0.71% at September 30, 2020 from 0.52% at December 31, 2019 and 0.58% as of September 30, 2019. The allowance to nonperforming loan ratio was 177.58%, 160.28% and 141.64% as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively.

Below is an analysis of the consolidated allowance for credit losses for the nine months ended September 30, 2020 and 2019 and the year-ended December 31, 2019:


	September 30, 2020		September 30, 2019		December 31, 2019
	(dollars in thousands)
Balance, beginning of period	$	51,637	$	47,764	$	47,764
Loans charged off:
Commercial, financial, agricultural and other	5,166		2,185		3,393
Real estate construction	—		—		—
Residential real estate	933		663		1,042
Commercial real estate	2,417		1,681		2,008
Loans to individuals	5,245		4,058		5,831
Total loans charged off	13,761		8,587		12,274
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	189		233		326
Real estate construction	26		158		158
Residential real estate	312		236		315
Commercial real estate	154		160		189
Loans to individuals	712		433		626
Total recoveries	1,393		1,220		1,614
Net credit losses	12,368		7,367		10,660
Provision charged to expense	49,038		9,638		14,533
Balance, end of period	$	88,307	$	50,035	$	51,637

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Noninterest Income

The following table presents the components of noninterest income for the nine months ended September 30:


	2020		2019		$ Change		% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	6,774	$	6,221	$	553	9	%
Service charges on deposit accounts	12,066		13,792		(1,726)		(13)
Insurance and retail brokerage commissions	5,982		5,887		95		2
Income from bank owned life insurance	4,963		4,408		555		13
Card-related interchange income	17,589		15,800		1,789		11
Swap fee income	864		1,634		(770)		(47)
Other income	5,314		5,356		(42)		(1)
Subtotal	53,552		53,098		454		1
Net securities gains	47		15		32		213
Gain on sale of mortgage loans	13,226		6,101		7,125		117
Gain on sale of other loans and assets	3,151		3,831		(680)		(18)
Derivatives mark to market	(2,122)		(88)		(2,034)		2,311

Total noninterest income	$	67,854	$	62,957	$	4,897	8	%

Total noninterest income, excluding net securities gains, gain on sale of mortgage loans, gain on sale of other loans and assets and derivatives mark to market for the nine months ended September 30, 2020 increased $0.5 million, or 1%, compared to the nine months ended September 30, 2019. Card-related interchange income increased $1.8 million due to growth in customer accounts and transactions, including $1.4 million attributable to accounts acquired in the Santander branch acquisition in the third quarter of 2019. Service charges on deposit accounts decreased $1.7 million, despite a $0.7 million increase attributable to the Santander branch acquisition. The lower level of service charge on deposit accounts is a result of customers maintaining higher deposit balances due to CARES Act stimulus and lower consumer spending during the second and third quarters of 2020.

Total noninterest income increased $4.9 million, or 8%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include a $7.1 million increase in gain on sale of mortgage loans as a result of growth in our mortgage lending area. The mark to market adjustment on interest rate swaps entered into for our commercial customers resulted in a decrease of $2.0 million in noninterest income compared to the prior year period. This adjustment does not reflect a realized loss on the swaps, but rather relates to change in fair value due to movements in corporate bond spreads and swap rates. The gain on sale of other loans and assets decreased $0.7 million due to a lower volume of loans being sold in the first nine months of 2020 compared to the same period in 2019.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Noninterest Expense

The following table presents the components of noninterest expense for the nine months ended September 30:


	2020		2019		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	87,573	$	83,205	$	4,368	5	%
Net occupancy	13,979		13,878		101		1
Furniture and equipment	11,468		11,396		72		1
Data processing	7,804		7,988		(184)		(2)
Advertising and promotion	3,800		3,611		189		5
Pennsylvania shares tax	3,246		3,365		(119)		(4)
Intangible amortization	2,792		2,364		428		18

Other professional fees and services	2,755		2,755		—		—
FDIC insurance	1,637		1,164		473		41

Other operating	18,351		20,696		(2,345)		(11)
Subtotal	153,405		150,422		2,983		2
Loss on sale or write-down of assets	416		1,398		(982)		(70)


Merger and acquisition related	—		3,772		(3,772)		(100)
COVID-19 related	567		—		567		—
Voluntary early retirement	3,304		—		3,304		—
Branch consolidation	2,544		—		2,544		—
Litigation and operational losses	1,038		1,264		(226)		(18)
Total noninterest expense	$	161,274	$	156,856	$	4,418	3	%

