FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2021 June (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 June 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 August 5, 2021, was 95,938,473.

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	51

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	76

ITEM 4.	Controls and Procedures	76

PART II.	Other Information

ITEM 1.	Legal Proceedings	77

ITEM 1A.	Risk Factors	77

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77

ITEM 3.	Defaults Upon Senior Securities	77

ITEM 4.	Mine Safety Disclosures	77

ITEM 5.	Other Information	77

ITEM 6.	Exhibits	78

	Signatures	79

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)


	June 30, 2021		December 31, 2020

	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	89,505	$	100,009
Interest-bearing bank deposits	194,948		256,572
Securities available for sale, at fair value	1,090,530		831,223
Securities held to maturity, at amortized cost (Fair value of $555,820 and $369,851 at June 30, 2021 and December 31, 2020, respectively)	554,225		361,844
Other investments	11,527		12,227
Loans held for sale	19,530		33,436
Loans:
Portfolio loans	6,740,535		6,761,183
Allowance for credit losses	(97,038)		(101,309)
Net loans	6,643,497		6,659,874
Premises and equipment, net(1)	118,410		125,517
Other real estate owned	394		1,215
Goodwill	303,328		303,328
Amortizing intangibles, net	12,169		13,492
Bank owned life insurance	226,371		225,952
Other assets	137,968		143,415
Total assets	$	9,402,402	$	9,068,104
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	2,617,651	$	2,319,958
Interest-bearing	5,267,368		5,118,708
Total deposits	7,885,019		7,438,666
Short-term borrowings	107,372		117,373
Subordinated debentures	170,694		170,612
Other long-term debt	5,918		56,258
Capital lease obligation	6,155		6,385
Total long-term debt	182,767		233,255
Other liabilities	120,825		210,193
Total liabilities	8,295,983		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 June 30, 2021 and December 31, 2020, and 96,201,628 and 96,130,751 shares outstanding at June 30, 2021 and December 31, 2020, respectively	113,915		113,915
Additional paid-in capital	495,899		494,683
Retained earnings	644,362		596,614
Accumulated other comprehensive income, net	7,115		17,233
Treasury stock (17,713,274 and 17,784,151 shares at June 30, 2021 and December 31, 2020, respectively)	(154,872)		(153,828)

Total shareholders’ equity	1,106,419		1,068,617
Total liabilities and shareholders’ equity	$	9,402,402	$	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 Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	65,367	$	68,076	$	133,680	$	139,816
Interest and dividends on investments:
Taxable interest	6,302		6,493		11,666		13,466
Interest exempt from federal income taxes	154		267		318		582
Dividends	138		113		281		377
Interest on bank deposits	90		32		167		69
Total interest income	72,051		74,981		146,112		154,310
Interest Expense
Interest on deposits	1,433		5,686		3,485		14,135
Interest on short-term borrowings	27		47		58		635
Interest on subordinated debentures	2,136		2,142		4,264		4,288
Interest on other long-term debt	194		354		540		709
Interest on lease obligations	62		66		124		133

Total interest expense	3,852		8,295		8,471		19,900
Net Interest Income	68,199		66,686		137,641		134,410
Provision for credit losses	5,413		6,859		1,023		37,826
Net Interest Income after Provision for Credit Losses	62,786		59,827		136,618		96,584
Noninterest Income



Net securities gains	10		8		16		27
Trust income	2,706		2,109		5,222		4,220
Service charges on deposit accounts	4,310		3,286		8,357		8,031
Insurance and retail brokerage commissions	1,978		1,831		4,150		3,826
Income from bank owned life insurance	1,509		1,800		3,460		3,416
Gain on sale of mortgage loans	3,084		4,243		8,130		6,789
Gain on sale of other loans and assets	2,111		581		3,801		1,280
Card-related interchange income	7,406		5,886		13,833		11,148
Derivatives mark to market	(277)		(221)		1,153		(1,962)

Swap fee income	1,252		609		1,398		823
Other income	1,997		1,680		3,921		3,487
Total noninterest income	26,086		21,812		53,441		41,085
Noninterest Expense
Salaries and employee benefits	28,347		28,773		57,018		58,750
Net occupancy	3,881		4,397		8,654		9,370
Furniture and equipment	3,866		3,657		7,814		7,435
Data processing	3,192		2,596		6,244		5,063
Advertising and promotion	1,355		1,535		2,679		2,685

Pennsylvania shares tax	1,258		1,254		2,090		1,992
Intangible amortization	863		919		1,729		1,853

Other professional fees and services	1,091		920		1,842		1,818
FDIC insurance	438		733		1,134		761
Loss on sale or write-down of assets	43		140		52		353

Litigation and operational losses	556		319		1,035		709


COVID-19 related	232		419		306		442

Branch consolidation	(22)		—		18		—
Other operating	6,442		7,094		12,786		11,796
Total noninterest expense	51,542		52,756		103,401		103,027
Income Before Income Taxes	37,330		28,883		86,658		34,642
Income tax provision	7,711		5,032		17,269		6,064
Net Income	$	29,619	$	23,851	$	69,389	$	28,578
Average Shares Outstanding	96,012,828		97,932,333		96,019,808		98,027,980

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

Table of Contents


Average Shares Outstanding Assuming Dilution	96,282,425		98,146,854		96,255,475		98,254,429

Per Share Data: Basic Earnings per Share	$	0.31	$	0.24	$	0.72	$	0.29
Diluted Earnings per Share	$	0.31	$	0.24	$	0.72	$	0.29
Cash Dividends Declared per Common Share	$	0.115	$	0.110	$	0.225	$	0.220

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 Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(dollars in thousands)
Net Income	$	29,619	$	23,851	$	69,389	$	28,578
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period	1,707		5,822		(14,097)		25,325

Less: reclassification adjustment for gains on securities included in net income	(10)		(8)		(16)		(27)
Unrealized holding gains (losses) on derivatives arising during the period	(537)		(536)		1,305		(5,117)

Total other comprehensive (loss) income, before tax benefit (expense)	1,160		5,278		(12,808)		20,181
Income tax benefit (expense) related to items of other comprehensive (loss) income	(243)		(1,108)		2,690		(4,238)
Total other comprehensive (loss) income	917		4,170		(10,118)		15,943
Comprehensive Income	$	30,536	$	28,021	$	59,271	$	44,521

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						69,389						69,389
Other comprehensive loss								(10,118)				(10,118)
Cash dividends declared ($0.225 per share)						(21,641)						(21,641)




Treasury stock acquired	(196,119)									(2,658)		(2,658)
Treasury stock reissued	173,907			771		—				1,493		2,264
Restricted stock	93,089	—		445		—				121		566

Balance at June 30, 2021	96,201,628	$	113,915	$	495,899	$	644,362	$	7,115	$	(154,872)	$	1,106,419


	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						28,578						28,578
Other comprehensive income								15,943				15,943
Cash dividends declared ($0.22 per share)						(21,614)						(21,614)




Treasury stock acquired	(430,896)									(5,220)		(5,220)
Treasury stock reissued	158,453			458		—				1,358		1,816
Restricted stock	93,300	—		487		—				50		537

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

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 March 31, 2021	96,248,476	$	113,915	$	495,720	$	625,806	$	6,198	$	(154,159)	$	1,087,480


Net income						29,619						29,619
Other comprehensive income								917				917
Cash dividends declared ($0.115 per share)						(11,063)						(11,063)




Treasury stock acquired	(72,724)									(1,015)		(1,015)
Treasury stock reissued	15,376			90		—				133		223
Restricted stock	10,500	—		89		—				169		258

Balance at June 30, 2021	96,201,628	$	113,915	$	495,899	$	644,362	$	7,115	$	(154,872)	$	1,106,419




