FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2021 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, 2021


☐			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, 2021, was 94,932,087.

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)	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to the Unaudited Consolidated Financial Statements	10

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	78

ITEM 4.	Controls and Procedures	78

PART II.	Other Information

ITEM 1.	Legal Proceedings	79

ITEM 1A.	Risk Factors	79

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79

ITEM 3.	Defaults Upon Senior Securities	79

ITEM 4.	Mine Safety Disclosures	79

ITEM 5.	Other Information	79

ITEM 6.	Exhibits	80

	Signatures	81

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)


	September 30, 2021		December 31, 2020

	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	94,579	$	100,009
Interest-bearing bank deposits	240,095		256,572
Securities available for sale, at fair value	1,124,956		831,223
Securities held to maturity, at amortized cost (Fair value of $547,343 and $369,851 at September 30, 2021 and December 31, 2020, respectively)	548,057		361,844
Other investments	12,719		12,227
Loans held for sale	19,925		33,436
Loans:
Portfolio loans	6,732,580		6,761,183
Allowance for credit losses	(94,185)		(101,309)
Net loans	6,638,395		6,659,874
Premises and equipment, net	117,879		125,517
Other real estate owned	502		1,215
Goodwill	303,328		303,328
Amortizing intangibles, net	11,764		13,492
Bank owned life insurance	225,746		225,952
Other assets	139,909		143,415
Total assets	$	9,477,854	$	9,068,104
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	2,656,229	$	2,319,958
Interest-bearing	5,280,256		5,118,708
Total deposits	7,936,485		7,438,666
Short-term borrowings	117,754		117,373
Subordinated debentures	170,734		170,612
Other long-term debt	5,746		56,258
Capital lease obligation	6,039		6,385
Total long-term debt	182,519		233,255
Other liabilities	128,241		210,193
Total liabilities	8,364,999		7,999,487
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, 2021 and December 31, 2020, and 95,209,685 and 96,130,751 shares outstanding at September 30, 2021 and December 31, 2020, respectively	113,915		113,915
Additional paid-in capital	495,929		494,683
Retained earnings	667,422		596,614
Accumulated other comprehensive income, net	3,516		17,233
Treasury stock (18,705,217 and 17,784,151 shares at September 30, 2021 and December 31, 2020, respectively)	(167,927)		(153,828)

Total shareholders’ equity	1,112,855		1,068,617
Total liabilities and shareholders’ equity	$	9,477,854	$	9,068,104

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,
	2021		2020		2021		2020
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	67,259	$	67,474	$	200,939	$	207,290
Interest and dividends on investments:
Taxable interest	6,560		5,598		18,226		19,064
Interest exempt from federal income taxes	142		268		460		850
Dividends	105		159		386		536
Interest on bank deposits	130		94		297		163
Total interest income	74,196		73,593		220,308		227,903
Interest Expense
Interest on deposits	1,269		4,621		4,753		18,756
Interest on short-term borrowings	19		35		77		670
Interest on subordinated debentures	2,146		2,146		6,410		6,434
Interest on other long-term debt	56		356		596		1,065
Interest on lease obligations	61		66		185		199

Total interest expense	3,551		7,224		12,021		27,124
Net Interest Income	70,645		66,369		208,287		200,779
Provision for credit losses	330		11,212		1,353		49,038
Net Interest Income after Provision for Credit Losses	70,315		55,157		206,934		151,741
Noninterest Income



Net securities gains	—		20		16		47
Trust income	3,118		2,554		8,340		6,774
Service charges on deposit accounts	4,770		4,035		13,127		12,066
Insurance and retail brokerage commissions	2,218		2,156		6,368		5,982
Income from bank owned life insurance	1,486		1,547		4,946		4,963
Gain on sale of mortgage loans	3,485		6,437		11,615		13,226
Gain on sale of other loans and assets	2,480		1,871		6,281		3,151
Card-related interchange income	7,052		6,441		20,885		17,589
Derivatives mark to market	218		(160)		1,371		(2,122)

Swap fee income	317		41		1,715		864
Other income	2,101		1,827		6,022		5,314
Total noninterest income	27,245		26,769		80,686		67,854
Noninterest Expense
Salaries and employee benefits	31,066		28,823		88,084		87,573
Net occupancy	3,960		4,609		12,614		13,979
Furniture and equipment	4,052		4,033		11,866		11,468
Data processing	3,196		2,741		9,440		7,804
Advertising and promotion	1,150		1,115		3,829		3,800

Pennsylvania shares tax	1,257		1,254		3,347		3,246
Intangible amortization	868		939		2,597		2,792

Other professional fees and services	1,308		937		3,150		2,755
FDIC insurance	830		876		1,964		1,637
Loss on sale or write-down of assets	171		63		223		416

Litigation and operational losses	589		329		1,624		1,038


COVID-19 related	50		125		357		567
Voluntary early retirement	—		3,304		—		3,304
Branch consolidation	—		2,544		18		2,544
Other operating	6,530		6,555		19,316		18,351
Total noninterest expense	55,027		58,247		158,429		161,274
Income Before Income Taxes	42,533		23,679		129,191		58,321
Income tax provision	8,441		4,493		25,710		10,557
Net Income	$	34,092	$	19,186	$	103,481	$	47,764

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

Table of Contents


Average Shares Outstanding	95,616,421		97,917,096		95,883,868		97,990,749
Average Shares Outstanding Assuming Dilution	95,892,304		98,160,143		96,130,602		98,224,506

Per Share Data: Basic Earnings per Share	$	0.36	$	0.20	$	1.08	$	0.49
Diluted Earnings per Share	$	0.36	$	0.20	$	1.08	$	0.49
Cash Dividends Declared per Common Share	$	0.115	$	0.110	$	0.340	$	0.330

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,
	2021		2020		2021		2020
	(dollars in thousands)
Net Income	$	34,092	$	19,186	$	103,481	$	47,764
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period	(4,025)		(3,256)		(18,122)		22,069

Less: reclassification adjustment for gains on securities included in net income	—		(20)		(16)		(47)
Unrealized holding (losses) gains on derivatives arising during the period	(529)		225		776		(4,892)

Total other comprehensive (loss) income, before tax benefit (expense)	(4,554)		(3,051)		(17,362)		17,130
Income tax benefit (expense) related to items of other comprehensive (loss) income	955		640		3,645		(3,598)
Total other comprehensive (loss) income	(3,599)		(2,411)		(13,717)		13,532
Comprehensive Income	$	30,493	$	16,775	$	89,764	$	61,296

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, 2020	96,130,751	$	113,915	$	494,683	$	596,614	$	17,233	$	(153,828)	$	1,068,617


Net income						103,481						103,481
Other comprehensive loss								(13,717)				(13,717)
Cash dividends declared ($0.340 per share)						(32,673)						(32,673)




Treasury stock acquired	(1,194,062)									(15,985)		(15,985)
Treasury stock reissued	173,907			771		—				1,493		2,264
Restricted stock	99,089	—		475		—				393		868

Balance at September 30, 2021	95,209,685	$	113,915	$	495,929	$	667,422	$	3,516	$	(167,927)	$	1,112,855


	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 ($0.330 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

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, 2021	96,201,628	$	113,915	$	495,899	$	644,362	$	7,115	$	(154,872)	$	1,106,419


Net income						34,092						34,092
Other comprehensive loss								(3,599)				(3,599)
Cash dividends declared ($0.115 per share)						(11,032)						(11,032)




Treasury stock acquired	(997,943)									(13,327)		(13,327)
Treasury stock reissued	—			—		—				—		—
Restricted stock	6,000	—		30		—				272		302

Balance at September 30, 2021	95,209,685	$	113,915	$	495,929	$	667,422	$	3,516	$	(167,927)	$	1,112,855




	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 ($0.110 per share)						(10,794)						(10,794)




Treasury stock acquired	(1,207,916)			—						(9,153)		(9,153)
Treasury stock reissued	—			—		—				—		—
Restricted stock	—	—		—		—				298		298

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

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,
	2021		2020
Operating Activities	(dollars in thousands)
Net income	$	103,481	$	47,764
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	1,353		49,038
Deferred tax expense (benefit)	1,057		(5,059)
Depreciation and amortization	8,784		8,676
Net gains on securities and other assets	(17,093)		(12,608)
Net amortization of premiums and discounts on securities	3,693		4,662

Income from increase in cash surrender value of bank owned life insurance	(4,617)		(4,699)
Decrease (increase) in interest receivable	4,590		(13,105)
Mortgage loans originated for sale	(308,744)		(287,196)
Proceeds from sale of mortgage loans	338,115		281,424
Increase in interest payable	929		575
Increase (decrease) in income taxes payable	2,142		(536)

Other-net	(14,267)		1,888
Net cash provided by operating activities	119,423		70,824
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	89,698		76,841
Purchases	(337,054)		(9,621)
Transactions with securities available for sale:

Proceeds from maturities and redemptions	353,788		272,544
Purchases	(667,861)		(282,461)
Purchases of FHLB stock	(3,552)		(21,903)
Proceeds from the redemption of FHLB stock	3,060		25,698
Proceeds from bank owned life insurance	5,208		1,147
Proceeds from sale of loans	52,919		25,534
Proceeds from sale of other assets	6,620		4,875


Net increase in loans	(37,782)		(798,377)

Purchases of premises and equipment and other assets	(6,056)		(6,570)
Net cash used in investing activities	(541,012)		(712,293)
Financing Activities

Net increase (decrease) in other short-term borrowings	381		(79,497)
Net increase in deposits	497,915		1,026,580
Repayments of other long-term debt	(50,512)		(493)
Repayments of capital lease obligation	(346)		(321)



Dividends paid	(32,673)		(32,408)
Proceeds from reissuance of treasury stock	222		222
Purchase of treasury stock	(15,305)		(14,373)

Net cash provided by financing activities	399,682		899,710
Net (decrease) increase in cash and cash equivalents	(21,907)		258,241
Cash and cash equivalents at January 1	356,581		121,856
Cash and cash equivalents at September 30	$	334,674	$	380,097

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, 2021 are not necessarily indicative of the results that may be expected for the full year of 2021. These interim financial statements should be read in conjunction with First Commonwealth’s 2020 Annual Report on Form 10-K.

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the 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,
	2021						2020
	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	$	(18,122)	$	3,805	$	(14,317)	$	22,069	$	(4,635)	$	17,434

Reclassification adjustment for gains on securities included in net income	(16)		3		(13)		(47)		10		(37)
Total unrealized (losses) gains on securities	(18,138)		3,808		(14,330)		22,022		(4,625)		17,397
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period	776		(163)		613		(4,892)		1,027		(3,865)
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized gains (losses) on derivatives	776		(163)		613		(4,892)		1,027		(3,865)




Total other comprehensive (loss) income	$	(17,362)	$	3,645	$	(13,717)	$	17,130	$	(3,598)	$	13,532

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,
	2021						2020
	Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized losses on securities:
Unrealized holding losses on securities arising during the period	$	(4,025)	$	844	$	(3,181)	$	(3,256)	$	684	$	(2,572)

Reclassification adjustment for gains on securities included in net income	—		—		—		(20)		4		(16)
Total unrealized losses on securities	(4,025)		844		(3,181)		(3,276)		688		(2,588)
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period	(529)		111		(418)		225		(48)		177
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized (losses) gains on derivatives	(529)		111		(418)		225		(48)		177




Total other comprehensive loss	$	(4,554)	$	955	$	(3,599)	$	(3,051)	$	640	$	(2,411)

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


	2021								2020
	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	$	20,310	$	(182)	$	(2,895)	$	17,233	$	4,580	$	365	$	634	$	5,579


Other comprehensive (loss) income before reclassification adjustment	(14,317)		—		613		(13,704)		17,434		—		(3,865)		13,569
Amounts reclassified from accumulated other comprehensive (loss) income	(13)		—		—		(13)		(37)		—		—		(37)
Net other comprehensive (loss) income during the period	(14,330)		—		613		(13,717)		17,397		—		(3,865)		13,532
Balance at September 30	$	5,980	$	(182)	$	(2,282)	$	3,516	$	21,977	$	365	$	(3,231)	$	19,111

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




	2021								2020
	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	$	9,161	$	(182)	$	(1,864)	$	7,115	$	24,565	$	365	$	(3,408)	$	21,522


Other comprehensive loss before reclassification adjustment	(3,181)		—		(418)		(3,599)		(2,572)		—		177		(2,395)
Amounts reclassified from accumulated other comprehensive (loss) income	—		—		—		—		(16)		—		—		(16)
Net other comprehensive loss during the period	(3,181)		—		(418)		(3,599)		(2,588)		—		177		(2,411)
Balance at September 30	$	5,980	$	(182)	$	(2,282)	$	3,516	$	21,977	$	365	$	(3,231)	$	19,111

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the period for interest and income taxes, as well as detail on non-cash investing and financing activities for the nine months ended September 30:


	2021		2020
	(dollars in thousands)
Cash paid during the period for:
Interest	$	11,039	$	26,687
Income taxes	22,374		16,207
Non-cash investing and financing activities:

Loans transferred to other real estate owned and repossessed assets	2,533		3,206
Loans transferred from held to maturity to held for sale	55,700		27,391

Loans transferred from available for sale to held to maturity	—		1,908
Gross (decrease) increase in market value adjustment to securities available for sale	(18,138)		22,022
Gross increase (decrease) in market value adjustment to derivatives	776		(4,892)
Investments committed to purchase, not settled	—		22,644
Increase in limited partnership investment unfunded commitment	6,929		—
Noncash treasury stock reissuance	2,042		1,594

Unsettled treasury stock repurchases	680		—
Proceeds from death benefit on bank owned life insurance not received	(384)		(384)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4 Earnings per Share

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Weighted average common shares issued	113,914,902		113,914,902		113,914,902		113,914,902
Average treasury stock shares	(18,103,611)		(15,821,469)		(17,840,694)		(15,761,114)
Average deferred compensation shares	(55,615)		(45,454)		(55,581)		(41,790)
Average unearned nonvested shares	(139,255)		(130,883)		(134,759)		(121,249)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	95,616,421		97,917,096		95,883,868		97,990,749
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	220,268		197,545		191,119		188,255
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share	55,615		45,502		55,615		45,502

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	95,892,304		98,160,143		96,130,602		98,224,506
Basic Earnings per Share	$	0.36	$	0.20	$	1.08	$	0.49
Diluted Earnings per Share	$	0.36	$	0.20	$	1.08	$	0.49

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.