Noninterest expense increased $4.4 million, or 3%, for the nine months ended September 30, 2020 compared to the same period in 2019. Contributing to the higher expenses in 2020 is a $4.4 million increase in salaries and employee benefits as a result of a higher number of full-time equivalent employees, annual merit increases and a $2.3 million increase in hospitalization expense. The higher number of employees is primarily a result of the acquisition of 14 branches from Santander in September 2019 and continued expansion of our mortgage and commercial banking businesses. The Santander acquisition accounted for $2.3 million of the salaries and employee benefits increase. Partially offsetting these increases in salaries and employee benefit expense was the deferral of $0.6 million in salary and benefit costs related to the origination of approximately 4,900 PPP loans during the second quarter of 2020. Included in the Other operating line in the table above is a $0.9 million decrease in unfunded commitment expense. This decrease is a result of updates made in the first quarter of 2020 to the probability of default and loss given default information incorporated into the calculation. FDIC insurance increased $0.5 million in comparison to the prior period due growth in our deposits. Loss on sale or write-down of assets decreased $1.0 million due to a $0.5 million write-down on an OREO property in the first nine months of 2019 with no similar activity in the current year.

Also increasing noninterest expense for the nine months ended September, 30, 2020 is $3.3 million related to the voluntary early retirement program and $2.5 million related to the branch consolidation initiative, both of which were announced during the third quarter of 2020. The early retirement program was offered to all eligible employees who will reach age 60 or above as of December 31, 2020. Approximately 72 employees elected to participate in the early retirement program resulting in the recognition of $2.9 million in severance and $0.4 million in hospitalization expense. The branch consolidation initiative includes combining 29 of the Company's retail locations into nearby offices by December 31, 2020 and the related expenses include writedowns of $1.4 million on owned properties and leasehold improvements and $0.7 million in lease termination expense. Offsetting these is a $3.8 million decrease in merger and acquisition expenses with the completion of the Santander acquisition in the third quarter of 2019 with no similar activity in 2020.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Income Tax

The provision for income taxes decreased $8.5 million, or 44.5%, for the nine months ended September 30, 2020, compared to the corresponding period in 2019. The effective tax rate decreased 140 basis points, or 7.2%, primarily due to a $39.2 million decrease in income before income taxes offset by a $0.6 million increase in tax-free income from bank owned life insurance.

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 nine months ended September 30, 2020 and 2019.

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. These provided for an annual effective tax rate of 18.1% and 19.5% for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, our deferred tax assets totaled $18.3 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 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.

Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Net Income

For the three months ended September 30, 2020, First Commonwealth recognized net income of $19.2 million, or $0.20 diluted earnings per share, compared to net income of $26.6 million, or $0.27 diluted earnings per share, in the three months ended September 30, 2019. The decrease in net income was primarily the result of a $8.5 million increase in the provision for credit losses, and a $2.1 million decrease net interest income.

For the three months ended September 30, 2020, the Company’s return on average equity was 7.01% and its return on average assets was 0.81%, compared to 10.22% and 1.31%, respectively, for the three months ended September 30, 2019.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $66.7 million in the third quarter of 2020, compared to $68.9 million for the same period in 2019. This decrease resulted despite the positive impact of $1.3 billion growth in average interest-earning assets, which was more than offset by the impact of lower interest rates that contributed to a 65 basis points decrease in the net interest margin. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 71.3% and 75.5% for the three months ended September 30, 2020 and 2019, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.11% and 3.76% for the three months ended September 30, 2020 and September 30, 2019, respectively. The decrease 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.

The taxable equivalent yield on interest-earning assets was 3.45% for the three months ended September 30, 2020, a decrease of 108 basis points compared to the 4.53% yield for the same period in 2019. This is largely due to a decrease in the loan portfolio yield, which declined by 106 basis points when compared to the three months ended September 30, 2019. Contributing to this was a decrease in the Federal Funds target rate of 181 basis points in comparison to September 30, 2019. While not fully reflected in the comparison of the periods presented, such decreases in rates have the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing liabilities, and any additional rate decreases would be expected to have a similar effect. Also impacting the yield on loans was PPP loans originated under the CARES Act which have a stated rate of 1% and a yield of 2.7%. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $2.4 million. These loans increased the average balance of loans by $572.4 million for the third quarter of 2020 causing an 11 basis point decrease in the yield on loans and a 3 basis point decrease in the net interest margin. The yield on the investment portfolio decreased 57 basis points in comparison to the prior year.

The cost of interest-bearing liabilities decreased to 0.49% for the three months ended September 30, 2020, from 1.05% for the same period in 2019, primarily due to a decrease in the cost of short-term borrowings and the cost of interest-bearing deposits.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Deposits acquired from the 3rd quarter 2019 acquisition of Santander branches as well as the portion of PPP loan proceeds still remaining in customers' deposit accounts contributed to a decline in average short-term borrowings of $198.4 million for the three months ended September 30, 2020 compared to the same period in 2019. Lower market interest rates resulted in the cost of interest-bearing deposits decreasing 55 basis points and short-term borrowings decreasing 188 basis points in comparison to the same period last year. Lower interest rates also impacted the cost of long-term debt, decreasing the cost by 14 basis points.