	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 March 31, 2020	98,015,396	$	113,915	$	494,181	$	571,256	$	17,352	$	(138,780)	$	1,057,924


Net income						23,851						23,851
Other comprehensive income								4,170				4,170
Cash dividends declared ($0.110 per share)						(10,795)						(10,795)




Treasury stock acquired	—			—						—		—
Treasury stock reissued	24,001			14		—				208		222
Restricted stock	93,300	—		487		—				(154)		333

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

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 Six Months Ended
	June 30,
	2021		2020
Operating Activities	(dollars in thousands)
Net income	$	69,389	$	28,578
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	1,023		37,826
Deferred tax expense (benefit)	2,863		(3,387)
Depreciation and amortization	5,931		5,549
Net gains on securities and other assets	(13,205)		(5,896)
Net amortization of premiums and discounts on securities	2,588		2,993

Income from increase in cash surrender value of bank owned life insurance	(3,132)		(3,149)
Decrease (increase) in interest receivable	3,697		(10,218)
Mortgage loans originated for sale	(210,746)		(155,916)
Proceeds from sale of mortgage loans	231,321		150,821
Decrease in interest payable	(357)		(484)
(Decrease) increase in income taxes payable	(1,870)		9,349

Other-net	(14,178)		(4,875)
Net cash provided by operating activities	73,324		51,191
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	59,170		42,175
Purchases	(312,247)		(200)
Transactions with securities available for sale:

Proceeds from maturities and redemptions	285,216		125,162
Purchases	(560,180)		(127,368)
Purchases of FHLB stock	(2,134)		(20,927)
Proceeds from the redemption of FHLB stock	2,834		25,416
Proceeds from bank owned life insurance	3,097		201
Proceeds from sale of loans	33,824		10,335
Proceeds from sale of other assets	4,979		3,173


Net increase in loans	(17,885)		(752,191)

Purchases of premises and equipment and other assets	(3,909)		(5,363)
Net cash used in investing activities	(507,235)		(699,587)
Financing Activities

Net decrease in other short-term borrowings	(10,001)		(93,369)
Net increase in deposits	446,426		1,104,794
Repayments of other long-term debt	(50,339)		(327)
Repayments of capital lease obligation	(230)		(213)



Dividends paid	(21,641)		(21,614)
Proceeds from reissuance of treasury stock	222		222
Purchase of treasury stock	(2,654)		(5,220)

Net cash provided by financing activities	361,783		984,273
Net (decrease) increase in cash and cash equivalents	(72,128)		335,877
Cash and cash equivalents at January 1	356,581		121,856
Cash and cash equivalents at June 30	$	284,453	$	457,733

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 six months ended June 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 Six Months Ended June 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	$	(14,097)	$	2,961	$	(11,136)	$	25,325	$	(5,319)	$	20,006

Reclassification adjustment for gains on securities included in net income	(16)		3		(13)		(27)		6		(21)
Total unrealized (losses) gains on securities	(14,113)		2,964		(11,149)		25,298		(5,313)		19,985
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period	1,305		(274)		1,031		(5,117)		1,075		(4,042)
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized gains (losses) on derivatives	1,305		(274)		1,031		(5,117)		1,075		(4,042)




Total other comprehensive (loss) income	$	(12,808)	$	2,690	$	(10,118)	$	20,181	$	(4,238)	$	15,943

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 June 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 gains on securities:
Unrealized holding gains on securities arising during the period	$	1,707	$	(358)	$	1,349	$	5,822	$	(1,223)	$	4,599

Reclassification adjustment for gains on securities included in net income	(10)		2		(8)		(8)		2		(6)
Total unrealized gains on securities	1,697		(356)		1,341		5,814		(1,221)		4,593
Unrealized losses on derivatives:
Unrealized holding losses on derivatives arising during the period	(537)		113		(424)		(536)		113		(423)
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized losses on derivatives	(537)		113		(424)		(536)		113		(423)




Total other comprehensive income	$	1,160	$	(243)	$	917	$	5,278	$	(1,108)	$	4,170

The following table details the change in components of OCI for the six months ended June 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	(11,136)		—		1,031		(10,105)		20,006		—		(4,042)		15,964
Amounts reclassified from accumulated other comprehensive (loss) income	(13)		—		—		(13)		(21)		—		—		(21)
Net other comprehensive (loss) income during the period	(11,149)		—		1,031		(10,118)		19,985		—		(4,042)		15,943
Balance at June 30	$	9,161	$	(182)	$	(1,864)	$	7,115	$	24,565	$	365	$	(3,408)	$	21,522

The following table details the change in components of OCI for the three months ended June 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 March 31	$	7,820	$	(182)	$	(1,440)	$	6,198	$	19,972	$	365	$	(2,985)	$	17,352


Other comprehensive income before reclassification adjustment	1,349		—		(424)		925		4,599		—		(423)		4,176
Amounts reclassified from accumulated other comprehensive (loss) income	(8)		—		—		(8)		(6)		—		—		(6)
Net other comprehensive income during the period	1,341		—		(424)		917		4,593		—		(423)		4,170
Balance at June 30	$	9,161	$	(182)	$	(1,864)	$	7,115	$	24,565	$	365	$	(3,408)	$	21,522

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 six months ended June 30:


	2021		2020
	(dollars in thousands)
Cash paid during the period for:
Interest	$	8,800	$	20,493
Income taxes	16,209		130
Non-cash investing and financing activities:

Loans transferred to other real estate owned and repossessed assets	1,649		2,368
Loans transferred from held to maturity to held for sale	30,704		13,442

Loans transferred from available for sale to held to maturity	—		1,908
Gross (decrease) increase in market value adjustment to securities available for sale	(14,113)		25,298
Gross increase (decrease) in market value adjustment to derivatives	1,305		(5,117)
Investments committed to purchase, not settled	—		21,853
Noncash treasury stock reissuance	2,042		1,594

Unsettled treasury stock repurchases	4		—
Proceeds from death benefit on bank owned life insurance not received	(384)		557

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 June 30,				For the Six Months Ended June 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	(17,695,829)		(15,788,359)		(17,707,057)		(15,730,604)
Average deferred compensation shares	(55,582)		(41,426)		(55,563)		(39,939)
Average unearned nonvested shares	(150,663)		(152,784)		(132,474)		(116,379)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	96,012,828		97,932,333		96,019,808		98,027,980
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	213,982		173,095		180,052		185,023
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share	55,615		41,426		55,615		41,426

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	96,282,425		98,146,854		96,255,475		98,254,429
Basic Earnings per Share	$	0.31	$	0.24	$	0.72	$	0.29
Diluted Earnings per Share	$	0.31	$	0.24	$	0.72	$	0.29

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 six months ended June 30 because to do so would have been antidilutive.


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

Restricted Stock	66,092	$	13.72	$	14.58	122,066	$	13.72	$	15.44
Restricted Stock Units	26,343	$	16.41	$	16.41	91,240	$	12.43	$	15.37

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5 Commitments and Contingent Liabilities

Commitments and Letters of Credit

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

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


	June 30, 2021		December 31, 2020
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	2,195,786	$	2,097,628
Financial standby letters of credit	18,514		15,988
Performance standby letters of credit	16,545		16,864
Commercial letters of credit	965		783

The notional amounts outstanding as of June 30, 2021 include amounts issued in 2021 of $0.5 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. A liability of $0.1 million has been recorded as of both June 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 $5.5 million and $7.4 million as of June 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 June 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.

First Commonwealth Bank was named a defendant in a putative class action that commenced on October 14, 2020 in the Court of Common Pleas of Allegheny County, Pennsylvania. The claims related to certain notices and other practices in connection with the repossession of motor vehicles. On May 4, 2021, the Court granted the Bank’s preliminary objections and dismissed the plaintiffs’ complaint with prejudice. The plaintiffs have filed a notice of appeal of the Court’s order dismissing the complaint.