	2021					2020
		Price Range					Price Range
	Shares	From		To		Shares	From		To

Restricted Stock	111,589	$	12.77	$	14.58	110,068	$	13.72	$	15.44
Restricted Stock Units	29,547	$	16.41	$	16.41	102,844	$	12.43	$	15.37

Note 5 Commitments and Contingent Liabilities

Commitments and Letters of Credit

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

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


	September 30, 2021		December 31, 2020
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	2,270,058	$	2,097,628
Financial standby letters of credit	15,914		15,988
Performance standby letters of credit	11,233		16,864
Commercial letters of credit	975		783

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The notional amounts outstanding as of September 30, 2021 include amounts issued in 2021 of $2.5 million in performance standby letters of credit and $0.1 million in financial standby letters of credit. There were no commercial letters of credit issued in 2021, however there was a change in terms for one letter of credit which increased its commitment amount. A liability of $0.1 million has been recorded as of both September 30, 2021 and December 31, 2020, 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 $6.4 million and $7.4 million as of September 30, 2021 and December 31, 2020, respectively. This liability is reflected in "Other liabilities" in the unaudited Consolidated Statements of Financial Condition. The credit risk evaluation incorporates the expected loss percentage calculated for comparable loan categories as part of the allowance for credit losses for loans as well as estimated utilization for each loan category.

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, 2021, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $1 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 Investment Securities

Securities Available for Sale

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


	September 30, 2021								December 31, 2020
	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	$	5,448	$	534	$	—	$	5,982	$	6,492	$	738	$	—	$	7,230
Mortgage-Backed Securities – Commercial	390,566		4,588		(1,447)		393,707		182,823		8,357		—		191,180
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	682,677		9,296		(6,547)		685,426		481,109		14,924		—		496,033

Other Government-Sponsored Enterprises	1,000		—		(9)		991		100,996		2		—		100,998
Obligations of States and Political Subdivisions	9,586		105		(81)		9,610		11,154		243		—		11,397
Corporate Securities	28,107		1,173		(40)		29,240		22,941		1,444		—		24,385



Total Securities Available for Sale	$	1,117,384	$	15,696	$	(8,124)	$	1,124,956	$	805,515	$	25,708	$	—	$	831,223

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, 2021, by contractual maturity, are shown below.


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	5,000	$	5,027
Due after 1 but within 5 years	13,872		14,498
Due after 5 but within 10 years	19,821		20,316
Due after 10 years	—		—
	38,693		39,841
Mortgage-Backed Securities (a)	1,078,691		1,085,115
Total Debt Securities	$	1,117,384	$	1,124,956

(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 $396.0 million and a fair value of $399.7 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $682.7 million and a fair value of $685.4 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 and maturities related to securities held to maturity and securities available for sale were as follows for the nine months ended September 30:


	2021		2020
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities
Gross gains	16		47
Gross losses	—		—

	16		47
Net gains	$	16	$	47

Securities available for sale with an estimated fair value of $802.2 million and $792.1 million were pledged as of September 30, 2021 and December 31, 2020, 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, 2021								December 31, 2020
	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	$	2,432	$	125	$	—	$	2,557	$	2,766	$	138	$	—	$	2,904
Mortgage-Backed Securities- Commercial	96,228		590		(834)		95,984		36,799		1,441		—		38,240
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	387,399		3,832		(4,303)		386,928		277,351		5,389		(10)		282,730
Mortgage-Backed Securities – Commercial	7,927		235		—		8,162		9,737		344		—		10,081
Other Government-Sponsored Enterprises	21,825		—		(726)		21,099		—		—		—		—
Obligations of States and Political Subdivisions	31,246		461		(94)		31,613		34,391		705		—		35,096
Debt Securities Issued by Foreign Governments	1,000		—		—		1,000		800		—		—		800




Total Securities Held to Maturity	$	548,057	$	5,243	$	(5,957)	$	547,343	$	361,844	$	8,017	$	(10)	$	369,851

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2021, 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	$	1,800	$	1,807
Due after 1 but within 5 years	5,568		5,616
Due after 5 but within 10 years	43,207		42,769
Due after 10 years	3,496		3,520
	54,071		53,712
Mortgage-Backed Securities (a)	493,986		493,631
Total Debt Securities	$	548,057	$	547,343

(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 $98.7 million and a fair value of $98.5 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $395.3 million and a fair value of $395.1 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 $334.5 million and $228.1 million were pledged as of September 30, 2021 and December 31, 2020, 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of September 30, 2021 and December 31, 2020, our FHLB stock totaled $11.0 million and $10.6 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, 2021.

As of both September 30, 2021 and December 31, 2020, "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, 2021 and 2020, 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

We review our investment portfolio on a quarterly basis for indications of impairment. For available for sale securities, the

review includes analyzing 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 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 and our

cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. Held-to-maturity securities are

evaluated for impairment on a quarterly basis using historical probability of default and loss given default information specific

to the investment category. If this evaluation determines that credit losses exist an allowance for credit loss is recorded and

included in earnings as a component of credit loss expense.

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.

The following table presents the gross unrealized losses and estimated fair values at September 30, 2021 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:


	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:

Mortgage-Backed Securities – Commercial	$	213,203	$	(2,281)	$	—	$	—	$	213,203	$	(2,281)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	640,235		(10,850)		—		—		640,235		(10,850)

Other Government-Sponsored Enterprises	22,090		(735)		—		—		22,090		(735)
Obligations of States and Political Subdivisions	13,798		(175)		—		—		13,798		(175)

Corporate Securities	5,111		(40)		—		—		5,111		(40)



Total Securities	$	894,437	$	(14,081)	$	—	$	—	$	894,437	$	(14,081)

At September 30, 2021, fixed income securities issued by the U.S. Government and U.S. Government-sponsored enterprises comprised 98% of total unrealized losses due to changes in market interest rates. At September 30, 2021, there are 52 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, 2020 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	$	3,755	$	(10)	$	—	$	—	$	3,755	$	(10)





Total Securities	$	3,755	$	(10)	$	—	$	—	$	3,755	$	(10)

As of September 30, 2021, our corporate securities had an amortized cost and an estimated fair value of $28.1 million and $29.2 million, respectively. As of December 31, 2020, our corporate securities had an amortized cost and estimated fair value of $22.9 million and $24.4 million, respectively. Corporate securities are comprised of debt issued by large regional banks. There was one corporate security in an unrealized loss position as of September 30, 2021 and none as of December 31, 2020. When unrealized losses exist, management reviews each of the issuer’s asset quality, earnings trends and capital position to determine whether the unrealized loss position is a result of credit losses. All interest payments on the corporate securities are being made as contractually required.

There was no expected credit related impairment recognized on investment securities during the nine months ended September 30, 2021 and 2020.

Note 7 Loans and Allowance for Credit Losses

Loans are presented in the Consolidated Statements of Financial Condition net of deferred fees and costs, and discounts related to purchased loans. Net deferred fees were $2.6 million and $6.0 million as of September 30, 2021 and December 31, 2020, respectively, and discounts on purchased loans were $6.3 million and $7.0 million at September 30, 2021 and December 31, 2020, respectively. The following table provides outstanding balances related to each of our loan types:


	September 30, 2021		December 31, 2020

	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,224,591	$	1,555,986
Time and demand	1,210,694		1,541,382
Commercial credit cards	13,897		14,604
Real estate construction	424,016		427,221
Residential real estate	1,875,375		1,750,592
Residential first lien	1,254,142		1,144,323
Residential junior lien/home equity	621,233		606,269
Commercial real estate	2,231,890		2,211,569
Multifamily	405,720		371,239
Nonowner occupied	1,442,845		1,421,151
Owner occupied	383,325		419,179
Loans to individuals	976,708		815,815
Automobile	886,367		712,800
Consumer credit cards	10,617		12,360
Consumer other	79,724		90,655
Total loans	$	6,732,580	$	6,761,183

In the table above, Commercial, financial, agricultural and other loans at September 30, 2021 and December 31, 2020 includes $152.1 million and $478.9 million, respectively, 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

On March 27, 2020, the CARES Act was signed into law, providing banking organizations with optional, temporary relief from complying with CECL. The Company elected to defer its adoption of CECL until the fourth quarter 2020. At the end of the deferral period, CECL was adopted effective January 1, 2020. The allowance for credit losses for the interim period ending September 30, 2020, was calculated in accordance with previously applicable GAAP.

First Commonwealth’s loan portfolio includes five primary loan categories. When calculating the allowance for credit losses these categories are classified into eleven portfolio segments. The composition of loans by portfolio segment includes:

Commercial, financial, agricultural and other

Time & Demand - Consists primarily of commercial and industrial loans. This category consists of loans that are typically cash flow dependent and therefore have different risk and loss characteristics than other commercial loans. Loans in this category include revolving and term structures with fixed and variable interest rates. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and economic conditions measured by GDP.

Commercial Credit Cards - Consists of unsecured credit cards for commercial customers. These commercial credit cards have separate characteristics outside of normal commercial non-real estate loans, as they tend to have shorter overall duration. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and economic conditions measured by GDP.

Real estate construction

Includes both 1-4 family and commercial construction loans. The risk and loss characteristics of the construction category are different than other real estate secured categories due to the collateral being at various stages of completion. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and measures of completed construction projects.

Residential real estate

Residential first lien - Consists of loans with collateral of 1-4 family residencies with a senior lien position. The risk and loss characteristics are unique for this group because the collateral for these loans are the borrower’s primary residence. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and residential property values.

Residential Junior Lien/Home Equity - Consists of loans with collateral of 1-4 family residencies with an open end line of credit or junior lien position. The junior lien position for the majority of these loans provides a higher risk of loss than other residential real estate loans. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and residential property values.

Commercial real estate

Multifamily - Consists of loans secured by commercial multifamily properties. Real estate related to rentals to consumers could provide unique risk and loss characteristics. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of commercial real estate values and rental vacancy.

Nonowner Occupied - Consists of loans secured by commercial real estate non-owner occupied and provides different loss characteristics than other real estate categories. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and economic conditions measured by GDP.

Owner Occupied - Consists of loans secured by commercial real estate owner occupied properties. The risk and loss characteristics of this category were considered different than other real estate categories because it is owner occupied and would impact the ability to conduct business. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of national unemployment and economic conditions measured by GDP.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans to individuals

Automobile - Consists of both direct and indirect loans with automobiles and recreational vehicles held as collateral. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of consumer sentiment and automobile retention value.

Consumer Credit Cards – Consists of unsecured consumer credit cards. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of consumer sentiment and economic conditions measured by GDP.

Other Consumer - Consists of lines of credit, student loans and other consumer loans, not secured by real estate or autos. The primary macroeconomic drivers for estimating credit losses for this category include forecasts of consumer sentiment and the level of household debt.

The allowance for credit losses is calculated by pooling loans of similar credit risk characteristics and applying a discounted cash flow methodology after incorporating probability of default and loss given default estimates. Probability of default represents an estimate of the likelihood of default and loss given default measures the expected loss upon default. Inputs impacting the expected losses include a forecast of macroeconomic factors, using a weighted forecast from a nationally recognized firm. Our model incorporates a one-year forecast of macroeconomic factors, after which the factors revert back to the historical mean over a one-year period. The most significant macroeconomic factor used in estimating credit losses is the national unemployment rate. The forecasted value for national unemployment at September 30, 2021 was 5.13% and during the one-year forecast period it was projected to average 5.00%, with a peak of 5.13%.