For the three months ended September 30, 2020, changes in interest rates negatively impacted net interest income by $17.0 million when compared with the same period in 2019. The lower yield on interest-earning assets negatively impacted net interest income by $23.6 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $6.5 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $14.9 million in the three months ended September 30, 2020, as compared to the same period in 2019. Higher levels of interest-earning assets resulted in an increase of $14.5 million in interest income while changes in the volume and mix of interest-bearing liabilities decreased interest expense by $0.4 million. Average interest-earning assets for the three months ended September 30, 2020 increased $1,259.6 million, or 17.3%, compared to the same period in 2019. Average loans for the comparable period increased $932.6 million, or 15.4%. Loans acquired with of the Santander branch acquisition contributed $26.1 million to the increase in average loans during the third quarter 2019.

Net interest income also benefited from a $740.8 million increase in average net free funds at September 30, 2020 as compared to September 30, 2019. 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 $720.7 million, or 46.2%, in noninterest-bearing demand deposit average balances. Average time deposits for the three months ended September 30, 2020 decreased by $167.5 million at lower costs compared to the comparable period in 2019, decreasing interest expense by $0.8 million.

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 September 30:


	2020		2019
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	73,593	$	82,575
Adjustment to fully taxable equivalent basis	373		430
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	73,966		83,005
Interest expense	7,224		14,130
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	66,742	$	68,875

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 September 30:


	2020						2019
	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	$	343,689	$	94	0.11	%	$	9,033	$	81	3.56	%
Tax-free investment securities	45,706		338		2.94		65,463		504		3.05
Taxable investment securities	1,163,857		5,757		1.97		1,151,774		7,382		2.54
Loans, net of unearned income (b)(c)(e)	6,975,402		67,777		3.87		6,042,822		75,038		4.93
Total interest-earning assets	8,528,654		73,966		3.45		7,269,092		83,005		4.53
Noninterest-earning assets:
Cash	100,751						93,740
Allowance for credit losses	(83,237)						(52,593)
Other assets	843,797						739,813
Total noninterest-earning assets	861,311						780,960
Total Assets	$	9,389,965					$	8,050,052
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,669,157	$	234	0.06	%	$	1,357,281	$	2,092	0.61	%
Savings deposits (d)	3,149,419		2,139		0.27		2,575,810		3,950		0.61
Time deposits	696,227		2,248		1.28		863,714		3,804		1.75
Short-term borrowings	124,670		35		0.11		323,041		1,620		1.99
Long-term debt	233,588		2,568		4.37		234,497		2,664		4.51
Total interest-bearing liabilities	5,873,061		7,224		0.49		5,354,343		14,130		1.05
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	2,281,200						1,560,478
Other liabilities	147,603						101,328
Shareholders’ equity	1,088,101						1,033,903
Total noninterest-bearing funding sources	3,516,904						2,695,709
Total Liabilities and Shareholders’ Equity	$	9,389,965					$	8,050,052
Net Interest Income and Net Yield on Interest-Earning Assets			$	66,742	3.11	%			$	68,875	3.76	%

(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 September 30, 2020 and 2019.

(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 September 30, 2020 compared with September 30, 2019:


	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	$	13	$	3,003	$	(2,990)
Tax-free investment securities	(166)		(152)		(14)
Taxable investment securities	(1,625)		77		(1,702)
Loans	(7,261)		11,589		(18,850)
Total interest income (b)	(9,039)		14,517		(23,556)
Interest-bearing liabilities:
Interest-bearing demand deposits	(1,858)		480		(2,338)
Savings deposits	(1,811)		882		(2,693)
Time deposits	(1,556)		(739)		(817)
Short-term borrowings	(1,585)		(995)		(590)
Long-term debt	(96)		(10)		(86)
Total interest expense	(6,906)		(382)		(6,524)
Net interest income	$	(2,133)	$	14,899	$	(17,032)

(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 table below provides a breakout of the provision for credit losses by loan category for the three months ended September 30:


	2020				2019
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	3,682	33	%	$	(17)	(1)	%
Real estate construction	270		3		(155)		(6)
Residential real estate	(870)		(8)		125		5
Commercial real estate	7,648		68		1,037		38
Loans to individuals	482		4		1,718		64

Total	$	11,212	100	%	$	2,708	100	%

The provision for credit losses for the three months ended September 30, 2020 increased in comparison to the three months ended September 30, 2019 by $8.5 million. The level of provision expense in the third quarter of 2020 is primarily a result of a $5.6 million increase in qualitative reserves due to the uncertain economic environment and consideration of the estimated probable losses incurred in certain loan categories that may be affected by COVID-19, such as hospitality and retail. In addition, a $1.1 million increase in specific reserves was recognized on four commercial loan relationships. Net charge-offs for the three months ended September 30, 2020 were $4.3 million.