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:


	June 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	$	5,772	$	555	$	—	$	6,327	$	6,492	$	738	$	—	$	7,230
Mortgage-Backed Securities – Commercial	326,712		4,296		(540)		330,468		182,823		8,357		—		191,180
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	712,715		10,398		(4,486)		718,627		481,109		14,924		—		496,033

Other Government-Sponsored Enterprises	1,000		—		(10)		990		100,996		2		—		100,998
Obligations of States and Political Subdivisions	9,609		131		(59)		9,681		11,154		243		—		11,397
Corporate Securities	23,126		1,350		(39)		24,437		22,941		1,444		—		24,385



Total Securities Available for Sale	$	1,078,934	$	16,730	$	(5,134)	$	1,090,530	$	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 June 30, 2021, by contractual maturity, are shown below.


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	5,000	$	5,058
Due after 1 but within 5 years	12,871		13,610
Due after 5 but within 10 years	15,864		16,440
Due after 10 years	—		—
	33,735		35,108
Mortgage-Backed Securities (a)	1,045,199		1,055,422
Total Debt Securities	$	1,078,934	$	1,090,530

(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 $332.5 million and a fair value of $336.8 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $712.7 million and a fair value of $718.6 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 six months ended June 30:


	2021		2020
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities
Gross gains	16		27
Gross losses	—		—

	16		27
Net gains and impairment	$	16	$	27

Securities available for sale with an estimated fair value of $838.4 million and $792.1 million were pledged as of June 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:


	June 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	$	2,652	$	128	$	—	$	2,780	$	2,766	$	138	$	—	$	2,904
Mortgage-Backed Securities- Commercial	102,982		818		(728)		103,072		36,799		1,441		—		38,240
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	384,392		3,712		(2,645)		385,459		277,351		5,389		(10)		282,730
Mortgage-Backed Securities – Commercial	8,527		275		—		8,802		9,737		344		—		10,081
Other Government-Sponsored Enterprises	21,747		—		(452)		21,295		—		—		—		—
Obligations of States and Political Subdivisions	32,925		566		(79)		33,412		34,391		705		—		35,096
Debt Securities Issued by Foreign Governments	1,000		—		—		1,000		800		—		—		800




Total Securities Held to Maturity	$	554,225	$	5,499	$	(3,904)	$	555,820	$	361,844	$	8,017	$	(10)	$	369,851

The amortized cost and estimated fair value of debt securities held to maturity at June 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	$	3,465	$	3,481
Due after 1 but within 5 years	4,772		4,826
Due after 5 but within 10 years	43,634		43,558
Due after 10 years	3,801		3,842
	55,672		55,707
Mortgage-Backed Securities (a)	498,553		500,113
Total Debt Securities	$	554,225	$	555,820

(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 $105.6 million and a fair value of $105.9 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $392.9 million and a fair value of $394.3 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 $348.8 million and $228.1 million were pledged as of June 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 June 30, 2021 and December 31, 2020, our FHLB stock totaled $9.9 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 six months ended June 30, 2021.

As of both June 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 three-months ended June 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 June 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	$	191,215	$	(1,268)	$	—	$	—	$	191,215	$	(1,268)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	520,020		(7,131)		—		—		520,020		(7,131)

Other Government-Sponsored Enterprises	22,285		(462)		—		—		22,285		(462)
Obligations of States and Political Subdivisions	7,237		(138)		—		—		7,237		(138)

Corporate Securities	5,136		(39)		—		—		5,136		(39)



Total Securities	$	745,893	$	(9,038)	$	—	$	—	$	745,893	$	(9,038)

At June 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 June 30, 2021, there are 44 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 June 30, 2021, our corporate securities had an amortized cost and an estimated fair value of $23.1 million and $24.4 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 June 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 six months ended June 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 $7.1 million and $6.0 million as of June 30, 2021 and December 31, 2020, respectively, and discounts on purchased loans were $6.5 million and $7.0 million at March 31, 2021 and December 31, 2020, respectively. The following table provides outstanding balances related to each of our loan types:


	June 30, 2021		December 31, 2020

	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,374,177	$	1,555,986
Time and demand	1,360,065		1,541,382
Commercial credit cards	14,112		14,604
Real estate construction	414,816		427,221
Residential real estate	1,828,783		1,750,592
Residential first lien	1,218,300		1,144,323
Residential junior lien/home equity	610,483		606,269
Commercial real estate	2,205,758		2,211,569
Multifamily	385,905		371,239
Nonowner occupied	1,429,192		1,421,151
Owner occupied	390,661		419,179
Loans to individuals	917,001		815,815
Automobile	829,150		712,800
Consumer credit cards	10,834		12,360
Consumer other	77,017		90,655
Total loans	$	6,740,535	$	6,761,183

In the table above, Commercial, financial, agricultural and other loans at June 30, 2021 and December 31, 2020 includes $292.4 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 June 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 June 30, 2021 was 5.76% and during the one-year forecast period it was projected to average 5.37%, with a peak of 5.76%.

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:


	June 30, 2021
			Non-Pass
	Pass		OAEM		Substandard		Doubtful		Loss		Total Non-Pass		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,329,974	$	28,567	$	15,636	$	—	$	—	$	44,203	$	1,374,177
Time and demand	1,315,862		28,567		15,636		—		—		44,203		1,360,065
Commercial credit cards	14,112		—		—		—		—		—		14,112
Real estate construction	413,059		1,703		54		—		—		1,757		414,816
Residential real estate	1,820,506		1,531		6,746		—		—		8,277		1,828,783
Residential first lien	1,213,599		1,457		3,244		—		—		4,701		1,218,300
Residential junior lien/home equity	606,907		74		3,502		—		—		3,576		610,483
Commercial real estate	2,009,839		162,669		33,250		—		—		195,919		2,205,758
Multifamily	370,681		14,703		521		—		—		15,224		385,905
Nonowner occupied	1,263,952		138,440		26,800		—		—		165,240		1,429,192
Owner occupied	375,206		9,526		5,929		—		—		15,455		390,661
Loans to individuals	916,730		—		271		—		—		271		917,001
Automobile	828,936		—		214		—		—		214		829,150
Consumer credit cards	10,834		—		—		—		—		—		10,834
Consumer other	76,960		—		57		—		—		57		77,017
Total loans	$	6,490,108	$	194,470	$	55,957	$	—	$	—	$	250,427	$	6,740,535


	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:


	June 30, 2021
	Term Loans												Revolving Loans
	2021		2020		2019		2018		2017		Prior				Total
	(dollars in thousands)
Time and demand	$	335,532	$	188,651	$	160,849	$	109,102	$	59,017	$	133,929	$	372,985	$	1,360,065
Pass	335,532		188,552		149,819		108,430		52,920		118,387		362,222		1,315,862
OAEM	—		89		10,943		135		2,147		7,373		7,880		28,567
Substandard	—		10		87		537		3,950		8,169		2,883		15,636
Commercial credit cards	—		—		—		—		—		—		14,112		14,112
Pass	—		—		—		—		—		—		14,112		14,112