Credit Quality Information

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


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

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

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

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

The 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. 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables represent our credit risk profile by creditworthiness:


	September 30, 2021
			Non-Pass
	Pass		OAEM		Substandard		Doubtful		Loss		Total Non-Pass		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,185,987	$	12,318	$	26,286	$	—	$	—	$	38,604	$	1,224,591
Time and demand	1,172,090		12,318		26,286		—		—		38,604		1,210,694
Commercial credit cards	13,897		—		—		—		—		—		13,897
Real estate construction	422,668		1,294		54		—		—		1,348		424,016
Residential real estate	1,867,190		1,516		6,669		—		—		8,185		1,875,375
Residential first lien	1,249,248		1,444		3,450		—		—		4,894		1,254,142
Residential junior lien/home equity	617,942		72		3,219		—		—		3,291		621,233
Commercial real estate	2,084,476		121,883		25,531		—		—		147,414		2,231,890
Multifamily	390,579		14,635		506		—		—		15,141		405,720
Nonowner occupied	1,323,095		99,917		19,833		—		—		119,750		1,442,845
Owner occupied	370,802		7,331		5,192		—		—		12,523		383,325
Loans to individuals	976,468		—		240		—		—		240		976,708
Automobile	886,183		—		184		—		—		184		886,367
Consumer credit cards	10,617		—		—		—		—		—		10,617
Consumer other	79,668		—		56		—		—		56		79,724
Total loans	$	6,536,789	$	137,011	$	58,780	$	—	$	—	$	195,791	$	6,732,580


	December 31, 2020
			Non-Pass
	Pass		OAEM		Substandard		Doubtful		Loss		Total Non-Pass		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,491,916	$	48,233	$	15,837	$	—	$	—	$	64,070	$	1,555,986
Time and demand	1,477,312		48,233		15,837		—		—		64,070		1,541,382
Commercial credit cards	14,604		—		—		—		—		—		14,604
Real estate construction	426,663		504		54		—		—		558		427,221
Residential real estate	1,740,992		1,902		7,698		—		—		9,600		1,750,592
Residential first lien	1,138,409		1,780		4,134		—		—		5,914		1,144,323
Residential junior lien/home equity	602,583		122		3,564		—		—		3,686		606,269
Commercial real estate	1,983,258		175,995		52,316		—		—		228,311		2,211,569
Multifamily	369,883		131		1,225		—		—		1,356		371,239
Nonowner occupied	1,216,252		161,336		43,563		—		—		204,899		1,421,151
Owner occupied	397,123		14,528		7,528		—		—		22,056		419,179
Loans to individuals	815,541		—		274		—		—		274		815,815
Automobile	712,539		—		261		—		—		261		712,800
Consumer credit cards	12,360		—		—		—		—		—		12,360
Consumer other	90,642		—		13		—		—		13		90,655
Total loans	$	6,458,370	$	226,634	$	76,179	$	—	$	—	$	302,813	$	6,761,183

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the loan risk rating category by loan type including term loans on an amortized cost basis by origination year:


	September 30, 2021
	Term Loans												Revolving Loans
	2021		2020		2019		2018		2017		Prior				Total
	(dollars in thousands)
Time and demand	$	305,101	$	127,699	$	145,265	$	100,018	$	54,657	$	118,361	$	359,593	$	1,210,694
Pass	305,081		127,623		126,211		99,050		51,866		109,244		353,015		1,172,090
OAEM	—		75		1,173		816		67		7,323		2,864		12,318
Substandard	20		1		17,881		152		2,724		1,794		3,714		26,286
Commercial credit cards	—		—		—		—		—		—		13,897		13,897
Pass	—		—		—		—		—		—		13,897		13,897


Real estate construction	109,671		145,193		118,290		48,963		455		936		508		424,016
Pass	109,647		143,923		118,290		48,963		455		882		508		422,668
OAEM	24		1,270		—		—		—		—		—		1,294
Substandard	—		—		—		—		—		54		—		54
Residential first lien	280,135		372,184		138,407		95,498		81,299		284,645		1,974		1,254,142
Pass	280,124		372,164		138,236		95,081		81,160		280,586		1,897		1,249,248
OAEM	—		—		—		71		—		1,296		77		1,444
Substandard	11		20		171		346		139		2,763		—		3,450
Residential junior lien/home equity	42,602		2,207		3,682		3,038		1,161		6,297		562,246		621,233
Pass	42,602		2,207		3,604		3,038		1,161		6,141		559,189		617,942
OAEM	—		—		—		—		—		62		10		72
Substandard	—		—		78		—		—		94		3,047		3,219
Multifamily	81,608		80,628		16,466		54,180		65,075		106,420		1,343		405,720
Pass	81,608		80,628		16,466		54,180		50,974		105,380		1,343		390,579
OAEM	—		—		—		—		14,101		534		—		14,635
Substandard	—		—		—		—		—		506		—		506
Nonowner occupied	113,742		111,404		198,003		163,617		195,894		655,679		4,506		1,442,845
Pass	113,742		111,404		198,003		145,792		163,703		587,138		3,313		1,323,095
OAEM	—		—		—		17,825		25,274		55,781		1,037		99,917
Substandard	—		—		—		—		6,917		12,760		156		19,833
Owner occupied	49,257		59,485		56,875		34,738		33,796		143,789		5,385		383,325
Pass	49,257		57,858		54,392		34,212		32,449		137,363		5,271		370,802
OAEM	—		1,414		1,239		526		1,323		2,796		33		7,331
Substandard	—		213		1,244		—		24		3,630		81		5,192
Automobile	384,494		276,368		139,680		57,986		22,494		5,345		—		886,367
Pass	384,494		276,368		139,599		57,956		22,487		5,279		—		886,183

Substandard	—		—		81		30		7		66		—		184
Consumer credit cards	—		—		—		—		—		—		10,617		10,617
Pass	—		—		—		—		—		—		10,617		10,617


Consumer other	10,223		5,288		9,439		6,166		854		5,793		41,961		79,724
Pass	10,223		5,288		9,439		6,166		854		5,749		41,949		79,668

Substandard	—		—		—		—		—		44		12		56
Total	$	1,376,833	$	1,180,456	$	826,107	$	564,204	$	455,685	$	1,327,265	$	1,002,030	$	6,732,580

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 31, 2020
	Term Loans												Revolving Loans
	2020		2019		2018		2017		2016		Prior				Total
	(dollars in thousands)
Time and demand	$	598,053	$	193,601	$	142,224	$	72,277	$	74,228	$	83,313	$	377,686	$	1,541,382
Pass	597,405		189,834		140,473		63,137		68,007		65,418		353,038		1,477,312
OAEM	93		3,373		972		8,820		6,182		8,043		20,750		48,233
Substandard	555		394		779		320		39		9,852		3,898		15,837
Commercial credit cards	—		—		—		—		—		—		14,604		14,604
Pass	—		—		—		—		—		—		14,604		14,604


Real estate construction	150,493		133,195		104,167		34,803		389		1,009		3,165		427,221
Pass	150,493		133,195		104,167		34,803		389		709		2,907		426,663
OAEM	—		—		—		—		—		246		258		504
Substandard	—		—		—		—		—		54		—		54
Residential first lien	316,052		184,550		142,823		110,365		91,495		297,057		1,981		1,144,323
Pass	316,028		184,533		142,467		110,260		91,059		292,158		1,904		1,138,409
OAEM	—		—		83		—		100		1,520		77		1,780
Substandard	24		17		273		105		336		3,379		—		4,134
Residential junior lien/home equity	3,055		5,783		4,545		2,005		1,303		7,127		582,451		606,269
Pass	3,055		5,698		4,545		2,005		1,303		6,909		579,068		602,583
OAEM	—		—		—		—		—		112		10		122
Substandard	—		85		—		—		—		106		3,373		3,564
Multifamily	76,249		16,287		69,439		66,963		34,383		106,328		1,590		371,239
Pass	76,249		16,287		69,439		66,963		34,383		104,972		1,590		369,883
OAEM	—		—		—		—		—		131		—		131
Substandard	—		—		—		—		—		1,225		—		1,225
Nonowner occupied	105,861		199,280		161,018		214,915		217,883		518,052		4,142		1,421,151
Pass	105,861		190,301		139,643		181,659		175,148		419,900		3,740		1,216,252
OAEM	—		8,979		21,375		26,339		37,762		66,752		129		161,336
Substandard	—		—		—		6,917		4,973		31,400		273		43,563
Owner occupied	59,519		72,313		61,079		40,796		27,415		152,555		5,502		419,179
Pass	58,551		70,726		55,478		39,351		26,359		141,376		5,282		397,123
OAEM	968		684		4,736		1,421		114		6,572		33		14,528
Substandard	—		903		865		24		942		4,607		187		7,528
Automobile	350,293		202,923		96,355		45,218		14,285		3,726		—		712,800
Pass	350,293		202,827		96,336		45,187		14,255		3,641		—		712,539

Substandard	—		96		19		31		30		85		—		261
Consumer credit cards	—		—		—		—		—		—		12,360		12,360
Pass	—		—		—		—		—		—		12,360		12,360


Consumer other	7,814		14,464		10,752		1,965		711		6,383		48,566		90,655
Pass	7,814		14,464		10,752		1,965		711		6,373		48,563		90,642

Substandard	—		—		—		—		—		10		3		13
Total	$	1,667,389	$	1,022,396	$	792,402	$	589,307	$	462,092	$	1,175,550	$	1,052,047	$	6,761,183

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Portfolio Risks

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

Total net charge-offs for the nine months ended September 30, 2021 and 2020 were $9.5 million and $12.4 million, respectively.

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, 2021 and December 31, 2020. 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, 2021
	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)
Commercial, financial, agricultural and other	$	158	$	478	$	33	$	4,554	$	5,223	$	1,219,368	$	1,224,591
Time and demand	23		459		—		4,554		5,036		1,205,658		1,210,694
Commercial credit cards	135		19		33		—		187		13,710		13,897
Real estate construction	—		—		—		54		54		423,962		424,016
Residential real estate	3,354		824		411		6,046		10,635		1,864,740		1,875,375
Residential first lien	2,217		272		172		3,036		5,697		1,248,445		1,254,142
Residential junior lien/home equity	1,137		552		239		3,010		4,938		616,295		621,233
Commercial real estate	177		45		—		19,782		20,004		2,211,886		2,231,890
Multifamily	—		—		—		435		435		405,285		405,720
Nonowner occupied	175		—		—		17,783		17,958		1,424,887		1,442,845
Owner occupied	2		45		—		1,564		1,611		381,714		383,325
Loans to individuals	1,751		351		691		240		3,033		973,675		976,708
Automobile	1,363		83		158		184		1,788		884,579		886,367
Consumer credit cards	50		22		25		—		97		10,520		10,617
Consumer other	338		246		508		56		1,148		78,576		79,724
Total loans	$	5,440	$	1,698	$	1,135	$	30,676	$	38,949	$	6,693,631	$	6,732,580

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 31, 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)
Commercial, financial, agricultural and other	$	146	$	62	$	112	$	3,317	$	3,637	$	1,552,349	$	1,555,986
Time and demand	97		28		23		3,317		3,465		1,537,917		1,541,382
Commercial credit cards	49		34		89		—		172		14,432		14,604
Real estate construction	936		—		—		54		990		426,231		427,221
Residential real estate	3,883		1,492		769		6,824		12,968		1,737,624		1,750,592
Residential first lien	1,775		660		267		3,489		6,191		1,138,132		1,144,323
Residential junior lien/home equity	2,108		832		502		3,335		6,777		599,492		606,269
Commercial real estate	237		160		3		35,072		35,472		2,176,097		2,211,569
Multifamily	—		—		—		460		460		370,779		371,239
Nonowner occupied	18		104		—		31,822		31,944		1,389,207		1,421,151
Owner occupied	219		56		3		2,790		3,068		416,111		419,179
Loans to individuals	2,870		852		639		274		4,635		811,180		815,815
Automobile	2,090		417		94		261		2,862		709,938		712,800
Consumer credit cards	52		39		123		—		214		12,146		12,360
Consumer other	728		396		422		13		1,559		89,096		90,655
Total loans	$	8,072	$	2,566	$	1,523	$	45,541	$	57,702	$	6,703,481	$	6,761,183

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.

Nonperforming Loans

Management considers loans to be nonperforming 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. Nonperforming loans include nonaccrual loans and all troubled debt restructured loans. When management identifies a loan as nonperforming, the credit loss 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 loan is less than the recorded investment in the loan, a credit loss is recognized through an allowance estimate or a charge-off to the allowance for credit losses.

When the ultimate collectability of the total principal of a nonperforming 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 a nonperforming 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, 2021, there were no nonperforming loans held for sale. Subsequent to September 30, 2021, as the result of a borrower initiated sale, a $6.9 million nonperforming commercial real estate loan with a $0.3 million specific reserve was sold

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

at par. At December 31, 2020, there was one nonperforming loan totaling $13 thousand classified as held for sale. During the nine months ended September 30, 2021, a $5.0 million nonperforming relationship was transferred to held for sale and sold, resulting in a $0.4 million gain. During the nine months ended September 30, 2020, there were no gains recognized on the sale of nonperforming loans.