The level of provision expense in the third quarter of 2019 was primarily due to $3.7 million in net charge-offs.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Below is an analysis of the consolidated allowance for credit losses for the three months ended September 30, 2020 and 2019 and the year-ended December 31, 2019:


	9/30/2020		9/30/2019		12/31/2019
	(dollars in thousands)
Balance, beginning of period	$	81,441	$	51,061	$	47,764
Loans charged off:
Commercial, financial, agricultural and other	3,395		791		3,393
Real estate construction	—		—		—
Residential real estate	283		383		1,042
Commercial real estate	—		1,382		2,008
Loans to individuals	1,229		1,574		5,831
Total loans charged off	4,907		4,130		12,274
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	57		62		326
Real estate construction	—		74		158
Residential real estate	166		17		315
Commercial real estate	110		81		189
Loans to individuals	228		162		626
Total recoveries	561		396		1,614
Net credit losses	4,346		3,734		10,660
Provision charged to expense	11,212		2,708		14,533
Balance, end of period	$	88,307	$	50,035	$	51,637

Noninterest Income

The following table presents the components of noninterest income for the three months ended September 30:


	2020		2019		$ Change		% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	2,554	$	2,325	$	229	10	%
Service charges on deposit accounts	4,035		4,954		(919)		(19)
Insurance and retail brokerage commissions	2,156		1,912		244		13
Income from bank owned life insurance	1,547		1,540		7		—
Card-related interchange income	6,441		5,629		812		14
Swap fee income	41		421		(380)		(90)
Other income	1,827		1,865		(38)		(2)
Subtotal	18,601		18,646		(45)		—
Net securities gains	20		9		11		122
Gain on sale of mortgage loans	6,437		2,599		3,838		148
Gain on sale of other loans and assets	1,871		970		901		93
Derivatives mark to market	(160)		(45)		(115)		256

Total noninterest income	$	26,769	$	22,179	$	4,590	21	%

Total noninterest income for the three months ended September 30, 2020 increased $4.6 million in comparison to the three months ended September 30, 2019. The most significant changes include a $3.8 million increase in the gain on sale of mortgage loans primarily due to growth in our mortgage lending area and a $0.9 million increase in gain on sale of other loans and assets due to an increase in the volume of SBA loans sold during the quarter. Additionally, card-related interchange income increased $0.8 million, of which $0.5 million is attributable to the Santander branches acquired in September 2019. Service charges on

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

deposits decreased $0.9 million for the three months ended due to customers maintaining higher deposit balances as a result of the CARES Act stimulus in 2020.

Noninterest Expense

The following table presents the components of noninterest expense for the three months ended September 30:


	2020		2019		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	28,823	$	28,674	$	149	1	%
Net occupancy	4,609		4,521		88		2
Furniture and equipment	4,033		3,904		129		3
Data processing	2,741		2,825		(84)		(3)
Advertising and promotion	1,115		1,140		(25)		(2)
Pennsylvania shares tax	1,254		1,189		65		5
Intangible amortization	939		865		74		9

Other professional fees and services	937		969		(32)		(3)
FDIC insurance	876		35		841		2,403

Other operating	6,555		6,577		(22)		—
Subtotal	51,882		50,699		1,183		2
Loss on sale or write-down of assets	63		152		(89)		(59)


Merger and acquisition related	—		3,738		(3,738)		(100)
COVID-19 related	125		—		125		—
Voluntary early retirement	3,304		—		3,304		—
Branch consolidation	2,544		—		2,544		—
Litigation and operational losses	329		308		21		7
Total noninterest expense	$	58,247	$	54,897	$	3,350	6	%

Noninterest expense increased $3.4 million, or 6%, for the three months ended September 30, 2020 compared to the same period in 2019. Contributing to the higher expenses in 2020 is a $0.8 million increase in FDIC Insurance expense. In the third quarter of 2019, we received a $0.6 million credit due to the FDIC deposit insurance fund reaching the required minimum reserve ratio. Because these credits were fully recognized in the second quarter of 2020, no credit was recognized during the three months ended September 30, 2020.

Additionally, noninterest expense was impacted by $3.3 million and $2.5 million recognized for the voluntary early retirement and branch consolidation initiatives, respectively. Branch consolidation expenses include $1.4 million related to writedowns on owned properties and leasehold improvements and $0.7 million in lease termination expense. Offsetting these increases is a decrease of $3.7 million in merger and acquisition expenses related to the Santander acquisition. There were no similar expenses in the current quarter.