Real estate construction	42,696		172,170		137,732		49,029		10,255		1,799		1,135		414,816
Pass	42,694		170,912		137,732		49,029		10,255		1,548		889		413,059
OAEM	2		1,258		—		—		—		197		246		1,703
Substandard	—		—		—		—		—		54		—		54
Residential first lien	195,705		354,035		150,421		108,962		89,214		317,986		1,977		1,218,300
Pass	195,694		354,013		150,391		108,596		89,073		313,932		1,900		1,213,599
OAEM	—		—		—		75		—		1,305		77		1,457
Substandard	11		22		30		291		141		2,749		—		3,244
Residential junior lien/home equity	25,133		2,458		4,511		3,680		1,442		6,836		566,423		610,483
Pass	25,133		2,458		4,430		3,680		1,442		6,676		563,088		606,907
OAEM	—		—		—		—		—		64		10		74
Substandard	—		—		81		—		—		96		3,325		3,502
Multifamily	56,127		75,824		16,654		55,568		72,187		108,109		1,436		385,905
Pass	56,127		75,824		16,654		55,568		58,027		107,045		1,436		370,681
OAEM	—		—		—		—		14,160		543		—		14,703
Substandard	—		—		—		—		—		521		—		521
Nonowner occupied	62,682		106,872		201,303		165,753		208,921		679,702		3,959		1,429,192
Pass	62,682		106,872		201,303		155,781		181,049		552,582		3,683		1,263,952
OAEM	—		—		—		9,972		20,955		107,392		121		138,440
Substandard	—		—		—		—		6,917		19,728		155		26,800
Owner occupied	42,351		56,499		61,763		39,319		34,847		150,834		5,048		390,661
Pass	42,351		54,856		60,212		37,655		33,528		141,773		4,831		375,206
OAEM	—		1,430		658		877		1,295		5,233		33		9,526
Substandard	—		213		893		787		24		3,828		184		5,929
Automobile	261,079		302,782		159,487		69,074		28,644		8,084		—		829,150
Pass	261,079		302,782		159,399		69,058		28,616		8,002		—		828,936

Substandard	—		—		88		16		28		82		—		214
Consumer credit cards	—		—		—		—		—		—		10,834		10,834
Pass	—		—		—		—		—		—		10,834		10,834


Consumer other	2,414		6,060		11,100		7,362		1,171		6,131		42,779		77,017
Pass	2,414		6,060		11,100		7,362		1,171		6,086		42,767		76,960

Substandard	—		—		—		—		—		45		12		57
Total	$	1,023,719	$	1,265,351	$	903,820	$	607,849	$	505,698	$	1,413,410	$	1,020,688	$	6,740,535

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 six months ended June 30, 2021 and 2020 were $7.2 million and $8.0 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 June 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.


	June 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	$	166		$	48	$	8	$	12,349	$	12,571	$	1,361,606	$	1,374,177
Time and demand	116			6		—		12,349		12,471		1,347,594		1,360,065
Commercial credit cards	50		1	42		8		—		100		14,012		14,112
Real estate construction	—			—		—		54		54		414,762		414,816
Residential real estate	3,064			578		434		6,102		10,178		1,818,605		1,828,783
Residential first lien	2,116			381		367		2,817		5,681		1,212,619		1,218,300
Residential junior lien/home equity	948			197		67		3,285		4,497		605,986		610,483
Commercial real estate	91			149		—		27,424		27,664		2,178,094		2,205,758
Multifamily	—			—		—		445		445		385,460		385,905
Nonowner occupied	—			101		—		24,726		24,827		1,404,365		1,429,192
Owner occupied	91			48		—		2,253		2,392		388,269		390,661
Loans to individuals	1,350			449		461		271		2,531		914,470		917,001
Automobile	945		1	322		66		214		1,547		827,603		829,150
Consumer credit cards	38			23		120		—		181		10,653		10,834
Consumer other	367			104		275		57		803		76,214		77,017
Total loans	$	4,671		$	1,224	$	903	$	46,200	$	52,998	$	6,687,537	$	6,740,535

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		1	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		1	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 June 30, 2021, there were no nonperforming loans held for sale. At December 31, 2020, there was one nonperforming loan totaling $13 thousand classified as held for sale. During the six months ended June 30, 2021, a $5.0 million nonperforming

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

relationship was transferred to held for sale and sold, resulting in a $0.4 million gain. During the six months ended June 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 June 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.


	June 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	$	5,598	$	14,230			$	2,025	$	2,725
Time and demand	5,598		14,230				2,025		2,725

Real estate construction	54		53				54		53
Residential real estate	10,029		12,207				10,939		13,258
Residential first lien	5,364		6,746				6,062		7,575
Residential junior lien/home equity	4,665		5,461				4,877		5,683
Commercial real estate	13,575		14,388				20,650		23,641
Multifamily	—		—				1		82
Nonowner occupied	11,134		11,621				16,786		19,459
Owner occupied	2,441		2,767				3,863		4,100
Loans to individuals	476		513				418		447
Automobile	419		452				405		430

Consumer other	57		61				13		17
Subtotal	29,732		41,391				34,086		40,124
With an allowance recorded:
Commercial, financial, agricultural and other	8,737		8,889		2,358		4,210		9,377		1,268
Time and demand	8,737		8,889		2,358		4,210		9,377		1,268

Real estate construction	—		—		—		—		—		—
Residential real estate	—		—		—		—		—		—
Residential first lien	—		—		—		—		—		—
Residential junior lien/home equity	—		—		—		—		—		—
Commercial real estate	14,324		15,850		588		15,757		15,830		3,638
Multifamily	445		463		113		459		470		116
Nonowner occupied	13,614		15,122		475		15,060		15,122		3,508
Owner occupied	265		265		—		238		238		14
Loans to individuals	—		—		—		—		—		—
Automobile	—		—		—		—		—		—

Consumer other	—		—		—		—		—		—
Subtotal	23,061		24,739		2,946		19,967		25,207		4,906
Total	$	52,793	$	66,130	$	2,946	$	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 Six Months Ended June 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		$	3,966	$	43	$	6,894	$	34	$	74	$	—
Time and demand		3,966		43

Real estate construction		54		—		—		—		—		—
Residential real estate		10,726		221		10,182		159		1,922		17
Residential first lien		5,822		176
Residential junior lien/home equity		4,904		45
Commercial real estate		15,879		30		14,367		67		238		—
Multifamily		—		—
Nonowner occupied		13,079		10
Owner occupied		2,800		20
Loans to individuals		477		6		457		6		11		—
Automobile		426		6

Consumer other		51		—
Subtotal		31,102		300		31,900		266		2,245		17
With an allowance recorded:
Commercial, financial, agricultural and other		6,813		36		1,881		1		—		—
Time and demand		6,813		36

Real estate construction		—		—		—		—		51		—
Residential real estate		—		—		290		—		—		—
Residential first lien		—		—
Residential junior lien/home equity		—		—
Commercial real estate		14,730		—		11,509		4		1,222		—
Multifamily		457		—
Nonowner occupied		14,096		—
Owner occupied		177		—
Loans to individuals		—		—		—		—		—		—
Automobile		—		—

Consumer other		—		—
Subtotal		21,543		36		13,680		5		1,273		—
Total		$	52,645	$	336	$	45,580	$	271	$	3,518	$	17

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 June 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		$	5,591		$	31	$	6,758	$	12	$	74	$	—
Time and demand		5,591			31

Real estate construction		54			—		—		—		—		—
Residential real estate		10,560		1	159		9,836		80		1,753		15
Residential first lien		5,661			132
Residential junior lien/home equity		4,899			27
Commercial real estate		13,689			7		17,411		48		246		—
Multifamily		—			—
Nonowner occupied		11,227			2
Owner occupied		2,462			5
Loans to individuals		475			4		468		4		11		—
Automobile		415			4

Consumer other		60			—
Subtotal		30,369			201		34,473		144		2,084		15
With an allowance recorded:
Commercial, financial, agricultural and other		8,791		1	19		2,028		—		—		—
Time and demand		8,791			19

Real estate construction		—			—		—		—		103		—
Residential real estate		—		1	—		254		—		—		—
Residential first lien		—			—
Residential junior lien/home equity		—			—
Commercial real estate		14,329			—		17,142		—		1,828		—
Multifamily		450			—
Nonowner occupied		13,614			—
Owner occupied		265			—
Loans to individuals		—			—		—		—		—		—
Automobile		—			—

Consumer other		—			—
Subtotal		23,120			19		19,424		—		1,931		—
Total		$	53,489		$	220	$	53,897	$	144	$	4,015	$	15

Unfunded commitments related to nonperforming loans were $0.2 million at both June 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 June 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 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 June 30, 2021, loans with an aggregate principal balance of $59.5 million were in a forbearance period granted under the CARES Act.