The following tables include the recorded investment and unpaid principal balance for nonperforming loans with the associated allowance amount, if applicable, as of September 30, 2021 and December 31, 2020. Also presented are the average recorded investment in nonperforming loans and the related amount of interest recognized while the loan was considered nonperforming. 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, 2021						December 31, 2020
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	4,836	$	15,308			$	2,025	$	2,725
Time and demand	4,836		15,308				2,025		2,725

Real estate construction	54		53				54		53
Residential real estate	9,910		12,101				10,939		13,258
Residential first lien	5,599		7,003				6,062		7,575
Residential junior lien/home equity	4,311		5,098				4,877		5,683
Commercial real estate	13,176		13,981				20,650		23,641
Multifamily	—		—				1		82
Nonowner occupied	11,531		12,147				16,786		19,459
Owner occupied	1,645		1,834				3,863		4,100
Loans to individuals	498		537				418		447
Automobile	442		476				405		430

Consumer other	56		61				13		17
Subtotal	28,474		41,980				34,086		40,124
With an allowance recorded:
Commercial, financial, agricultural and other	1,899		1,898		$	479	4,210		9,377		$	1,268
Time and demand	1,899		1,898		479		4,210		9,377		1,268

Real estate construction	—		—		—		—		—		—
Residential real estate	—		—		—		—		—		—
Residential first lien	—		—		—		—		—		—
Residential junior lien/home equity	—		—		—		—		—		—
Commercial real estate	7,713		7,794		501		15,757		15,830		3,638
Multifamily	435		456		103		459		470		116
Nonowner occupied	6,917		6,979		338		15,060		15,122		3,508
Owner occupied	361		359		60		238		238		14
Loans to individuals	—		—		—		—		—		—
Automobile	—		—		—		—		—		—

Consumer other	—		—		—		—		—		—
Subtotal	9,612		9,692		980		19,967		25,207		4,906
Total	$	38,086	$	51,672	$	980	$	54,053	$	65,331	$	4,906

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,
		2021				2020
	Total Loans			Originated Loans				Acquired Loans
		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		$	9,266	$	50	$	4,062	$	15	$	74	$	—
Time and demand		9,266		50

Real estate construction		54		—		6		—		137		—
Residential real estate		10,504		275		10,380		235		1,772		18
Residential first lien		5,734		210
Residential junior lien/home equity		4,770		65
Commercial real estate		20,813		101		13,994		90		1,453		76
Multifamily		—		—
Nonowner occupied		18,050		15
Owner occupied		2,763		86
Loans to individuals		486		12		469		9		11		—
Automobile		433		12

Consumer other		53		—
Subtotal		41,123		438		28,911		349		3,447		94
With an allowance recorded:
Commercial, financial, agricultural and other		1,820		50		4,569		45		—		—
Time and demand		1,820		50

Real estate construction		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Residential first lien		—		—
Residential junior lien/home equity		—		—
Commercial real estate		7,408		—		13,830		9		—		—
Multifamily		451		—
Nonowner occupied		6,917		—
Owner occupied		40		—
Loans to individuals		—		—		—		—		—		—
Automobile		—		—

Consumer other		—		—
Subtotal		9,228		50		18,399		54		—		—
Total		$	50,351	$	488	$	47,310	$	403	$	3,447	$	94

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,
		2021				2020
	Total Loans			Originated Loans				Acquired Loans
		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		$	9,858	$	3	$	1,918	$	10	$	74	$	—
Time and demand		9,858		3

Real estate construction		54		—		18		—		308		—
Residential real estate		10,060		54		10,198		72		1,473		1
Residential first lien		5,558		34
Residential junior lien/home equity		4,502		20
Commercial real estate		15,967		68		14,312		23		1,440		76
Multifamily		—		—
Nonowner occupied		13,633		4
Owner occupied		2,334		64
Loans to individuals		504		6		494		3		11		—
Automobile		448		6

Consumer other		56		—
Subtotal		36,443		131		26,940		108		3,306		77
With an allowance recorded:
Commercial, financial, agricultural and other		1,842		19		6,423		16		—		—
Time and demand		1,842		19

Real estate construction		—		—		—		—		—		—
Residential real estate		—		—		—		—		—		—
Residential first lien		—		—
Residential junior lien/home equity		—		—
Commercial real estate		7,476		—		17,407		3		—		—
Multifamily		439		—
Nonowner occupied		6,917		—
Owner occupied		120		—
Loans to individuals		—		—		—		—		—		—
Automobile		—		—

Consumer other		—		—
Subtotal		9,318		19		23,830		19		—		—
Total		$	45,761	$	150	$	50,770	$	127	$	3,306	$	77

Unfunded commitments related to nonperforming loans were $0.2 million at both September 30, 2021 and December 31, 2020. After consideration of the requirements to draw and available collateral related to these commitments, it was determined that no reserve was required at September 30, 2021. At December 31, 2020, a reserve of $26 thousand was established for these off balance sheet exposures.

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 alternative financing sources. Troubled debt restructured loans are considered to be nonperforming loans.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

along with a joint agency statement issued by banking regulators, provides that short-term modifications, meeting certain 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. As of September 30, 2021, loans with an aggregate principal balance of $29.9 million were in a forbearance period granted under the CARES Act compared to $113.8 million as of December 31, 2020 and $65.4 million as of September 30, 2020.

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


	September 30, 2021		December 31, 2020
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	7,410	$	8,512
Nonaccrual status	16,210		14,740
Total	$	23,620	$	23,252
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	15		11
Total	$	75	$	71

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, 2021
		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	6	$	—	$	—	$	6,803	$	6,803	$	2,895	$	—
Time and demand	6	—		—		6,803		6,803		2,895		—


Residential real estate	13	—		219		301		520		500		—
Residential first lien	10	—		219		171		390		375		—
Residential junior lien/home equity	3	—		—		130		130		125		—
Commercial real estate	2	—		—		644		644		645		—

Nonowner occupied	2	—		—		644		644		645		—

Loans to individuals	7	—		110		63		173		151		—
Automobile	7	—		110		63		173		151		—


Total	28	$	—	$	329	$	7,811	$	8,140	$	4,191	$	—


	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

The troubled debt restructurings included in the above tables are also included in the nonperforming 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, 2021 and 2020, $284 thousand and $766 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 2021 and 2020, the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

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 Three Months Ended September 30, 2021
		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	5	$	—	$	—	$	206	$	206	$	202	$	—
Time and demand	5	—		—		206		206		202		—


Residential real estate	5	—		113		117		230		221		—
Residential first lien	3	—		113		—		113		109		—
Residential junior lien/home equity	2	—		—		117		117		112		—
Commercial real estate	2	—		—		644		644		645		—

Nonowner occupied	2	—		—		644		644		645		—

Loans to individuals	3	—		17		63		80		76		—
Automobile	3	—		17		63		80		76		—


Total	15	$	—	$	130	$	1,030	$	1,160	$	1,144	$	—


	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

The troubled debt restructurings included in the above tables are also included in the nonperforming 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, 2021 and 2020, $86 thousand and $694 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 2021 and 2020 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:



	2021			2020
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)


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

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:



	2021			2020
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)



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

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


	For the Nine Months Ended September 30, 2021
	Beginning balance		Charge-offs		Recoveries		Provision (credit)a		Ending balance
	(dollars in thousands)
Commercial, financial, agricultural and other	$	17,187	$	(6,522)	$	299	$	6,898	$	17,862
Time and demand	16,838		(6,397)		292		6,849		17,582
Commercial credit cards	349		(125)		7		49		280
Real estate construction	7,966		—		135		(3,768)		4,333
Residential real estate	14,358		(130)		309		(1,732)		12,805
Residential first lien	7,919		(36)		206		(632)		7,457
Residential junior lien/home equity	6,439		(94)		103		(1,100)		5,348
Commercial real estate	41,953		(1,659)		130		(5,784)		34,640
Multifamily	6,240		(1)		—		(2,408)		3,831
Nonowner occupied	28,414		(1,556)		120		(880)		26,098
Owner occupied	7,299		(102)		10		(2,496)		4,711
Loans to individuals	19,845		(3,199)		1,163		6,736		24,545
Automobile	16,133		(1,399)		826		5,642		21,202
Consumer credit cards	635		(372)		51		182		496
Consumer other	3,077		(1,428)		286		912		2,847
Total loans	$	101,309	$	(11,510)	$	2,036	$	2,350	$	94,185

a) The provision expense(credit) shown here excludes the provision for off-balance sheet credit exposure included in the income statement.

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, 2021
							Loans
	Ending balance		Ending balance: individually evaluated for credit losses		Ending balance: collectively evaluated for credit losses		Ending balance		Ending balance: individually evaluated for credit losses		Ending balance: collectively evaluated for credit losses
	(dollars in thousands)
Commercial, financial, agricultural and other	$	17,862	$	479	$	17,383	$	1,224,591	$	5,561	$	1,219,030
Time and demand	17,582		479		17,103		1,210,694		5,561		1,205,133
Commercial credit cards	280		—		280		13,897		—		13,897
Real estate construction	4,333		—		4,333		424,016		—		424,016
Residential real estate	12,805		—		12,805		1,875,375		254		1,875,121
Residential first lien	7,457		—		7,457		1,254,142		—		1,254,142
Residential junior lien/home equity	5,348		—		5,348		621,233		254		620,979
Commercial real estate	34,640		501		34,139		2,231,890		20,333		2,211,557
Multifamily	3,831		103		3,728		405,720		435		405,285
Nonowner occupied	26,098		338		25,760		1,442,845		18,314		1,424,531
Owner occupied	4,711		60		4,651		383,325		1,584		381,741
Loans to individuals	24,545		—		24,545		976,708		—		976,708
Automobile	21,202		—		21,202		886,367		—		886,367
Consumer credit cards	496		—		496		10,617		—		10,617
Consumer other	2,847		—		2,847		79,724		—		79,724
Total loans	$	94,185	$	980	$	93,205	$	6,732,580	$	26,148	$	6,706,432

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, 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 Three Months Ended September 30, 2021
	Beginning balance		Charge-offs		Recoveries		Provision (credit)a		Ending balance
	(dollars in thousands)
Commercial, financial, agricultural and other	$	21,466	$	(2,066)	$	106	$	(1,644)	$	17,862
Time and demand	21,098		(2,059)		104		(1,561)		17,582
Commercial credit cards	368		(7)		2		(83)		280
Real estate construction	4,285		—		—		48		4,333
Residential real estate	12,933		(11)		98		(215)		12,805
Residential first lien	7,394		—		24		39		7,457
Residential junior lien/home equity	5,539		(11)		74		(254)		5,348
Commercial real estate	35,795		(102)		90		(1,143)		34,640
Multifamily	4,379		—		—		(548)		3,831
Nonowner occupied	26,911		—		80		(893)		26,098
Owner occupied	4,505		(102)		10		298		4,711
Loans to individuals	22,559		(727)		335		2,378		24,545
Automobile	19,298		(331)		251		1,984		21,202
Consumer credit cards	528		(125)		9		84		496
Consumer other	2,733		(271)		75		310		2,847
Total loans	$	97,038	$	(2,906)	$	629	$	(576)	$	94,185

a) The provision expense(credit) shown here excludes the provision for off-balance sheet credit exposure included in the income statement.


	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

Note 8 Leases

First Commonwealth has elected to apply certain practical expedients provided under ASU 2016-02 "Leases" (Topic 842) 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, including 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


					September 30, 2021			December 31, 2020
Balance sheet:
Operating lease asset classified as premises and equipment					$	40,245		$	42,617
Operating lease liability classified as other liabilities					44,473			46,819
	For the Three Months Ended				For the Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021			September 30, 2020
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	1,202	$	1,545	$	3,603		$	4,281

Weighted average lease term, in years					14.36			15.10
Weighted average discount rate					3.34		%	3.42		%
Operating cash flows					$	1,190		$	2,007

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

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

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2021 were as follows (dollars in thousands):


For the twelve months ended:
September 30, 2022	$	4,623
September 30, 2023	4,591
September 30, 2024	4,428
September 30, 2025	4,306
September 30, 2026	3,849
Thereafter	35,364
Total future minimum lease payments	57,161
Less remaining imputed interest	12,688
Operating lease liability	$	44,473

Note 9 Income Taxes

In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” at September 30, 2021 and December 31, 2020, 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, 2018 are no longer open to examination by federal and state taxing authorities.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10 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, premise 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 nonperforming 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 6, “Investment Securities.”

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. Also included in loans held for sale are commercial loans for which fair value is determined using an executed trade or market bid obtained from potential buyers.

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 11, “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.

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 nonperforming 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, 2021

Other Investments

1,670

Carrying Value

N/A

Nonperforming Loans

657

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$2.00 - $2.00 (b)

Oil per BBL/d

$50.00 - $50.00 (b)

Limited Partnership Investments

14,613

Par Value

N/A

December 31, 2020

Other Investments

1,670

Carrying Value

N/A

Nonperforming Loans

798

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$1.46 - $1.48 (b)

Oil per BBL/d

$36 - $36 (b)

Limited Partnership Investments

6,619

Par Value

N/A

(a)The remainder of nonperforming 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 - one million British thermal units; BBL/d - barrels per day.

The discount rate is the significant unobservable input used in the fair value measurement of nonperforming 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 nonperforming 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, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	5,982	$	—	$	5,982
Mortgage-Backed Securities - Commercial	—		393,707		—		393,707
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		685,426		—		685,426

Other Government-Sponsored Enterprises	—		991		—		991
Obligations of States and Political Subdivisions	—		9,610		—		9,610
Corporate Securities	—		29,240		—		29,240



Total Securities Available for Sale	—		1,124,956		—		1,124,956
Other Investments	—		11,049		1,670		12,719
Loans Held for Sale	—		19,925		—		19,925

Other Assets(a)	—		34,631		14,613		49,244
Total Assets	$	—	$	1,190,561	$	16,283	$	1,206,844
Other Liabilities(a)	$	—	$	38,743	$	—	$	38,743
Total Liabilities	$	—	$	38,743	$	—	$	38,743

(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, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	7,230	$	—	$	7,230
Mortgage-Backed Securities - Commercial	—		191,180		—		191,180
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		496,033		—		496,033

Other Government-Sponsored Enterprises	—		100,998		—		100,998
Obligations of States and Political Subdivisions	—		11,397		—		11,397
Corporate Securities	—		24,385		—		24,385



Total Securities Available for Sale	—		831,223		—		831,223
Other Investments	—		10,557		1,670		12,227
Loans Held for Sale	—		33,436		—		33,436
Premises and Equipment, net	—		442		—		442
Other Assets(a)	—		54,362		6,619		60,981
Total Assets	$	—	$	930,020	$	8,289	$	938,309
Other Liabilities(a)	$	—	$	61,308	$	—	$	61,308
Total Liabilities	$	—	$	61,308	$	—	$	61,308

(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:


	2021
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	6,620	$	8,290
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		8,113		8,113
Issuances	—		—		—
Sales	—		—		—
Settlements	—		(120)		(120)
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	14,613	$	16,283

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	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

During the nine months ended September 30, 2021 and 2020, 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, 2021 and 2020.