Income Tax

The provision for income taxes decreased $1.9 million for the three months ended September 30, 2020, compared to the corresponding period in 2019. The effective tax rate decreased 30 basis points from 19.3% to 19.0% due to a $9.3 million decrease in income before income taxes.

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 nine months of 2020, the maturity and redemption of investment securities provided $349.4 million in liquidity. These

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

funds contributed to the liquidity used to pay down 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 September 30, 2020, our maximum borrowing capacity under this program was $1.4 billion and as of that date there was $4.5 million outstanding with an average weighted rate of 0.85% and an average original term of 334 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 September 30, 2020, the borrowing capacity under this program totaled $831.5 million and there was no balance outstanding. As of September 30, 2020, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.5 billion and as of that date amounts used against this capacity included $56.4 million in outstanding borrowings and no outstanding letters of credit.

We also have available unused federal funds lines with five correspondent banks. These lines have an aggregate commitment of $180.0 million with no outstanding balance as of September 30, 2020. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $456.0 million with no outstanding balance as of September 30, 2020.

First Commonwealth Financial Corporation has an unsecured $20.0 million line of credit with another financial institution. As of September 30, 2020, 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:


	September 30, 2020		December 31, 2019
	(dollars in thousands)
Noninterest-bearing demand deposits(a)	$	2,301,821	$	1,690,247
Interest-bearing demand deposits(a)	315,806		254,981
Savings deposits(a)	4,425,119		3,896,536
Time deposits	661,161		835,851
Total	$	7,703,907	$	6,677,615

(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 nine months of 2020, total deposits increased $1.0 billion. Interest-bearing demand and savings deposits increased $589.4 million, noninterest-bearing demand deposits increased $611.6 million and time deposits decreased $174.7 million. The deposit increase is a result of elevated customer deposit balances from PPP loan proceeds and the deposit of Federal stimulus checks into our customers' deposit accounts.

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 0.52 and 0.80 at September 30, 2020 and December 31, 2019, 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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 September 30, 2020 and December 31, 2019:


	September 30, 2020
	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	$	600,799		$	549,600		$	951,753		$	2,102,152		$	3,700,971		$	1,095,176
Investments	217,878			95,452			166,510			479,840			531,602			128,234
Other interest-earning assets	283,037			—			—			283,037			—			—
Total interest-sensitive assets (ISA)	1,101,714			645,052			1,118,263			2,865,029			4,232,573			1,223,410
Certificates of deposit	204,060			141,316			172,511			517,887			140,922			2,086
Other deposits	4,740,926			—			—			4,740,926			—			—
Borrowings	194,627			104			50,208			244,939			1,665			104,344
Total interest-sensitive liabilities (ISL)	5,139,613			141,420			222,719			5,503,752			142,587			106,430
Gap	$	(4,037,899)		$	503,632		$	895,544		$	(2,638,723)		$	4,089,986		$	1,116,980
ISA/ISL	0.21			4.56			5.02			0.52			29.68			11.49
Gap/Total assets	43.47		%	5.42		%	9.64		%	28.41		%	44.03		%	12.02		%


	December 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	$	2,818,183		$	313,651		$	494,467		$	3,626,301		$	2,052,952		$	475,962
Investments	103,225			79,866			162,225			345,316			633,178			235,437
Other interest-earning assets	19,510			—			—			19,510			—			—
Total interest-sensitive assets (ISA)	2,940,918			393,517			656,692			3,991,127			2,686,130			711,399
Certificates of deposit	121,302			161,488			303,245			586,035			246,512			2,822
Other deposits	4,151,518			—			—			4,151,518			—			—
Borrowings	274,213			193			385			274,791			103,082			53,064
Total interest-sensitive liabilities (ISL)	4,547,033			161,681			303,630			5,012,344			349,594			55,886
Gap	$	(1,606,115)		$	231,836		$	353,062		$	(1,021,217)		$	2,336,536		$	655,513
ISA/ISL	0.65			2.43			2.16			0.80			7.68			12.73
Gap/Total assets	19.33		%	2.79		%	4.25		%	12.29		%	28.12		%	7.89		%

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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
September 30, 2020 ($)	$	(6,033)		$	(3,754)		$	2,987		$	5,509
September 30, 2020 (%)	(2.18)		%	(1.35)		%	1.08		%	1.99		%

December 31, 2019 ($)	$	(12,540)		$	(5,880)		$	4,279		$	8,032
December 31, 2019 (%)	(4.52)		%	(2.12)		%	1.54		%	2.90		%

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)
September 30, 2020 ($)	$	(16,081)		$	(11,456)		$	9,659		$	17,680
September 30, 2020 (%)	(5.80)		%	(4.13)		%	3.48		%	6.37		%

December 31, 2019 ($)	$	(41,661)		$	(21,604)		$	12,259		$	22,291
December 31, 2019 (%)	(15.02)		%	(7.79)		%	4.42		%	8.04		%

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 nine months ended September 30, 2020 and 2019, the cost of our interest-bearing liabilities averaged 0.64% and 1.08%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.79% and 4.55%, 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 appropriateness of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated losses.