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


	June 30, 2021		December 31, 2020
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	6,593	$	8,512
Nonaccrual status	23,981		14,740
Total	$	30,574	$	23,252
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	12		11
Total	$	72	$	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 Six Months Ended June 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	3	$	6,373	$	—	$	6,596	$	12,969	$	10,167	$	1,091
Time and demand	3	6,373		—		6,596		12,969		10,167		1,091


Residential real estate	7	—		105		186		291		287		—
Residential first lien	6	—		105		172		277		274		—
Residential junior lien/home equity	1	—		—		14		14		13		—




Loans to individuals	4	—		93		—		93		85		—
Automobile	4	—		93		—		93		85		—


Total	14	$	6,373	$	198	$	6,782	$	13,353	$	10,539	$	1,091


	For the Six Months Ended June 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)


Residential real estate	4	—		—		264		264		256		—
Commercial real estate	2	—		—		12		12		9		—
Loans to individuals	10	—		71		124		195		186		—
Total	16	$	—	$	71	$	400	$	471	$	451	$	—

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 six months ended June 30, 2021 and 2020, $198 thousand and $71 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 June 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	1	$	—	$	—	$	6,596	$	6,596	$	3,916	$	—
Time and demand	1	—		—		6,596		6,596		3,916		—


Residential real estate	4	—		—		172		172		169		—
Residential first lien	4	—		—		172		172		169		—





Loans to individuals	2	—		29		—		29		29		—
Automobile	2	—		29		—		29		29		—


Total	7	$	—	$	29	$	6,768	$	6,797	$	4,114	$	—


	For the Three Months Ended June 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)


Residential real estate	2	$	—	$	—	$	146	$	146	$	142	$	—

Loans to individuals	3	—		53		1		54		55		—
Total	5	$	—	$	53	$	147	$	200	$	197	$	—

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 six months ended June 30, 2021 and 2020, $29 thousand and $53 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.

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 six months ended June 30:



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


Residential real estate	—	$	—	1	$	50


Total	—	$	—	1	$	50

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 June 30:

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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


Residential real estate	—	$	—	1	$	50


Total	—	$	—	1	$	50

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


	For the Six Months Ended June 30, 2021
	Beginning balance			Charge-offs		Recoveries		Provision (credit)a		Ending balance
	(dollars in thousands)
Commercial, financial, agricultural and other	$	17,187		$	(4,456)	$	193	$	8,542	$	21,466
Time and demand	16,838			(4,338)		188		8,410		21,098
Commercial credit cards	349			(118)		5		132		368
Real estate construction	7,966			—		135		(3,816)		4,285
Residential real estate	14,358		—	(119)		211		(1,517)		12,933
Residential first lien	7,919			(36)		182		(671)		7,394
Residential junior lien/home equity	6,439			(83)		29		(846)		5,539
Commercial real estate	41,953			(1,557)		40		(4,641)		35,795
Multifamily	6,240			(1)		—		(1,860)		4,379
Nonowner occupied	28,414			(1,556)		40		13		26,911
Owner occupied	7,299		—	—		—		(2,794)		4,505
Loans to individuals	19,845			(2,472)		828		4,358		22,559
Automobile	16,133			(1,068)		575		3,658		19,298
Consumer credit cards	635			(247)		42		98		528
Consumer other	3,077			(1,157)		211		602		2,733
Total loans	$	101,309		$	(8,604)	$	1,407	$	2,926	$	97,038

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 Six Months Ended June 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	$	21,466	$	2,358	$	19,108	$	1,374,177	$	13,688	$	1,360,489
Time and demand	21,098		2,358		18,740		1,360,065		13,688		1,346,377
Commercial credit cards	368		—		368		14,112		—		14,112
Real estate construction	4,285		—		4,285		414,816		—		414,816
Residential real estate	12,933		—		12,933		1,828,783		541		1,828,242
Residential first lien	7,394		—		7,394		1,218,300		—		1,218,300
Residential junior lien/home equity	5,539		—		5,539		610,483		541		609,942
Commercial real estate	35,795		588		35,207		2,205,758		27,099		2,178,659
Multifamily	4,379		113		4,266		385,905		445		385,460
Nonowner occupied	26,911		475		26,436		1,429,192		24,624		1,404,568
Owner occupied	4,505		—		4,505		390,661		2,030		388,631
Loans to individuals	22,559		—		22,559		917,001		—		917,001
Automobile	19,298		—		19,298		829,150		—		829,150
Consumer credit cards	528		—		528		10,834		—		10,834
Consumer other	2,733		—		2,733		77,017		—		77,017
Total loans	$	97,038	$	2,946	$	94,092	$	6,740,535	$	41,328	$	6,699,207

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	For the Six Months Ended June 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	(1,771)		—		(559)		(2,415)		(3,809)		(8,554)
Recoveries	117		26		121		44		476		784
Provision (credit)	6,245		483		5,586		15,770		7,683		35,767
Ending balance	24,812		3,067		9,239		33,130		9,334		79,582
Acquired loans:
Beginning balance	13		—		2		37		—		52
Charge-offs	—		—		(91)		(2)		(207)		(300)
Recoveries	15		—		25		—		8		48
Provision (credit)	304		171		64		1,321		199		2,059
Ending balance	332		171		—		1,356		—		1,859
Total ending balance	$	25,144	$	3,238	$	9,239	$	34,486	$	9,334	$	81,441
Ending balance: individually evaluated for impairment	$	958	$	171	$	—	$	5,766	$	—	$	6,895
Ending balance: collectively evaluated for impairment	24,186		3,067		9,239		28,720		9,334		74,546
Loans:
Ending balance	1,773,099		416,329		1,723,288		2,224,710		784,649		6,922,075
Ending balance: individually evaluated for impairment	3,336		308		1,498		32,537		—		37,679
Ending balance: collectively evaluated for impairment	1,769,763		416,021		1,721,790		2,192,173		784,649		6,884,396

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 June 30, 2021
	Beginning balance			Charge-offs		Recoveries		Provision (credit)a		Ending balance
	(dollars in thousands)
Commercial, financial, agricultural and other	$	21,801		$	(3,887)	$	103	$	3,449	$	21,466
Time and demand	21,427			(3,878)		99		3,450		21,098
Commercial credit cards	374			(9)		4		(1)		368
Real estate construction	4,021			—		135		129		4,285
Residential real estate	12,829		—	(14)		174		(56)		12,933
Residential first lien	7,227			(13)		159		21		7,394
Residential junior lien/home equity	5,602			(1)		15		(77)		5,539
Commercial real estate	37,668			(7)		1		(1,867)		35,795
Multifamily	4,251			—		—		128		4,379
Nonowner occupied	27,889			(7)		1		(972)		26,911
Owner occupied	5,528		—	—		—		(1,023)		4,505
Loans to individuals	20,444			(931)		499		2,547		22,559
Automobile	16,888			(388)		394		2,404		19,298
Consumer credit cards	689			(79)		25		(107)		528
Consumer other	2,867			(464)		80		250		2,733
Total loans	$	96,763		$	(4,839)	$	912	$	4,202	$	97,038

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 June 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	$	27,378	$	2,852	$	7,724	$	31,265	$	8,268	$	77,487
Charge-offs	(1,285)		—		(7)		(2,150)		(1,326)		(4,768)
Recoveries	49		26		59		—		264		398
Provision (credit)	(1,330)		189		1,463		4,015		2,128		6,465
Ending balance	24,812		3,067		9,239		33,130		9,334		79,582
Acquired loans:
Beginning balance	350		—		—		1,238		—		1,588
Charge-offs	—		—		(66)		(1)		(71)		(138)
Recoveries	2		—		12		—		1		15
Provision (credit)	(20)		171		54		119		70		394
Ending balance	332		171		—		1,356		—		1,859
Total ending balance	$	25,144	$	3,238	$	9,239	$	34,486	$	9,334	$	81,441

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.