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:


	2021
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	7,448	$	9,118
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		7,194		7,194
Issuances	—		—		—
Sales	—		—		—
Settlements	—		(29)		(29)
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	14,613	$	16,283

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	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

During the three months ended September 30, 2021 and 2020, 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, 2021 and 2020.

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


	September 30, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Nonperforming loans	$	—	$	24,512	$	12,594	$	37,106
Other real estate owned	—		631		—		631
Total Assets	$	—	$	25,143	$	12,594	$	37,737


	December 31, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Nonperforming loans	$	—	$	35,543	$	13,604	$	49,147
Other real estate owned	—		1,319		—		1,319
Total Assets	$	—	$	36,862	$	13,604	$	50,466

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,
	2021		2020		2021		2020
	(dollars in thousands)
Nonperforming loans	$	(745)	$	(3,695)	$	(2,537)	$	(9,940)
Other real estate owned	—		(4)		—		(4)
Total losses	$	(745)	$	(3,699)	$	(2,537)	$	(9,944)

Nonperforming 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 nonperforming 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

is performed to determine fair value for nonperforming 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 nonperforming loans with balances of $250 thousand and over. For real estate secured loans with balances under $250 thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.

The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned, determined using an internal valuation, is classified as Level 3. Other real estate owned has a current carrying value of $0.5 million as of September 30, 2021 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 12, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2021.

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, 2021 and December 31, 2020. See Note 5, “Commitments and Contingent Liabilities,” for additional information.

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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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


	September 30, 2021
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	94,579	$	94,579	$	94,579	$	—	$	—
Interest-bearing deposits	240,095		240,095		240,095		—		—
Securities available for sale	1,124,956		1,124,956		—		1,124,956		—
Securities held to maturity	548,057		547,343		—		547,343		—
Other investments	12,719		12,719		—		11,049		1,670
Loans held for sale	19,925		19,925		—		19,925		—
Loans	6,732,580		7,118,886		—		24,512		7,094,374
Financial liabilities
Deposits	7,936,485		7,936,033		—		7,936,033		—
Short-term borrowings	117,754		117,602		—		117,602		—
Subordinated debt	170,734		175,178		—		—		175,178
Long-term debt	5,746		6,385		—		6,385		—
Capital lease obligation	6,039		6,039		—		6,039		—


	December 31, 2020
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	100,009	$	100,009	$	100,009	$	—	$	—
Interest-bearing deposits	256,572		256,572		256,572		—		—
Securities available for sale	831,223		831,223		—		831,223		—
Securities held to maturity	361,844		369,851		—		369,851		—
Other investments	12,227		12,227		—		10,557		1,670
Loans held for sale	33,436		33,436		—		33,436		—
Loans	6,761,183		7,202,763		—		35,543		7,167,220
Financial liabilities
Deposits	7,438,666		7,440,906		—		7,440,906		—
Short-term borrowings	117,373		117,037		—		117,037		—
Subordinated debt	170,612		165,665		—		—		165,665
Long-term debt	56,258		57,881		—		57,881		—
Capital lease obligation	6,385		6,385		—		6,385		—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11 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 35 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 16 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.

During 2021, the Company entered into four interest rate swap contracts that were designated as cash flow hedges. The interest rate swaps have a total notional amount of $350.0 million: $25.0 million with an original maturity of three years, $175.0 million with an original maturity of four years and $150.0 million with an original maturity of five years. 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 on commercial loans benchmarked to the 1-month LIBOR rate. Therefore, the interest rate swaps convert the interest payments on the first $350.0 million of 1-month LIBOR based commercial loans into fixed rate payments.

The periodic net settlement of these interest rate swaps are recorded as an adjustment to "Interest on subordinated debentures" or "Interest and fees on loans" in the unaudited Consolidated Statements of Income. For the three and nine months ended September 30, 2021 there was a positive impact of $272 thousand and $115 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," or "Interest and fees on loans", the same line items in the unaudited Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at September 30, 2021, and changes in the fair value attributed to hedge ineffectiveness were not material.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2021 was a decrease of $0.4 million and $1.3 million, respectively.

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, 2021, the underlying funded mortgage loan commitments had a carrying value of $11.1 million and a fair value of $12.5 million, while the underlying unfunded mortgage loan commitments had a notional amount of $38.5 million. At December 31, 2020, the underlying funded mortgage loan commitments had a carrying value of $25.0 million and a fair value of $28.4 million, while the underlying unfunded mortgage loan commitments had a notional amount of $47.9 million. The interest rate lock commitments increased other noninterest income by $0.3 million and $0.7 million for the three and nine months ended September 30, 2021, 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, 2021 totaled $2 thousand and $7 thousand, respectively. At September 30, 2021 and December 31, 2020, the underlying loans had a carrying value of $2.6 million and $2.1 million, respectively, and a fair value of $2.6 million and $2.1 million, respectively.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2021		December 31, 2020
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(1,422)	$	(2,792)
Notional amount:
Interest rate derivatives	704,383		631,446
Interest rate caps	66,137		66,527
Interest rate collars	35,354		35,354
Risk participation agreements	214,736		220,280
Sold credit protection on risk participation agreements	(90,539)		(78,522)
Interest rate options	38,509		47,874
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	(2,890)		(3,665)
Notional amount	420,000		70,000
Interest rate forwards:
Fair value adjustment	182		(483)
Notional amount	36,000		65,000
Foreign exchange forwards:
Fair value adjustment	17		(5)
Notional amount	2,589		2,119

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,
	2021		2020		2021		2020
	(dollars in thousands)
Non-hedging interest rate derivatives
(Decrease) increase in other income	$	(202)	$	142	$	106	$	(611)

Hedging interest rate derivatives
Decrease in interest and fees on loans	(520)		—		(825)		—
Increase in interest from subordinated debentures	248		208		710		219

Hedging interest rate forwards
(Decrease) increase in other income	(265)		(102)		(666)		132

Hedging foreign exchange forwards
Increase in other expense	2		3		7		15

The fair value of our derivatives is included in a table in Note 10, “Fair Values of Assets and Liabilities,” in the line items

“Other assets” and “Other liabilities.”

Note 12 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as both of September 30, 2021 and December 31, 2020 was $303.3 million. No impairment charges on goodwill or other intangible assets were incurred in 2021 or 2020.

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

As of September 30, 2021, no indicators of impairment were identified; however, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

Note 13 Subordinated Debentures

Subordinated debentures outstanding are as follows:


		September 30, 2021			December 31, 2020
	Due	Amount		Rate	Amount		Rate
		(dollars in thousands)
Owed to:

First Commonwealth Bank	2028	$	49,383	4.875% until June 1, 2023, then LIBOR + 1.845%	$	49,314	4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank	2033	49,184		5.50% until June 1, 2028, then LIBOR + 2.37%	49,131		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		$	170,734		$	170,612

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 three-month 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 three-month 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 three-month 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 three-month LIBOR + 2.85%, which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

In order to reduce its exposure to variability in expected future cash flows related to interest payments on First Commonwealth Capital Trust II and III, the Company entered into two interest rate swap contracts that are designated as cash flow hedges. These contracts fix the LIBOR based portion of the interest rate on Capital Trust II at 1.515% until August 15, 2024 and on Capital Trust III at 1.525% until August 15, 2026. Additional information related to these cash flow hedges can be found in Note 11- "Derivatives".

Note 14 Revenue Recognition

Substantially all of the Company’s revenue is generated from contracts with customers. Revenue associated with financial instruments, including revenue from loans and securities, certain noninterest income streams such as fees associated with derivatives are not in scope of ASC 606 - Revenue from Contracts with Customers. ASC 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. For contracts within the scope of ASC 606, the Company immediately expenses contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

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

Trust Income

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

Service Charges on Deposit Accounts

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

Insurance and Retail Brokerage Commissions

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $0.8 million in commission expense as of September 30, 2021 and 2020, 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.

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,
	2021		2020		2021		2020
	(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income	$	3,118	$	2,554	$	8,340	$	6,774
Service charges on deposit accounts	4,770		4,035		13,127		12,066
Insurance and retail brokerage commissions	2,218		2,156		6,368		5,982
Card-related interchange income	7,052		6,441		20,885		17,589
Gain on sale of other loans and assets	125		520		630		853
Other income	1,064		945		3,146		2,713
Noninterest Income (in-scope of Topic 606)	18,347		16,651		52,496		45,977
Noninterest Income (out-of-scope of Topic 606)	8,898		10,118		28,190		21,877
Total Noninterest Income	$	27,245	$	26,769	$	80,686	$	67,854

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15 Subsequent Event

On October 26, 2021, the Board of Directors authorized a new $25.0 million share repurchase program of the Company's common stock. Under the new program, management is authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in a manner that is intended to comply with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. First Commonwealth may suspend or discontinue the program at any time.

Subsequent to September 30, 2021, as the result of a borrower initiated sale, a $6.9 million nonperforming commercial real estate loan with a $0.3 million specific reserve was sold at par. This loan accounted for 22.5% of our nonperforming loans as of September 30, 2021.

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, 2021 and 2020, 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 impact of the COVID-19 pandemic 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 they facilitate comparison with the performance of others in the financial services industry. Although we believe that these non-

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 pages 57 and 65 for the nine and three months ended September 30, 2021 and 2020, 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,
	2021			2020			2021			2020
	(dollars in thousands, except per share data)
Net Income	$	34,092		$	19,186		$	103,481		$	47,764
Per Share Data:
Per Share Data: Basic Earnings per Share	$	0.36		$	0.20		$	1.08		$	0.49
Diluted Earnings per Share	0.36			0.20			1.08			0.49
Cash Dividends Declared per Common Share	0.115			0.110			0.340			0.330
Average Balance:
Total assets	$	9,502,501		$	9,389,965		$	9,362,908		$	8,925,315
Total equity	1,113,789			1,088,101			1,096,282			1,077,030
End of Period Balance:
Net loans (1)							$	6,658,320		$	6,899,407
Total assets							9,477,854			9,289,366
Total deposits							7,936,485			7,703,907
Total equity							1,112,855			1,072,831
Key Ratios:
Return on average assets	1.42		%	0.81		%	1.48		%	0.71		%
Return on average equity	12.14		%	7.01		%	12.62		%	5.92		%
Dividends payout ratio	31.94		%	55.00		%	31.48		%	67.35		%
Average equity to average assets ratio	11.72		%	11.59		%	11.71		%	12.07		%
Net interest margin	3.23		%	3.11		%	3.27		%	3.34		%
Net loans to deposits ratio							83.90		%	89.56		%

(1) Includes loans held for sale.

Results of Operations

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net Income

For the nine months ended September 30, 2021, First Commonwealth had net income of $103.5 million, or $1.08 diluted earnings per share, compared to net income of $47.8 million, or $0.49 diluted earnings per share, in the nine months ended September 30, 2020. The increase in net income was primarily the result of a $1.4 million provision for credit losses recognized during the nine months ended September 30, 2021 compared to $49.0 million recognized in the same period in 2020. Additionally, noninterest income increased $12.8 million and noninterest expense decreased $2.8 million during the nine months ended September 30, 2021 compared to the same period in 2020. These positive changes were partially offset by a $15.2 million increase in the income tax provision due to higher income before income taxes.

For the nine months ended September 30, 2021, the Company’s return on average equity was 12.62% and its return on average assets was 1.48%, compared to 5.92% and 0.71%, respectively, for the nine months ended September 30, 2020.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $209.1 million in the first nine months of 2021, compared to $201.9 million for the same period in 2020. The increase in net interest income can be attributed to a 35 basis point decrease in the cost of interest-bearing liabilities offset by a 34 basis point decrease in the yield on interest-earning assets and a $479.9 million increase in interest-earning assets. Net interest income comprises the majority of our operating revenue (net interest

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

income before provision expense plus noninterest income), at 72.1% and 74.7% for the nine months ended September 30, 2021 and 2020, respectively.

The net interest margin on a fully taxable equivalent basis was 3.27% and 3.34% for the nine months ended September 30, 2021 and September 30, 2020, respectively. The decline in the net interest margin is primarily attributable to the lower 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 nine months ended September 30, 2021, a decrease of 34 basis points compared to the 3.79% yield for the same period in 2020. This decrease is largely due to a decline in the investment portfolio yield, which decreased by 46 basis points when compared to the nine months ended September 30, 2020. Contributing to this decline was the yield on our adjustable and variable rate commercial loan portfolio, which declined 61 basis points as a result of the Federal Reserve's decrease of short-term interest rates in March 2020. During the first quarter of 2020, the Federal Reserve decreased the Federal Funds target rate by 150 basis points.