On March 27, 2020, the CARES Act was signed into law, which provides banking organizations with optional, temporary relief from complying with Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (“CECL”). The Company had planned to adopt CECL as of January 1, 2020, however, due to the uncertain economic conditions caused by the COVID-19 pandemic and the resulting volatility of economic forecasts, the Company elected to defer its adoption of CECL and has, therefore, calculated reserves for loan losses under the incurred loss method at September 30, 2020.

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 $250 thousand, loss experience trends and other relevant factors.

First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled $3.4 million at September 30, 2020 and is classified in "Other liabilities" on the unaudited 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 nine months of 2020, 33 loans totaling $1.8 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans decreased $2.0 million from December 31, 2019. Changes during the first nine months of 2020 can be attributed to new restructurings in conjunction with bankruptcy offset by payments received on existing troubled debt restructured loans, including the $1.9 million payoff of a commercial loan relationship. Please refer to Note 8 “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The CARES Act, along with a joint agency statement issued by banking regulators, provides that modifications meeting certain criteria made in response to COVID-19 do not need to be accounted for as a TDR. As of September 30, 2020, the Company has granted approximately 6,800 deferrals to its customers with aggregate principal balances of $1.4 billion. Payment deferrals granted on approximately 6,300 accounts or $1.3 billion in balances have expired as of October 23, 2020. It is possible that some of these deferrals will be extended in order to provide support for certain COVID-19 impacted customers. As of October 23, 2020, for the accounts on which payment deferrals have expired, 145 accounts or $13.2 million are past due 30-59 days, 25 accounts or $0.4 million are past due 60-89 days and 45 accounts or $1.2 million are past due 90 or more days and still in accruing status.

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, increased $17.5 million to $49.7 million at September 30, 2020 compared to $32.2 million at December 31, 2019. During the nine months ended September 30, 2020, $40.4 million of loans were moved to nonaccrual including the transfer of five commercial real estate relationships totaling $32.5 million and one commercial, financial, agricultural and other relationship totaling $0.7 million. Offsetting these additions was a $3.9 million payoff of a commercial real estate relationship, a $1.9 million payoff of a commercial, financial, agricultural and other relationship and a $2.3 million paydown of a commercial, financial, agricultural and other relationship.

The allowance for credit losses as a percentage of nonperforming loans was 177.58% as of September 30, 2020, compared to 160.28% at December 31, 2019, and 141.64% at September 30, 2019. 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 $7.4 million and general reserves of $80.9 million as of September 30, 2020. Specific reserves increased $5.0 million from December 31, 2019, and $5.9 million from September 30, 2019. The increase from both periods is primarily due to specific reserves of $5.7 million added on the $27.0 million in new commercial real estate nonaccrual loans. Offsetting this was a $0.9 million decrease in specific reserves related to commercial, financial, agricultural and other loans and an $0.8 million decrease related to commercial real estate loans due to the aforementioned payoffs. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at September 30, 2020.

Criticized loans totaled $189.0 million at September 30, 2020 and represented 2.7% of the loan portfolio. The level of criticized loans increased as of September 30, 2020 when compared to December 31, 2019, by $88.4 million, or 87.8%. Classified loans totaled $80.2 million at September 30, 2020 compared to $52.0 million at December 31, 2019, an increase of $28.2 million, or 54.1%. The increase in criticized loans is the result of the aforementioned changes in nonperforming loans as well as credit downgrades on borrowers primarily in the hospitality and retail sectors. Delinquency on accruing loans for the same period decreased $1.9 million, or 14.4%, the majority of which are residential real estate loans.

The allowance for credit losses was $88.3 million at September 30, 2020, or 1.27% of total loans outstanding, compared to 0.83% reported at December 31, 2019, and 0.82% at September 30, 2019. 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 1.17% at September 30, 2020 compared to 0.80% at December 31, 2019 and 0.80% at September 30, 2019. General reserves as a percentage of non-impaired originated loans were 1.24% at September 30, 2020 compared to 0.86% at December 31, 2019 and 0.87% at September 30, 2019. The increase in the general reserve for both periods is reflective of higher qualitative reserves

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

maintained at September 30, 2020 as a result of the COVID-19 pandemic. These reserves were increased in order to provide for risks related to the uncertain economic environment, the large volume of consumer forbearances granted as of September 30, 2020 as a result of COVID-19 as well as consideration of the probable losses incurred in certain loan categories, such as hospitality and retail.