					June 30, 2021			December 31, 2020
Balance sheet:
Operating lease asset classified as premises and equipment					$	39,636		$	42,617
Operating lease liability classified as other liabilities					43,854			46,819
	For the Three Months Ended				For the Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021			June 30, 2020
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	1,200	$	1,368	$	2,401		$	2,736

Weighted average lease term, in years					14.69			14.96
Weighted average discount rate					3.41		%	3.41		%
Operating cash flows					$	1,193		$	1,325

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 June 30, 2021 were as follows (dollars in thousands):


For the twelve months ended:
June 30, 2022	$	4,595
June 30, 2023	4,406
June 30, 2024	4,240
June 30, 2025	4,144
June 30, 2026	3,702
Thereafter	35,772
Total future minimum lease payments	56,859
Less remaining imputed interest	13,005
Operating lease liability	$	43,854

Note 9 Income Taxes

In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” at June 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, 2017 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)

June 30, 2021

Other Investments

1,670

CarryingValue

N/A

Nonperforming Loans

712

(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)

5,160

(a)

Discounted Cash Flow

Discount Rate

6.50%

Limited Partnership Investments

7,448

Par Value

N/A

December 31, 2020

Other Investments

1,670

CarryingValue

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:


	June 30, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	6,327	$	—	$	6,327
Mortgage-Backed Securities - Commercial	—		330,468		—		330,468
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		718,627		—		718,627

Other Government-Sponsored Enterprises	—		990		—		990
Obligations of States and Political Subdivisions	—		9,681		—		9,681
Corporate Securities	—		24,437		—		24,437



Total Securities Available for Sale	—		1,090,530		—		1,090,530
Other Investments	—		9,857		1,670		11,527
Loans Held for Sale	—		19,530		—		19,530

Other Assets(a)	—		39,252		7,448		46,700
Total Assets	$	—	$	1,159,169	$	9,118	$	1,168,287
Other Liabilities(a)	$	—	$	43,313	$	—	$	43,313
Total Liabilities	$	—	$	43,313	$	—	$	43,313

(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 six months ended June 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	—		919		919
Issuances	—		—		—
Sales	—		—		—
Settlements	—		(91)		(91)
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	7,448	$	9,118

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	—		611		611
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	6,406	$	8,076

During the six months ended June 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 June 30, 2021 and 2020.

For the three months ended June 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	$	7,010	$	8,680
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		529		529
Issuances	—		—		—
Sales	—		—		—
Settlements	—		(91)		(91)
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	7,448	$	9,118

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	$	6,223	$	7,893
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		183		183
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	6,406	$	8,076

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

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


	June 30, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Nonperforming loans	$	—	$	32,510	$	17,337	$	49,847
Other real estate owned	—		655		—		655
Total Assets	$	—	$	33,165	$	17,337	$	50,502


	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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(dollars in thousands)
Nonperforming loans	$	(2,527)	$	191	$	(2,314)	$	(6,822)
Other real estate owned	—		(26)		—		(76)
Total losses	$	(2,527)	$	165	$	(2,314)	$	(6,898)

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 $0.4 million as of June 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 six months ended June 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 June 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:


	June 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	$	89,505	$	89,505	$	89,505	$	—	$	—
Interest-bearing deposits	194,948		194,948		194,948		—		—
Securities available for sale	1,090,530		1,090,530		—		1,090,530		—
Securities held to maturity	554,225		555,820		—		555,820		—
Other investments	11,527		11,527		—		9,857		1,670
Loans held for sale	19,530		19,530		—		19,530		—
Loans	6,740,535		7,117,132		—		32,510		7,084,622
Financial liabilities
Deposits	7,885,019		7,885,040		—		7,885,040		—
Short-term borrowings	107,372		106,922		—		106,922		—
Subordinated debt	170,694		174,902		—		—		174,902
Long-term debt	5,918		6,617		—		6,617		—
Capital lease obligation	6,155		6,155		—		6,155		—


	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 39 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 15 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.

In May and June 2021, the Company entered into three interest rate swap contracts that were designated as cash flow hedges. The interest rate swaps have a total notional amount of $325.0 million; $25.0 million with an original maturity of three years, $150.0 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 $325.0 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 six months ended June 30, 2021 there was a positive impact of $69 thousand and a negative impact of $157 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 June 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 six months ended June 30, 2021 was a decrease of $0.8 million.

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At June 30, 2021, the underlying funded mortgage loan commitments had a carrying value of $14.5 million and a fair value of $16.4 million, while the underlying unfunded mortgage loan commitments had a notional amount of $40.0 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 $0.4 million for the three and six months ended June 30, 2021.

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 six months ended June 30, 2021 totaled $5 thousand, respectively. At June 30, 2021 and December 31, 2020, the underlying loans had a carrying value of $2.3 million and $2.1 million, respectively, and a fair value of $2.3 million and $2.1 million, respectively.

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


	June 30, 2021		December 31, 2020
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(1,639)	$	(2,792)
Notional amount:
Interest rate derivatives	692,606		631,446
Interest rate caps	66,267		66,527
Interest rate collars	35,354		35,354
Risk participation agreements	227,943		220,280
Sold credit protection on risk participation agreements	(86,852)		(78,522)
Interest rate options	39,996		47,874
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	(2,360)		(3,665)
Notional amount	395,000		70,000
Interest rate forwards:
Fair value adjustment	(82)		(483)
Notional amount	41,000		65,000
Foreign exchange forwards:
Fair value adjustment	20		(5)
Notional amount	2,331		2,119

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(dollars in thousands)
Non-hedging interest rate derivatives
(Decrease) increase in other income	$	(27)	$	1,672	$	309	$	(753)

Hedging interest rate derivatives

Increase in interest from subordinated debentures	236		66		462		11

Hedging interest rate forwards
Increase (decrease) in other income	641		(248)		(401)		234

Hedging foreign exchange forwards
Increase in other expense	3		8		5		12

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.

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as both of June 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 June 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13 Subordinated Debentures

Subordinated debentures outstanding are as follows:


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

First Commonwealth Bank	2028	$	49,361	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	49,166		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		$	170,694		$	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 LIBOR + 1.845%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2023, in whole or in part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to the date of redemption. Deferred issuance costs of $0.9 million are being amortized on a straight-line basis over the term of the notes.

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

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

Interest on the debentures issued to First Commonwealth Capital Trust III is paid quarterly at a floating rate of LIBOR + 2.85% which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at its option on any interest payment date at a redemption price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $0.6 million are being amortized on a straight-line basis over the term of the securities.

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

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 interest rate on Capital Trust II at 1.515% until August 15, 2024 and the rate 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".