The loan yield for the nine months ended September 30, 2021, decreased 19 basis points and was impacted by $380.6 million in average PPP loans outstanding during the period. These loans were originated under the CARES Act and have a stated loan rate of 1% and a yield of 6.72% for the nine months ended September 30, 2021. During the nine months ended September 30, 2020, PPP loans averaged $327.0 million with 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 $16.3 million for the nine months ended September 30, 2021. These amounts are recognized in interest income as a yield adjustment over the life of the loan with accelerated recognition when a loan is forgiven or paid off. As of September 30, 2021, we expect to recognize additional PPP-related deferred processing fees, net of origination costs, of approximately $6.3 million as an adjustment to yield over the remaining terms of the loans. The balance of PPP loans outstanding at September 30, 2021 totaled $152.1 million. During the nine months ended September 30, 2021, PPP loans generated $19.1 million in income compared to $6.6 million during the same period in 2020. For the nine months ended September 30, 2021, PPP loans increased the yield on total loans by 16 basis points and the net interest margin by 16 basis points. During the nine months ended September 30, 2021, the Company originated $255.8 million in new PPP loans and processed forgiveness on $578.7 million of PPP loans originated in prior quarters.

The investment portfolio yield decreased 46 basis points in comparison to the prior year as a result of lower short-term interest rates. Investment portfolio purchases during the nine months ended September 30, 2021 have been primarily in obligations of U.S. government agencies, obligations of other government-sponsored enterprises and obligations of states and political subdivisions with durations of approximately four to five years and a corporate bond with a duration of nine years. Additionally, as a result of excess liquidity caused by significant growth in deposits during the past year, the average balance of interest-bearing deposits with banks, primarily represented by deposits placed with the Federal Reserve, has increased from $173.1 million in 2020 to $340.9 million in 2021. The impact of the level and rate paid on interest-bearing deposits with banks decreased the yield on earning assets by 14 basis points for the nine months ended September 30, 2021.

Decreases in the cost of interest-bearing liabilities partially offset the negative impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities decreased to 0.29% for the nine months ended September 30, 2021, from 0.64% for the same period in 2020. Deposit growth due to the retention of PPP loan proceeds and the deposit of Federal stimulus checks combined to allow for the payoff of $50.0 million in short-term borrowings in May 2021, contributing to a decline in average short-term borrowings of $28.8 million for the nine months ended September 30, 2021 compared to the same period in 2020. Lower market interest rates and management's efforts to reduce deposit costs resulted in the cost of interest-bearing deposits decreasing 35 basis points and short-term borrowings decreasing 52 basis points in comparison to the same period last year.

For the nine months ended September 30, 2021, changes in interest rates negatively impacted net interest income by $3.1 million when compared with the same period in 2020. The lower yield on interest-earning assets negatively impacted net interest income by $14.6 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $11.5 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $10.3 million for the nine months ended September 30, 2021, as compared to the same period in 2020. Higher levels of interest-earning assets resulted in an increase of $6.7 million in interest income, and changes in the volume and mix of interest-bearing liabilities decreased interest expense by $3.6 million, primarily due to a decrease in time deposits. Average earning assets for the nine months ended September 30, 2021 increased $479.9 million, or 5.9%, compared to the same period in 2020. Average loans for the comparable period increased $101.4 million, or 1.5%.

Net interest income also benefited from a $580.5 million increase in average net free funds at September 30, 2021 as compared to September 30, 2020. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $525.7 million, or 25.9%, in noninterest-bearing demand deposit average balances, primarily due to deposit growth related to PPP loan proceeds and government stimulus payments. Average time deposits for the nine months ended September 30, 2021 decreased by $298.5 million compared to the comparable period in 2020, while the average rate paid on time deposits decreased 95 basis points compared to the same period in 2020.

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:


	2021		2020
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	220,308	$	227,903
Adjustment to fully taxable equivalent basis	834		1,129
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	221,142		229,032
Interest expense	12,021		27,124
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	209,121	$	201,908

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:


	2021						2020
	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	$	340,872	$	297	0.12	%	$	173,058	$	163	0.13	%
Tax-free investment securities	28,805		582		2.70		47,197		1,075		3.04
Taxable investment securities	1,416,373		18,612		1.76		1,187,354		19,600		2.20
Loans, net of unearned income (b)(c)	6,772,239		201,651		3.98		6,670,819		208,194		4.17
Total interest-earning assets	8,558,289		221,142		3.45		8,078,428		229,032		3.79
Noninterest-earning assets:
Cash	93,108						98,345
Allowance for credit losses	(103,654)						(72,256)
Other assets	815,165						820,798
Total noninterest-earning assets	804,619						846,887
Total Assets	$	9,362,908					$	8,925,315
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,531,928	$	332	0.03	%	$	1,534,147	$	1,702	0.15	%
Savings deposits (d)	3,256,381		2,531		0.10		3,000,925		8,494		0.38
Time deposits	467,653		1,890		0.54		766,106		8,560		1.49
Short-term borrowings	117,478		77		0.09		146,270		670		0.61
Long-term debt	207,225		7,191		4.64		233,818		7,698		4.40
Total interest-bearing liabilities	5,580,665		12,021		0.29		5,681,266		27,124		0.64
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits	2,556,078						2,030,364
Other liabilities	129,883						136,655
Shareholders’ equity	1,096,282						1,077,030
Total Noninterest-Bearing Funding Sources	3,782,243						3,244,049
Total Liabilities and Shareholders’ Equity	$	9,362,908					$	8,925,315
Net Interest Income and Net Yield on Interest-Earning Assets			$	209,121	3.27	%			$	201,908	3.34	%

(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, 2021 and 2020.

(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 nine months ended September 30, 2021 compared with September 30, 2020:


	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	$	134	$	163	$	(29)
Tax-free investment securities	(493)		(419)		(74)
Taxable investment securities	(988)		3,772		(4,760)
Loans	(6,543)		3,166		(9,709)
Total interest income (b)	(7,890)		6,682		(14,572)
Interest-bearing liabilities:
Interest-bearing demand deposits	(1,370)		(2)		(1,368)
Savings deposits	(5,963)		727		(6,690)
Time deposits	(6,670)		(3,329)		(3,341)
Short-term borrowings	(593)		(131)		(462)
Long-term debt	(507)		(876)		369
Total interest expense	(15,103)		(3,611)		(11,492)
Net interest income	$	7,213	$	10,293	$	(3,080)

(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 expected losses inherent in the loan portfolio and on off-balance sheet commitments. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	2021				2020
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	6,898	293	%	$	10,231	21	%
Time and demand	6,849		291
Commercial credit cards	49		2
Real estate construction	(3,768)		(160)		924		2
Residential real estate	(1,732)		(74)		4,780		10
Residential first lien	(632)		(27)
Residential junior lien/home equity	(1,100)		(47)
Commercial real estate	(5,784)		(246)		24,739		50
Multifamily	(2,408)		(103)
Nonowner occupied	(880)		(37)
Owner occupied	(2,496)		(106)
Loans to individuals	6,736		287		8,364		17
Automobile	5,642		240
Consumer credit cards	182		8
Consumer other	912		39

Provision for credit losses on loans	$	2,350	100	%	$	49,038	100	%
Provision for off-balance sheet credit exposure	(997)				—
Total provision for credit losses	$	1,353			$	49,038

The provision for credit losses on loans for the nine months ended September 30, 2021 decreased in comparison to the nine months ended September 30, 2020 by $46.7 million. The level of provision expense in the nine months ended September 30, 2021 is primarily the result of an improved economic forecast, which reflects a decline in the impact of the COVID-19 pandemic on the economy and expected loan losses. The provision for credit losses on loans was also impacted by a decrease of $6.4 million in reserves on individually analyzed loans. The total provision for credit losses was impacted by a $1.0 million decrease in expense related to a decline in reserves for off-balance sheet commitments.

Because PPP loans are fully guaranteed by the SBA, there is no allowance for credit losses recognized for these loans. As previously indicated, an improved economic forecast provided for a lower level of allowance for credit losses and therefore resulted in $2.4 million in provision expense for the nine months ended September 30, 2021. Two loan categories, commercial, financial, agricultural and other loans as well as loans to individuals, reflected provision expense during the nine-month period of 2021. The provision expense for Commercial, financial, agricultural and other loans was primarily due to loan growth, net charge-offs and an increase in qualitative reserves. Provision expense for Loans to individuals can be attributed to loan growth in that category as well as net charge-offs.

The level of provision expense in the first nine months of 2020 was primarily to build the allowance for loan loss in order to provide for credit losses related to the COVID-19 pandemic. Contributing to the higher provision during the nine months ended September 30, 2020 was $5.7 million in specific reserves 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 was attributable to higher qualitative reserves due the uncertain economic environment resulting from COVID-19. Net charge-offs during the first nine months of 2020 totaled $12.4 million.

The allowance for credit losses was $94.2 million, or 1.40%, of total loans outstanding at September 30, 2021, compared to $101.3 million, or 1.50%, at December 31, 2020 and $88.3 million, or 1.27%, at September 30, 2020. Nonperforming loans as a percentage of total loans decreased to 0.56% at September 30, 2021 from 0.80% at December 31, 2020 and 0.71% as of September 30, 2020. The allowance to nonperforming loan ratio was 247.30%, 187.43% and 177.58% as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively.

Management believes that the allowance for credit losses is at a level deemed appropriate to absorb expected losses inherent in the loan portfolio at September 30, 2021.

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 nine months ended September 30, 2021 and 2020 and the year-ended December 31, 2020:


	September 30, 2021			September 30, 2020			December 31, 2020
	(dollars in thousands)
Balance, beginning of period	$	101,309		$	51,637		$	51,637
Adoption of accounting standard - ASU 2016-13(1)	—			—			13,393
Loans charged off:
Commercial, financial, agricultural and other	6,522			5,166			6,318
Real estate construction	—			—			—
Residential real estate	130			933			1,040
Commercial real estate	1,659			2,417			4,939
Loans to individuals	3,199			5,245			6,953
Total loans charged off	11,510			13,761			19,250
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	299			189			314
Real estate construction	135			26			26
Residential real estate	309			312			414
Commercial real estate	130			154			312
Loans to individuals	1,163			712			991
Total recoveries	2,036			1,393			2,057
Net charge-offs	9,474			12,368			17,193
Provision for credit losses on loans charged to expense	2,350			49,038			53,472
Balance, end of period	$	94,185		$	88,307		$	101,309
Net charge-offs as a percentage of average loans outstanding (annualized)	0.19		%	0.25		%	0.26		%
Allowance for credit losses as a percentage of end-of-period loans outstanding	1.40		%	1.27		%	1.50		%
Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans	1.43		%	1.38		%	1.61		%

(1) CECL was adopted on December 31, 2020 in accordance with relief provided under the CARES Act.

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:


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	8,340	$	6,774	$	1,566	23	%
Service charges on deposit accounts	13,127		12,066		1,061		9
Insurance and retail brokerage commissions	6,368		5,982		386		6
Income from bank owned life insurance	4,946		4,963		(17)		—
Card-related interchange income	20,885		17,589		3,296		19
Swap fee income	1,715		864		851		98
Other income	6,022		5,314		708		13
Subtotal	61,403		53,552		7,851		15
Net securities gains	16		47		(31)		(66)
Gain on sale of mortgage loans	11,615		13,226		(1,611)		(12)
Gain on sale of other loans and assets	6,281		3,151		3,130		99
Derivatives mark to market	1,371		(2,122)		3,493		(165)

Total noninterest income	$	80,686	$	67,854	$	12,832	19	%

Total noninterest income, excluding net securities gains, gain on sale of mortgage loans, gain on sale of other loans and assets and the derivatives mark to market for the nine months ended September 30, 2021 increased $7.9 million, or 15%, compared to the nine months ended September 30, 2020. Card-related interchange income increased $3.3 million due to growth in customer accounts and transactions and trust income increased $1.6 million as a result of growth in assets under management. Service charges on deposit accounts increased $1.1 million as customer activity began to return to pre-COVID levels, and swap fee income increased $0.9 million due to growth in interest rate swaps entered into for our commercial customers.

Total noninterest income increased $12.8 million, or 19%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include $3.5 million in the mark to market adjustment on interest rate swaps entered into for our commercial customers. This adjustment does not reflect a realized gain on the swaps, but rather relates to changes in fair value due to movements in corporate bond spreads and swap rates. The gain on sale of other loans and assets increased $3.1 million due to a higher volume of loans, primarily SBA loans, being sold in the first nine months of 2021 compared to the same period in 2020. Gain on sale of mortgage loans decreased $1.6 million as a result of changes in volume and the spread received on mortgage loans sold.

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:


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	88,084	$	87,573	$	511	1	%
Net occupancy	12,614		13,979		(1,365)		(10)
Furniture and equipment	11,866		11,468		398		3
Data processing	9,440		7,804		1,636		21
Advertising and promotion	3,829		3,800		29		1

Pennsylvania shares tax	3,347		3,246		101		3
Intangible amortization	2,597		2,792		(195)		(7)

Other professional fees and services	3,150		2,755		395		14
FDIC insurance	1,964		1,637		327		20

Other operating	19,316		18,351		965		5
Subtotal	156,207		153,405		2,802		2
Loss on sale or write-down of assets	223		416		(193)		(46)



COVID-19 related	357		567		(210)		(37)
Voluntary early retirement	—		3,304		(3,304)		(100)
Branch consolidation	18		2,544		(2,526)		(99)
Litigation and operational losses	1,624		1,038		586		56
Total noninterest expense	$	158,429	$	161,274	$	(2,845)	(2)	%

Noninterest expense decreased $2.8 million, or 1.8%, for the nine months ended September 30, 2021 compared to the same period in 2020. Contributing to the decline in expense in 2021 is the recognition in 2020 of $3.3 million in voluntary early retirement expense and $2.5 million in branch consolidation expenses. There were no similar expenses in 2021. Also contributing to the decrease in noninterest expense is a $1.4 million decline in net occupancy expense as a result of the branch consolidation efforts in 2020. Offsetting these is a $1.6 million increase in data processing expense related to updates to our digital banking product offerings and a $1.0 million increase in other operating expense resulting from a $1.2 million credit in unfunded commitment expense recognized in 2020, with no similar credit in 2021. As a result of the adoption of CECL, the unfunded commitment expense is now recorded as part of provision for credit losses.