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


	September 30,								December 31, 2019
	2020				2019
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	38,139			$	16,227			$	18,638
Loans held for sale on a nonaccrual basis	—				—				—
Troubled debt restructured loans on nonaccrual basis	4,511				11,074				6,037
Troubled debt restructured loans on accrual basis	7,078				8,024				7,542
Total nonperforming loans	$	49,728			$	35,325			$	32,217
Loans past due 30 to 90 days and still accruing	$	10,259			$	12,387			$	11,378
Loans past due in excess of 90 days and still accruing	$	1,249			$	2,054			$	2,073
Other real estate owned	$	1,079			$	1,622			$	2,228
Loans held for sale at end of period	$	37,998			$	20,288			$	15,989
Portfolio loans outstanding at end of period	$	6,949,716			$	6,099,561			$	6,189,148
Average loans outstanding	$	6,670,819		(a)	$	5,935,427		(a)	$	5,987,398		(b)
Nonperforming loans as a percentage of total loans	0.71		%		0.58		%		0.52		%
Provision for credit losses	$	49,038		(a)	$	9,638		(a)	$	14,533		(b)
Allowance for credit losses	$	88,307			$	50,035			$	51,637
Net charge-offs	$	12,368		(a)	$	7,367		(a)	$	10,660		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.25		%		0.17		%		0.18		%
Provision for credit losses as a percentage of net charge-offs	396.49		%	(a)	130.83		%	(a)	136.33		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	1.27		%		0.82		%		0.83		%
Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans (c)	1.38		%		0.82		%		0.83		%
Allowance for credit losses on originated loans as a percentage of end-of-period originated loans outstanding	1.31		%		0.90		%		0.90		%
Allowance for credit losses on originated loans as a percentage of end-of-period originated loans outstanding, excluding PPP loans	1.44		%		0.90		%		0.90		%
Allowance for credit losses as a percentage of nonperforming loans (d)	177.58		%		141.64		%		160.28		%

(a)For the nine-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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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:


	September 30, 2020				December 31, 2019
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,736,736	25	%	$	1,241,853	20	%
Real estate construction	452,989		7		449,039		7
Residential real estate	1,744,020		25		1,681,362		27
Commercial real estate	2,215,311		32		2,117,519		34
Loans to individuals	800,660		11		699,375		12
Total loans and leases net of unearned income	$	6,949,716	100	%	$	6,189,148	100	%

During the nine months ended September 30, 2020, loans increased $760.6 million, or 12.3%, compared to balances outstanding at December 31, 2019. All loan categories reflect growth for the nine months ended September 30, 2020, with commercial, financial, agricultural and other loans, commercial real estate and loans to individuals providing a majority of the growth.

Commercial, financial, agricultural and other loans increased $494.9 million, or 39.9%, due to the origination of $570.9 million in PPP loans for small businesses who meet the necessary eligibility requirements. PPP loans are 100% guaranteed by the SBA under the CARES Act and are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the PPP requirements. Because PPP loans are fully guaranteed by the SBA, there is no allowance for credit losses recognized for these loans. These loans carry a fixed rate of 1.00% and currently yield 2.7% after considering origination fees and costs. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of loan. PPP loans are for a term of two years, if not forgiven, in whole or in part and payments are deferred for the first six months of the loan. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program that cannot be determined at this time.

Real estate construction loans increased $4.0 million, or 0.9%, primarily due to growth in residential real estate construction. Residential real estate grew $62.7 million, or 3.7%, primarily due to originations of closed-end 1-4 family mortgage loans. Commercial real estate loans increased $97.8 million, or 4.6%, primarily due to construction real estate loans that converted to permanent loans. Loans to individuals increased $101.3 million, or 14.5%, as a result of growth in the indirect auto and recreational vehicle portfolio of $118.8 million offset by a decrease in other consumer loans of $17.5 million.

As indicated in the table below, commercial real estate and residential real estate loans represent a significant portion of the nonperforming loans as of September 30, 2020. See discussions related to the provision for credit losses and loans for more information.


	For the Nine Months Ended September 30, 2020						As of September 30, 2020
	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	$	4,977	40.24	%	0.10	%	$	5,619	11.30	%	0.08	%
Real estate construction	(26)		(0.21)		—		362		0.73		0.01
Residential real estate	621		5.02		0.01		11,391		22.91		0.16
Commercial real estate	2,263		18.30		0.05		31,850		64.04		0.45
Loans to individuals	4,533		36.65		0.09		506		1.02		0.01
Total loans, net of unearned income	$	12,368	100.00	%	0.25	%	$	49,728	100.00	%	0.71	%