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

not control the services rendered to the customers, retail brokerage fees are presented net of related costs, including $0.9 million and $0.8 million in commission expense as of June 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 June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
	(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income	$	2,706	$	2,109	$	5,222	$	4,220
Service charges on deposit accounts	4,310		3,286		8,357		8,031
Insurance and retail brokerage commissions	1,978		1,831		4,150		3,826
Card-related interchange income	7,406		5,886		13,833		11,148
Gain on sale of other loans and assets	337		173		506		332
Other income	1,103		824		2,083		1,768
Noninterest Income (in-scope of Topic 606)	17,840		14,109		34,151		29,325
Noninterest Income (out-of-scope of Topic 606)	8,246		7,703		19,290		11,760
Total Noninterest Income	$	26,086	$	21,812	$	53,441	$	41,085

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 six months ended June 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 55 and 63 for the six and three months ended June 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 June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
	(dollars in thousands, except per share data)
Net Income	$	29,619		$	23,851		$	69,389		$	28,578
Per Share Data:
Per Share Data: Basic Earnings per Share	$	0.31		$	0.24		$	0.72		$	0.29
Diluted Earnings per Share	0.31			0.24			0.72			0.29
Cash Dividends Declared per Common Share	0.12			0.11			0.23			0.22
Average Balance:
Total assets	$	9,451,683		$	9,043,554		$	9,291,956		$	8,690,437
Total equity	1,098,094			1,071,549			1,087,384			1,071,433
End of Period Balance:
Net loans (1)							$	6,663,027		$	6,871,043
Total assets							9,402,402			9,364,655
Total deposits							7,885,019			7,782,201
Total equity							1,106,419			1,075,705
Key Ratios:
Return on average assets	1.26		%	1.06		%	1.51		%	0.66		%
Return on average equity	10.82		%	8.95		%	12.87		%	5.36		%
Dividends payout ratio	38.71		%	45.83		%	31.94		%	75.86		%
Average equity to average assets ratio	11.62		%	11.85		%	11.70		%	12.33		%
Net interest margin	3.17		%	3.29		%	3.29		%	3.46		%
Net loans to deposits ratio							84.50		%	88.29		%

(1) Includes loans held for sale.

Results of Operations

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Net Income

For the six months ended June 30, 2021, First Commonwealth had net income of $69.4 million, or $0.72 diluted earnings per share, compared to net income of $28.6 million, or $0.29 diluted earnings per share, in the six months ended June 30, 2020. The increase in net income was primarily the result of a $1.0 million provision for credit losses recognized during the six months ended June 30, 2021 compared to $37.8 million recognized in the same period in 2020. Additionally, noninterest income increased $12.4 million during the six months ended June 30, 2021 compared to the same period in 2020. These increases were partially offset by a $11.2 million increase in the income tax provision due to higher income before income taxes.

For the six months ended June 30, 2021, the Company’s return on average equity was 12.87% and its return on average assets was 1.51%, compared to 5.36% and 0.66%, respectively, for the six months ended June 30, 2020.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $138.2 million in the first six months of 2021, compared to $135.2 million for the same period in 2020. The increase in net interest income can be attributed to a 41 basis point decrease in the cost of interest-bearing liabilities offset by a 48 basis point decrease in the yield on interest-earning assets and a $634.8 million increase in interest-earning assets. Net interest income comprises the majority of our operating revenue (net interest income

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

before provision expense plus noninterest income), at 72.0% and 76.6% for the six months ended June 30, 2021 and 2020, respectively.

The net interest margin on a fully taxable equivalent basis was 3.29% and 3.46% for the six months ended June 30, 2021 and June 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 3.49% for the six months ended June 30, 2021, a decrease of 48 basis points compared to the 3.97% yield for the same period in 2020. This decrease is largely due to a decline in the loan portfolio yield, which decreased by 34 basis points when compared to the six months ended June 30, 2020. Contributing to this decline was the yield on our adjustable and variable rate commercial loan portfolio, which declined 78 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 six months ended June 30, 2021, was impacted by $459.5 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 5.89% for the six months ended June 30, 2021. During the six months ended June 30, 2020, PPP loans averaged $202.9 million with a yield of 2.7%. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $11.2 million for the six months ended June 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 June 30, 2021, we expect to recognize additional PPP-related deferred processing fees, net of origination costs, of approximately $12.3 million as an adjustment to yield over the remaining terms of the loans. The balance of PPP loans outstanding at June 30, 2021 totaled $292.4 million. PPP loans increased the yield on total loans by 14 basis points and the net interest margin by 15 basis points during the six months ended June 30, 2021. During the six months ended June 30, 2021, the Company originated $255.8 million in new PPP loans and processed forgiveness on $438.5 million of PPP loans originated in prior quarters.

The investment portfolio yield decreased 52 basis points in comparison to the prior year as a result of lower short-term interest rates. Investment portfolio purchases during the six months ended June 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. 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 $86.8 million in 2020 to $349.7 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 six months ended June 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 0.31% for the six months ended June 30, 2021, from 0.72% 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 contribute to a decline in average short-term borrowings of $40.0 million for the six months ended June 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 41 basis points and short-term borrowings decreasing 71 basis points in comparison to the same period last year.

For the six months ended June 30, 2021, changes in interest rates negatively impacted net interest income by $6.1 million when compared with the same period in 2020. The lower yield on interest-earning assets negatively impacted net interest income by $15.4 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $9.2 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $9.2 million for the six months ended June 30, 2021, as compared to the same period in 2020. Higher levels of interest-earning assets resulted in an increase of $7.0 million in interest income, and changes in the volume and mix of interest-bearing liabilities decreased interest expense by $2.2 million, primarily due to a decrease in time deposits. Average earning assets for the six months ended June 30, 2021 increased $634.8 million, or 8.1%, compared to the same period in 2020. Average loans for the comparable period increased $259.7 million, or 4.0%.

Net interest income also benefited from a $657.1 million increase in average net free funds at June 30, 2021 as compared to June 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 $606.3 million, or 31.8%, in noninterest-bearing demand deposit average balances, primarily due to deposit

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

growth related to PPP loan proceeds and government stimulus payments. Average time deposits for the six months ended June 30, 2021 decreased by $308.2 million compared to the comparable period in 2020, while the average rate paid on time deposits decreased 96 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 six months ended June 30:


	2021		2020
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	146,112	$	154,310
Adjustment to fully taxable equivalent basis	598		755
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	146,710		155,065
Interest expense	8,471		19,900
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	138,239	$	135,165

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 six months ended June 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	$	349,747	$	167	0.10	%	$	86,804	$	69	0.16	%
Tax-free investment securities	29,539		402		2.74		47,950		737		3.09
Taxable investment securities	1,329,843		11,947		1.81		1,199,233		13,843		2.32
Loans, net of unearned income (b)(c)	6,776,560		134,194		3.99		6,516,854		140,416		4.33
Total interest-earning assets	8,485,689		146,710		3.49		7,850,841		155,065		3.97
Noninterest-earning assets:
Cash	92,243						97,129
Allowance for credit losses	(104,239)						(66,705)
Other assets	818,263						809,172
Total noninterest-earning assets	806,267						839,596
Total Assets	$	9,291,956					$	8,690,437
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,503,501	$	220	0.03	%	$	1,465,901	$	1,469	0.20	%
Savings deposits (d)	3,228,379		1,750		0.11		2,925,862		6,354		0.44
Time deposits	493,259		1,515		0.62		801,429		6,312		1.58
Short-term borrowings	117,155		58		0.10		157,188		635		0.81
Long-term debt	219,731		4,928		4.52		233,934		5,130		4.41
Total interest-bearing liabilities	5,562,025		8,471		0.31		5,584,314		19,900		0.72
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits	2,509,818						1,903,568
Other liabilities	132,729						131,122
Shareholders’ equity	1,087,384						1,071,433
Total Noninterest-Bearing Funding Sources	3,729,931						3,106,123
Total Liabilities and Shareholders’ Equity	$	9,291,956					$	8,690,437
Net Interest Income and Net Yield on Interest-Earning Assets			$	138,239	3.29	%			$	135,165	3.46	%