Income Tax

The provision for income taxes increased $15.2 million for the nine months ended September 30, 2021, compared to the corresponding period in 2020.

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, 2021 and 2020.

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 19.9% and 18.1% for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, our deferred tax assets totaled $24.6 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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Net Income

For the three months ended September 30, 2021, First Commonwealth recognized net income of $34.1 million, or $0.36 diluted earnings per share, compared to net income of $19.2 million, or $0.20 diluted earnings per share, in the three months ended September 30, 2020. The increase in net income was primarily the result of an $11.8 million decrease in the provision for credit losses on loans, a $4.3 million increase in net interest income, and a $3.2 million decrease in noninterest expense.

For the three months ended September 30, 2021, the Company’s return on average equity was 12.14% and its return on average assets was 1.42%, compared to 7.01% and 0.81%, respectively, for the three months ended September 30, 2020.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $70.9 million in the third quarter of 2021, compared to $66.7 million for the same period in 2020. This increase was the result of $0.2 billion of growth in average interest-earning assets combined with a $0.3 billion decrease in interest-bearing liabilities. The impact of these changes resulted in a 12 basis point increase in the net interest margin. Net interest income comprises the majority of our operating revenue (i.e. net interest income before provision expense plus noninterest income), at 72.2% and 71.3% for the three months ended September 30, 2021 and 2020, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.23% and 3.11% for the three months ended September 30, 2021 and September 30, 2020, respectively. The increase in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The taxable equivalent yield on interest-earning assets was 3.39% for the three months ended September 30, 2021, a decrease of 6 basis points compared to the 3.45% yield for the same period in 2020. This is largely due to a decrease in the investment portfolio yield, which declined by 32 basis points offset by a 9 basis point increase in the loan portfolio yield when compared to the three months ended September 30, 2020. 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 10.05% during the three months ended September 30,2021. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $5.1 million. These loans increased the average balance of loans by $225.3 million and generated $5.7 million in income for the third quarter of 2021, causing a 21 basis point increase in the yield on loans and an 18 basis point increase in the net interest margin.

The cost of interest-bearing liabilities decreased to 0.25% for the three months ended September 30, 2021, from 0.49% for the same period in 2020, primarily due to a decrease in the cost of savings deposits and time deposits. Lower market interest rates resulted in the cost of savings deposits decreasing 18 basis points and time deposits decreasing 92 basis points in comparison to the same period last year.

For the three months ended September 30, 2021, changes in interest rates positively impacted net interest income by $2.9 million when compared with the same period in 2020. The higher yield on loans contributed to interest-earning assets positively impacting net interest income by $0.6 million, while a decrease in the cost of interest-bearing liabilities positively impacted net interest income by $2.3 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $1.3 million during the three months ended September 30, 2021, as compared to the same period in 2020. The mix of interest-earning assets resulted in a decrease of $0.1 million in interest income while changes in the volume and mix of interest-bearing liabilities decreased interest expense by $1.4 million. Average interest-earning assets for the three months ended September 30, 2021 increased $172.5 million, or 2.0%, compared to the same period in 2020. Average loans for the comparable period decreased $211.7 million, or 3.0%, due to a $347.2 million decline in average PPP loans.

Net interest income also benefited from a $428.2 million increase in average net free funds at September 30, 2021 as compared to September 30, 2020. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $365.9 million, or 16.0%, in noninterest-bearing demand deposit average balances. Average time deposits for the three months ended September 30, 2021 decreased by $279.0 million compared to the comparable period in 2020, decreasing interest expense by $1.0 million.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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:


	2021		2020
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	74,196	$	73,593
Adjustment to fully taxable equivalent basis	235		373
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	74,431		73,966
Interest expense	3,551		7,224
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	70,880	$	66,742

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:


	2021						2020
	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	$	323,414	$	130	0.16	%	$	343,689	$	94	0.11	%
Tax-free investment securities	27,360		180		2.61		45,706		338		2.94
Taxable investment securities	1,586,611		6,665		1.67		1,163,857		5,757		1.97
Loans, net of unearned income (b)(c)	6,763,739		67,456		3.96		6,975,402		67,777		3.87
Total interest-earning assets	8,701,124		74,431		3.39		8,528,654		73,966		3.45
Noninterest-earning assets:
Cash	94,811						100,751
Allowance for credit losses	(102,503)						(83,237)
Other assets	809,069						843,797
Total noninterest-earning assets	801,377						861,311
Total Assets	$	9,502,501					$	9,389,965
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,587,855	$	112	0.03	%	$	1,669,157	$	234	0.06	%
Savings deposits (d)	3,311,473		781		0.09		3,149,419		2,139		0.27
Time deposits	417,274		376		0.36		696,227		2,248		1.28
Short-term borrowings	118,112		19		0.06		124,670		35		0.11
Long-term debt	182,623		2,263		4.92		233,588		2,568		4.37
Total interest-bearing liabilities	5,617,337		3,551		0.25		5,873,061		7,224		0.49
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	2,647,089						2,281,200
Other liabilities	124,286						147,603
Shareholders’ equity	1,113,789						1,088,101
Total noninterest-bearing funding sources	3,885,164						3,516,904
Total Liabilities and Shareholders’ Equity	$	9,502,501					$	9,389,965
Net Interest Income and Net Yield on Interest-Earning Assets			$	70,880	3.23	%			$	66,742	3.11	%

(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, 2021 and 2020.

(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, 2021 compared with September 30, 2020:


	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	$	36	$	(6)	$	42
Tax-free investment securities	(158)		(136)		(22)
Taxable investment securities	908		2,093		(1,185)
Loans	(321)		(2,059)		1,738
Total interest income (b)	465		(108)		573
Interest-bearing liabilities:
Interest-bearing demand deposits	(122)		(12)		(110)
Savings deposits	(1,358)		110		(1,468)
Time deposits	(1,872)		(898)		(974)
Short-term borrowings	(16)		(2)		(14)
Long-term debt	(305)		(560)		255
Total interest expense	(3,673)		(1,362)		(2,311)
Net interest income	$	4,138	$	1,254	$	2,884

(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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	2021				2020
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	(1,644)	286	%	$	3,682	33	%
Time and demand	(1,561)		271
Commercial credit cards	(83)		15
Real estate construction	48		(8)		270		3
Residential real estate	(215)		37		(870)		(8)
Residential first lien	39		(7)
Residential junior lien/home equity	(254)		44
Commercial real estate	(1,143)		198		7,648		68
Multifamily	(548)		95
Nonowner occupied	(893)		155
Owner occupied	298		(52)
Loans to individuals	2,378		(413)		482		4
Automobile	1,984		(344)
Consumer credit cards	84		(15)
Consumer other	310		(54)

Provision for credit losses on loans	$	(576)	100	%	$	11,212	100	%
Provision for off-balance sheet credit exposure	906				—
Total provision for credit losses	$	330			$	11,212

The provision for credit losses on loans for the three months ended September 30, 2021 decreased in comparison to the three months ended September 30, 2020 by $11.8 million. The level of provision expense in the third quarter of 2021 is primarily the result of an improved economic forecast, which reflects a decline in the impact of the COVID-19 pandemic on the economy and expected loan losses. The third quarter 2021 provision expense was also impacted by the release of a $1.1 million specific reserve on a nonaccrual loan that paid off during the third quarter. The improvement in the provision for credit losses on loans was offset by a $0.9 million provision for off-balance sheet credit exposure due to an increase in the level of unfunded commitments. Net charge-offs for the three months ended September 30, 2021 were $2.3 million.

The level of provision expense in the third quarter of 2020 was primarily due to a $5.6 million increase in qualitative reserves as a result of the uncertain economic environment related to COVID-19 and a $1.1 million increase in specific reserves related to four commercial loan relationships. Net charge-offs for the three months ended September 30, 2020 were $4.3 million.

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, 2021 and 2020 and the year-ended December 31, 2020:


	9/30/2021		9/30/2020		12/31/2020
	(dollars in thousands)
Balance, beginning of period	$	97,038	$	81,441	$	51,637
Adoption of accounting standard - ASU 2016-13(1)	—		—		13,393
Loans charged off:
Commercial, financial, agricultural and other	2,066		3,395		6,318
Real estate construction	—		—		—
Residential real estate	11		283		1,040
Commercial real estate	102		—		4,939
Loans to individuals	727		1,229		6,953
Total loans charged off	2,906		4,907		19,250
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	106		57		314
Real estate construction	—		—		26
Residential real estate	98		166		414
Commercial real estate	90		110		312
Loans to individuals	335		228		991
Total recoveries	629		561		2,057
Net charge-offs	2,277		4,346		17,193
Provision for credit losses on loans charged to expense	(576)		11,212		53,472
Balance, end of period	$	94,185	$	88,307	$	101,309

Noninterest Income

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


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	3,118	$	2,554	$	564	22	%
Service charges on deposit accounts	4,770		4,035		735		18
Insurance and retail brokerage commissions	2,218		2,156		62		3
Income from bank owned life insurance	1,486		1,547		(61)		(4)
Card-related interchange income	7,052		6,441		611		9
Swap fee income	317		41		276		673
Other income	2,101		1,827		274		15
Subtotal	21,062		18,601		2,461		13
Net securities gains	—		20		(20)		(100)
Gain on sale of mortgage loans	3,485		6,437		(2,952)		(46)
Gain on sale of other loans and assets	2,480		1,871		609		33
Derivatives mark to market	218		(160)		378		(236)

Total noninterest income	$	27,245	$	26,769	$	476	2	%

Total noninterest income for the three months ended September 30, 2021 increased $0.5 million, or 2%, in comparison to the three months ended September 30, 2020. The most significant changes include a $0.6 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 $0.6 million and service charges on deposits increased $0.7 million due to growth in customer accounts and

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

transactions. Gain on sale of mortgage loans declined $3.0 million for the three months ended September 30, 2021 compared to the comparable period in 2020 due to changes in the volume and spreads on mortgage loans sold.

Noninterest Expense

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


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	31,066	$	28,823	$	2,243	8	%
Net occupancy	3,960		4,609		(649)		(14)
Furniture and equipment	4,052		4,033		19		—
Data processing	3,196		2,741		455		17
Advertising and promotion	1,150		1,115		35		3
Pennsylvania shares tax	1,257		1,254		3		—
Intangible amortization	868		939		(71)		(8)

Other professional fees and services	1,308		937		371		40
FDIC insurance	830		876		(46)		(5)

Other operating	6,530		6,555		(25)		—
Subtotal	54,217		51,882		2,335		5
Loss on sale or write-down of assets	171		63		108		171



COVID-19 related	50		125		(75)		(60)
Voluntary early retirement	—		3,304		(3,304)		(100)
Branch consolidation	—		2,544		(2,544)		(100)
Litigation and operational losses	589		329		260		79
Total noninterest expense	$	55,027	$	58,247	$	(3,220)	(6)	%

Noninterest expense decreased $3.2 million, or 6%, for the three months ended September 30, 2021 compared to the same period in 2020. The decrease is a result of $3.3 million in voluntary early retirement expense and $2.5 million in branch consolidation expense recognized during the three months ended September 30, 2020. There were no similar expenses during the three months ended September 30, 2021. Offsetting these declines is an increase in salary and employee benefit expense of $2.2 million, primarily due to increases in hospitalization and incentive expense as well as additional employees hired to support the Company's expansion into equipment financing.

Income Tax

The provision for income taxes increased $3.9 million for the three months ended September 30, 2021, compared to the corresponding period in 2020. The effective tax rate increased 80 basis points from 19.0% to 19.8% due to a $18.9 million increase 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 2021, the maturity and redemption of investment securities provided $443.5 million in liquidity. These funds contributed to the liquidity used to 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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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, 2021, our maximum borrowing capacity under this program was $1.4 billion, and as of that date there was $7.5 million outstanding with an average weighted rate of 0.50% and an average original term of 304 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, 2021, the borrowing capacity under this program totaled $950.8 million and there was no balance outstanding. As of September 30, 2021, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.8 billion and as of that date amounts used against this capacity included $5.7 million in outstanding borrowings and no outstanding letters of credit.

We also have available unused federal funds lines with four correspondent banks. These lines have an aggregate commitment of $160.0 million with no outstanding balance as of September 30, 2021. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $621.4 million with no outstanding balance as of September 30, 2021.