Net charge-offs for the nine months ended September 30, 2020 totaled $12.4 million, compared to $7.4 million for the nine months ended September 30, 2019. The most significant charge-offs during the nine months ended September 30, 2020 included $4.2 million in charge-offs related to three commercial, financial, agricultural and other loan relationships and a $2.2 million charge-off related to a commercial real estate loan relationship, as well as $4.5 million in net charge-offs related to

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 September 30, 2020, shareholders’ equity was $1.1 billion, an increase of $17.2 million from December 31, 2019. The increase was primarily the result of $47.8 million in net income, $2.7 million in treasury stock sales and an increase of $13.5 million in the fair value of available for sale investments. These increases were partially offset by $32.4 million of dividends paid to shareholders and $14.4 million of common stock repurchases. Cash dividends declared per common share were $0.33 and $0.30 for the nine months ended September 30, 2020 and 2019, 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 included 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 rules improved 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, which was fully phased-in as of January 1, 2019, 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 7.0% 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.

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 September 30, 2020, the Company had $573.5 million in PPP loans outstanding under the CARES Act. Because these loans are 100% guaranteed by the SBA, banking regulators confirmed that they have a zero percent risk weight under applicable risk-based capital rules. Additionally, a bank may exclude all PPP loans pledged as collateral to the Federal Reserve's PPP Facility from average total assets when calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. The PPP loans originated by the Company are included in our leverage ratio as of September 30, 2020, as we did not utilize the PPP Facility.

As of September 30, 2020, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which they are subject and were 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:

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


	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	$	992,342	14.44	%		$	721,538	10.50	%	$	687,179	10.00	%
First Commonwealth Bank	967,486		14.11			719,943		10.50		685,660		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	807,968	11.76	%		$	584,102	8.50	%	$	549,744	8.00	%
First Commonwealth Bank	783,300		11.42			582,811		8.50		548,528		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	807,968	8.94	%		$	361,699	4.00	%	$	452,124	5.00	%
First Commonwealth Bank	783,300		8.68			360,923		4.00		451,154		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	737,968	10.74	%		$	481,026	7.00	%	$	446,667	6.50	%
First Commonwealth Bank	783,300		11.42			479,962		7.00		445,679		6.50

On October 27, 2020, First Commonwealth Financial Corporation declared a quarterly dividend of $0.11 per share payable on November 20, 2020 to shareholders of record as of November 6, 2020. 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 September 30, 2020, 1,969,474 common shares were repurchased at an average price of $9.41 per share.

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 one-time 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, however, on March 27, 2020, the CARES Act was signed into law, providing banking organizations with optional, temporary relief from implementing CECL until the earlier of the date on which the national emergency related to COVID-19 ends or December 31, 2020. As provided by the CARES Act, the Company has elected to delay its adoption of CECL as a result of the uncertainty and volatility around economic forecasts.

During our implementation process, we 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. In the fourth quarter of 2018, a third party was engaged to assist with evaluation of data and methodologies related to this standard.

As part of its process of adopting CECL, Management implemented a third party software solution and determined appropriate loan segments, methodologies, model assumptions and qualitative components. Our implementation plan also included the assessment and documentation of appropriate processes, policies and internal controls. Refinement and completion of this documentation was completed during the first quarter of 2020. Additionally, Management engaged a third party to perform a model validation, which was completed during the fourth quarter of 2019 and first quarter of 2020. During the third quarter of 2020, Management engaged a third party to complete an annual loss driver analysis. Due to updates incorporated into the model as a result of this analysis, a third party model validation was also completed in the third quarter.

Parallel runs were completed beginning with the third quarter of 2019 incorporating operational procedures and internal controls. Based on the composition, characteristics and quality of our loan portfolio as well as prevailing economic conditions and forecasts as of the January 1, 2020 adoption date, we expect that ASU 2016-13 will result in an increase of approximately 20% - 30% to our December 31, 2019 allowance for credit losses of $51.6 million.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

In addition, ASU 2016-13 amends the accounting for credit losses on certain debt securities. Based upon the nature and characteristics of our securities portfolio at the adoption date, management will not record any allowance for credit losses on its debt securities as a result of adopting ASU 2016-13.

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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 6, "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 previously disclosed under Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

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 in the third quarter of 2020:


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*
July 31, 2020	—	—		—	1,985,972
August 31, 2020	—	—		—	1,906,048
September 30, 2020	1,207,916	7.58		1,207,916	836,734

Total	1,207,916	$	7.58	1,207,916

* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $7.87 at July 31, 2020, $8.20 at August 31, 2020 and $7.74 at September 30, 2020.

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

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. Note that XBRL tags are embedded within the document.

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: November 6, 2020						/s/ T. Michael Price
						T. Michael Price President and Chief Executive Officer

DATED: November 6, 2020						/s/ James R. Reske
						James R. Reske Executive Vice President, Chief Financial Officer and Treasurer