First Commonwealth Financial Corporation has an unsecured $20.0 million line of credit with another financial institution. As of September 30, 2021, 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, 2021		December 31, 2020
	(dollars in thousands)
Noninterest-bearing demand deposits(a)	$	2,656,229	$	2,319,958
Interest-bearing demand deposits(a)	265,782		250,353
Savings deposits(a)	4,609,393		4,305,391
Time deposits	405,081		562,964
Total	$	7,936,485	$	7,438,666

(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 2021, total deposits increased $497.8 million. Interest-bearing demand and savings deposits increased $319.4 million, noninterest-bearing demand deposits increased $336.3 million and time deposits decreased $157.9 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 0.49 and 0.51 at September 30, 2021 and December 31, 2020, respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following is the gap analysis as of September 30, 2021 and December 31, 2020:


	September 30, 2021
	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	$	578,757		$	447,361		$	948,738		$	1,974,856		$	3,752,879		$	952,679
Investments	121,940			98,055			182,492			402,487			777,763			474,791
Other interest-earning assets	240,095			—			—			240,095			—			—
Total interest-sensitive assets (ISA)	940,792			545,416			1,131,230			2,617,438			4,530,642			1,427,470
Certificates of deposit	97,627			77,165			111,155			285,947			117,579			1,450
Other deposits	4,875,175			—			—			4,875,175			—			—
Borrowings	190,120			199			398			190,717			3,182			101,769
Total interest-sensitive liabilities (ISL)	5,162,922			77,364			111,553			5,351,839			120,761			103,219
Gap	$	(4,222,130)		$	468,052		$	1,019,677		$	(2,734,401)		$	4,409,881		$	1,324,251
ISA/ISL	0.18			7.05			10.14			0.49			37.52			13.83
Gap/Total assets	44.55		%	4.94		%	10.76		%	28.85		%	46.53		%	13.97		%


	December 31, 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	$	596,292		$	495,759		$	942,174		$	2,034,225		$	3,424,936		$	1,270,694
Investments	109,706			82,052			158,357			350,115			495,013			150,976
Other interest-earning assets	256,572			—			—			256,572			—			—
Total interest-sensitive assets (ISA)	962,570			577,811			1,100,531			2,640,912			3,919,949			1,421,670
Certificates of deposit	163,340			120,458			135,285			419,083			141,577			2,153
Other deposits	4,555,744			—			—			4,555,744			—			—
Borrowings	189,645			50,105			209			239,959			1,673			104,166
Total interest-sensitive liabilities (ISL)	4,908,729			170,563			135,494			5,214,786			143,250			106,319
Gap	$	(3,946,159)		$	407,248		$	965,037		$	(2,573,874)		$	3,776,699		$	1,315,351
ISA/ISL	0.20			3.39			8.12			0.51			27.36			13.37
Gap/Total assets	43.52		%	4.49		%	10.64		%	28.38		%	41.65		%	14.51		%

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


	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
September 30, 2021 ($)	$	(8,343)		$	(5,367)		$	6,730		$	11,130
September 30, 2021 (%)	(3.00)		%	(1.93)		%	2.42		%	4.00		%

December 31, 2020 ($)	$	(4,911)		$	(2,621)		$	3,340		$	6,229
December 31, 2020 (%)	(1.79)		%	(0.95)		%	1.22		%	2.27		%

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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, 2021 ($)	$	(21,583)		$	(15,554)		$	14,323		$	29,677
September 30, 2021 (%)	(7.76)		%	(5.59)		%	5.15		%	10.67		%

December 31, 2020 ($)	$	(13,807)		$	(9,175)		$	9,921		$	18,408
December 31, 2020 (%)	(5.03)		%	(3.34)		%	3.61		%	6.70		%

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, 2021 and 2020, the cost of our interest-bearing liabilities averaged 0.29% and 0.64%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.45% and 3.79%, respectively.

During the third quarter of 2021, after considering the excess liquidity position of First Commonwealth and the banking industry, management revised its interest rate assumptions related to its ability to lag deposit rate increases for the first two 25 basis point interest rate increases by the Federal Reserve. The results of this assumption change, which extended the repricing of core deposits, are reflected in the September 30, 2021 results in the above sensitivity tables for gradual and immediate interest rate changes.

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.

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

First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled $6.4 million at September 30, 2021 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 the borrower, who could not obtain comparable terms from alternative financing sources. In the first nine months of 2021, 28 loans totaling $8.1 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans increased $0.4 million from December 31, 2020. Changes during the first nine months of 2021 can be attributed to new restructurings in conjunction with bankruptcy. Please refer to Note 7 “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 troubled debt restructuring. As of September 30, 2021, loan

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

customers with an aggregate principal balance of $29.9 million were still in a payment deferral period. It is possible that some of these deferrals will be extended in order to provide support for certain COVID-19 impacted customers.

We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable to fully collect principal or interest due according to the contractual terms of the loan. A loan is also placed on nonaccrual status when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the borrower. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans, which are placed on nonaccrual status at 150 days past due.

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

Nonperforming loans, including loans held for sale, decreased $16.0 million to $38.1 million at September 30, 2021 compared to $54.1 million at December 31, 2020. During the nine months ended September 30, 2021, $16.5 million of loans were moved to nonaccrual, including the transfer of one commercial real estate relationship totaling $6.3 million and a commercial, financial, industrial loan relationship totaling $7.6 million. Offsetting these additions was a sale of a $5.0 million commercial real estate relationship, the $7.3 million payoff of two commercial, financial, agriculture and other relationships, a $0.8 million payoff of a commercial real estate relationship and a $1.4 million charge-off of a commercial real estate relationship.

The allowance for credit losses as a percentage of nonperforming loans was 247.30% as of September 30, 2021, compared to 187.43% at December 31, 2020, and 177.58% at September 30, 2020. 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 $1.0 million and general reserves of $93.2 million as of September 30, 2021. Specific reserves decreased $3.9 million from December 31, 2020, and $6.4 million from September 30, 2020. The decrease from both periods is primarily due to the charge-off and payoffs of relationships with specific reserves assigned. 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, 2021.

Criticized loans totaled $195.8 million at September 30, 2021 and represented 3% of the loan portfolio. The level of criticized loans decreased as of September 30, 2021 when compared to December 31, 2020, by $107.0 million, or 35%. Classified loans totaled $58.8 million at September 30, 2021 compared to $76.2 million at December 31, 2020, a decrease of $17.4 million, or 23%. The decrease in criticized loans is the result of the aforementioned changes in nonperforming loans as well as credit upgrades on borrowers, primarily in the hospitality sector. Delinquency on accruing loans for the same period decreased $3.9 million, or 32%, the majority of which are residential real estate and consumer loans.

The allowance for credit losses was $94.2 million at September 30, 2021, or 1.40% of total loans outstanding, compared to 1.50% reported at December 31, 2020, and 1.27% at September 30, 2020. General reserves, or the portion of the allowance related to loans that were not specifically evaluated, as a percentage of performing loans were 1.39% at September 30, 2021 compared to 1.43% at December 31, 2020 and 1.17% at September 30, 2020. The decrease in the general reserve from December 31, 2020 is reflective of lower unemployment rates utilized to forecast future loan losses at September 30, 2021. The increase in general reserves from September 30, 2020 can be attributed to the adoption of CECL and the related impact of future economic conditions.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	September 30,								December 31, 2020
	2021				2020
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	14,466			$	38,139			$	30,801

Troubled debt restructured loans on nonaccrual basis	16,210				4,511				14,740
Troubled debt restructured loans on accrual basis	7,410				7,078				8,512
Total nonperforming loans	$	38,086			$	49,728			$	54,053
Loans past due 30 to 90 days and still accruing	$	7,138			$	10,259			$	10,638
Loans past due in excess of 90 days and still accruing	$	1,135			$	1,249			$	1,523
Other real estate owned	$	502			$	1,079			$	1,215
Loans held for sale at end of period	$	19,925			$	37,998			$	33,436
Portfolio loans outstanding at end of period	$	6,732,580			$	6,949,716			$	6,761,183
Average loans outstanding	$	6,772,239		(a)	$	6,670,819		(a)	$	6,737,339		(b)
Nonperforming loans as a percentage of total loans	0.56		%		0.71		%		0.80		%
Provision for credit losses on loans	$	2,350		(a)	$	49,038		(a)	$	53,472		(b)
Allowance for credit losses	$	94,185			$	88,307			$	101,309
Net charge-offs	$	9,474		(a)	$	12,368		(a)	$	17,193		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.19		%		0.25		%		0.26		%
Provision for credit losses as a percentage of net charge-offs	24.80		%	(a)	396.49		%	(a)	311.01		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	1.40		%		1.27		%		1.50		%
Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans (c)	1.43		%		1.38		%		1.61		%


Allowance for credit losses as a percentage of nonperforming loans (d)	247.30		%		177.58		%		187.43		%

(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.

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, 2021				December 31, 2020
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,224,591	18	%	$	1,555,986	23	%
Real estate construction	424,016		6		427,221		6
Residential real estate	1,875,375		28		1,750,592		26
Commercial real estate	2,231,890		33		2,211,569		33
Loans to individuals	976,708		15		815,815		12
Total loans and leases net of unearned income	$	6,732,580	100	%	$	6,761,183	100	%

During the nine months ended September 30, 2021, loans decreased $28.6 million, or 0.4%, compared to balances outstanding at December 31, 2020.

Commercial, financial, agricultural and other loans decreased $331.4 million as the result of a $326.8 million decline in PPP loans.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Real estate construction loans decreased $3.2 million, or 0.8%, primarily due to the completion of commercial real estate construction projects. Residential real estate grew $124.8 million, or 7.1%, primarily due to originations of closed-end 1-4 family mortgage loans. Commercial real estate loans increased $20.3 million, or 0.9%, primarily due to growth in multifamily and nonresidential properties. Loans to individuals increased $160.9 million, or 19.7%, primarily due to growth in the indirect auto and recreational vehicle portfolio.

As indicated in the table below, commercial real estate, commercial, financial and agricultural and residential real estate loans represent a significant portion of the nonperforming loans as of September 30, 2021. See discussions related to the provision for credit losses and loans for more information.


	For the Nine Months Ended September 30, 2021						As of September 30, 2021
	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	$	6,223	65.69	%	0.12	%	$	6,735	17.68	%	0.10	%
Real estate construction	(135)		(1.43)		—		54		0.14		—
Residential real estate	(179)		(1.89)		—		9,910		26.02		0.14
Commercial real estate	1,529		16.14		0.03		20,889		54.85		0.31
Loans to individuals	2,036		21.49		0.04		498		1.31		0.01
Total loans, net of unearned income	$	9,474	100.00	%	0.19	%	$	38,086	100.00	%	0.56	%

Net charge-offs for the nine months ended September 30, 2021 totaled $9.5 million, compared to $12.4 million for the nine months ended September 30, 2020. The most significant charge-offs during the nine months ended September 30, 2021 included a $3.6 million charge-off related to a commercial loan as well as $2.0 million in net charge-offs related to loans to individuals, primarily indirect auto loans and personal credit lines. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At September 30, 2021, shareholders’ equity was $1.1 billion, an increase of $44.2 million from December 31, 2020. The increase was primarily the result of $103.5 million in net income, $3.1 million in treasury stock sales and an increase of $13.7 million in the fair value of available for sale investments. These increases were partially offset by $32.7 million of dividends paid to shareholders and $16.0 million of common stock repurchases. Cash dividends declared per common share were $0.34 for the nine months ended September 30, 2021 and $0.33 for the nine months ended September 30, 2020.

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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

As of September 30, 2021, the Company had $152.1 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, 2021, as we did not utilize the PPP Facility.

As of September 30, 2021, 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:


	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	$	1,064,222	14.95	%		$	747,543	10.50	%	$	711,946	10.00	%
First Commonwealth Bank	1,024,770		14.44			745,329		10.50		709,837		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	885,720	12.44	%		$	605,154	8.50	%	$	569,557	8.00	%
First Commonwealth Bank	846,268		11.92			603,362		8.50		567,870		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	885,720	9.63	%		$	367,761	4.00	%	$	459,701	5.00	%
First Commonwealth Bank	846,268		9.22			366,973		4.00		458,717		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	815,720	11.46	%		$	498,362	7.00	%	$	462,765	6.50	%
First Commonwealth Bank	846,268		11.92			496,886		7.00		461,394		6.50

On October 26, 2021, First Commonwealth Financial Corporation declared a quarterly dividend of $0.115 per share payable on November 19, 2021 to shareholders of record as of November 5, 2021. 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.

In January 2021, 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, 2021, 1,098,253 common shares had been repurchased under this program at an average price of $13.41 per share.

New Accounting Pronouncements

In March 2020, FASB released Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the potential discontinuance of the London Interbank Offered Rate ("LIBOR") as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company has established a cross-functional working group to manage the Company’s transition from LIBOR. Products that utilize LIBOR have been identified and have incorporated enhanced language to accommodate the transition to alternative reference rates. The Company continues to evaluate the impact of adopting the new standard.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

ITEM 4. Controls and Procedures

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

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed under Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

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

On January 25, 2021, 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 2021:


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, 2021	263,155	13.66		263,155	1,518,603
August 31, 2021	287,626	13.47		287,626	1,192,752
September 30, 2021	446,736	13.10		446,736	753,663

Total	997,517	$	13.35	997,517

* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $13.17 at July 31, 2021, $13.52 at August 31, 2021 and $13.63 at September 30, 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS

Exhibit
Number

Description

Incorporated by Reference to

10.1

Amendment One to the FCFC Amended and Restated Non-Qualified Deferred Compensation Plan

Filed herewith

10.2

Amendment Two to the FCFC Amended and Restated Non-Qualified Deferred Compensation Plan

Filed herewith

10.3

Amendment Three to the FCFC Amended and Restated Non-Qualified Deferred Compensation Plan

Filed herewith

31.1

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

Filed herewith

31.2

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

Filed herewith

32.1

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

Filed herewith

32.2

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

Filed herewith

101

The following materials from First Commonwealth Financial Corporation’s Quarterly Report on Form 10-Q, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements. 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 8, 2021						/s/ T. Michael Price
						T. Michael Price President and Chief Executive Officer

DATED: November 8, 2021						/s/ James R. Reske
						James R. Reske Executive Vice President, Chief Financial Officer and Treasurer