(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 six months ended June 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 six months ended June 30, 2021 compared with June 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	$	98	$	209	$	(111)
Tax-free investment securities	(335)		(283)		(52)
Taxable investment securities	(1,896)		1,507		(3,403)
Loans	(6,222)		5,592		(11,814)
Total interest income (b)	(8,355)		7,025		(15,380)
Interest-bearing liabilities:
Interest-bearing demand deposits	(1,249)		37		(1,286)
Savings deposits	(4,604)		662		(5,266)
Time deposits	(4,797)		(2,421)		(2,376)
Short-term borrowings	(577)		(161)		(416)
Long-term debt	(202)		(311)		109
Total interest expense	(11,429)		(2,194)		(9,235)
Net interest income	$	3,074	$	9,219	$	(6,145)

(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 six months ended June 30:


	2021				2020
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	8,542	292	%	$	6,549	17	%
Time and demand	8,410		287
Commercial credit cards	132		5
Real estate construction	(3,816)		(130)		654		2
Residential real estate	(1,517)		(52)		5,650		15
Residential first lien	(671)		(23)
Residential junior lien/home equity	(846)		(29)
Commercial real estate	(4,641)		(159)		17,091		45
Multifamily	(1,860)		(64)
Nonowner occupied	13		—
Owner occupied	(2,794)		(95)
Loans to individuals	4,358		149		7,882		21
Automobile	3,658		125
Consumer credit cards	98		3
Consumer other	602		21

Provision for credit losses on loans	$	2,926	100	%	$	37,826	100	%
Provision for off-balance sheet credit exposure	(1,903)				—
Total provision for credit losses	$	1,023			$	37,826

The provision for credit losses on loans for the six months ended June 30, 2021 decreased in comparison to the six months ended June 30, 2020 by $34.9 million. The level of provision expense in the six months ended June 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 $3.9 million in reserves on individually analyzed loans. The total provision for credit losses was impacted by a $1.9 million decrease in expense due 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 $1.0 million in provision expense for the six months ended June 30, 2021. Two loan categories, commercial, financial, agricultural and other loans as well as Loans to Individuals, reflected provision expense during the six month period of 2021. The provision expense for Commercial, financial, agricultural and other loans was primarily due to 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 six 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 six months ended June 30, 2020 was $5.9 million in specific reserves for four commercial real estate borrowers that were placed on nonaccrual status during the first six months of 2020. Additionally, $22.3 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 six months of 2020 totaled $8.0 million.

The allowance for credit losses was $97.0 million, or 1.44%, of total loans outstanding at June 30, 2021, compared to $101.3 million, or 1.50%, at December 31, 2020 and $81.4 million, or 1.18%, at June 30, 2020. Nonperforming loans as a percentage of total loans decreased to 0.78% at June 30, 2021 from 0.80% at December 31, 2020 and 0.81% as of June 30, 2020. The allowance to nonperforming loan ratio was 183.81%, 187.43% and 145.37% as of June 30, 2021, December 31, 2020 and June 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 June 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 six months ended June 30, 2021 and 2020 and the year-ended December 31, 2020:


	June 30, 2021			June 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	4,456			1,771			6,318
Real estate construction	—			—			—
Residential real estate	119			650			1,040
Commercial real estate	1,557			2,417			4,939
Loans to individuals	2,472			4,016			6,953
Total loans charged off	8,604			8,854			19,250
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	193			132			314
Real estate construction	135			26			26
Residential real estate	211			146			414
Commercial real estate	40			44			312
Loans to individuals	828			484			991
Total recoveries	1,407			832			2,057
Net charge-offs	7,197			8,022			17,193
Provision for credit losses on loans charged to expense	2,926			37,826			53,472
Balance, end of period	$	97,038		$	81,441		$	101,309
Net charge-offs as a percentage of average loans outstanding (annualized)	0.21		%	0.25		%	0.26		%
Allowance for credit losses as a percentage of end-of-period loans outstanding	1.44		%	1.18		%	1.50		%
Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans	1.50		%	1.28		%	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 six months ended June 30:


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	5,222	$	4,220	$	1,002	24	%
Service charges on deposit accounts	8,357		8,031		326		4
Insurance and retail brokerage commissions	4,150		3,826		324		8
Income from bank owned life insurance	3,460		3,416		44		1
Card-related interchange income	13,833		11,148		2,685		24
Swap fee income	1,398		823		575		70
Other income	3,921		3,487		434		12
Subtotal	40,341		34,951		5,390		15
Net securities gains	16		27		(11)		(41)
Gain on sale of mortgage loans	8,130		6,789		1,341		20
Gain on sale of other loans and assets	3,801		1,280		2,521		197
Derivatives mark to market	1,153		(1,962)		3,115		(159)

Total noninterest income	$	53,441	$	41,085	$	12,356	30	%

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 six months ended June 30, 2021 increased $5.4 million, or 15%, compared to the six months ended June 30, 2020. Card-related interchange income increased $2.7 million due to growth in customer accounts and transactions. Trust income increased $1.0 million as a result of growth in assets under management, and swap fee income increased $0.6 million due to growth in interest rate swaps entered into for our commercial customers.

Total noninterest income increased $12.4 million, or 30%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include $3.1 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 $2.5 million due to a higher volume of loans, primarily SBA loans, being sold in the first six months of 2021 compared to the same period in 2020. Gain on sale of mortgage loans increased $1.3 million as a result of growth in our mortgage lending area.

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 six months ended June 30:


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	57,018	$	58,750	$	(1,732)	(3)	%
Net occupancy	8,654		9,370		(716)		(8)
Furniture and equipment	7,814		7,435		379		5
Data processing	6,244		5,063		1,181		23
Advertising and promotion	2,679		2,685		(6)		—

Pennsylvania shares tax	2,090		1,992		98		5
Intangible amortization	1,729		1,853		(124)		(7)

Other professional fees and services	1,842		1,818		24		1
FDIC insurance	1,134		761		373		49

Other operating	12,786		11,796		990		8
Subtotal	101,990		101,523		467		—
Loss on sale or write-down of assets	52		353		(301)		(85)



COVID-19 related	306		442		(136)		(31)

Branch consolidation	18		—		18		—
Litigation and operational losses	1,035		709		326		46
Total noninterest expense	$	103,401	$	103,027	$	374	—	%

Noninterest expense increased $0.4 million, or 0.4%, for the six months ended June 30, 2021 compared to the same period in 2020. Contributing to the increase in expense in 2021 is a $1.2 million increase in data processing expense related to updates to our digital banking product offerings. Other operating expenses increased $1.0 million due to a $1.7 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. FDIC insurance increased $0.4 million in comparison to the prior period as a result of a $0.6 million assessment credit received in 2020 due to the FDIC deposit insurance fund reaching the required minimum reserve ratio. There was no similar credit in 2021. Partially offsetting these increases is a $1.7 million decrease in salaries and employee benefits primarily due to a decrease in full-time equivalent employees from 1,465 at June 30, 2020 to 1,392 at June 30, 2021. Additionally, net occupancy expense decreased $0.7 million. These decreases are largely attributable to the consolidation of 20% of the Bank’s branch facilities in the fourth quarter of 2020.

Income Tax

The provision for income taxes increased $11.2 million for the six months ended June 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 six months ended June 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 17.5% for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, our deferred tax assets totaled $21.8 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 June 30, 2021 Compared to Three Months Ended June 30, 2020

Net Income

For the three months ended June 30, 2021, First Commonwealth recognized net income of $29.6 million, or $0.31 diluted earnings per share, compared to net income of $23.9 million, or $0.24 diluted earnings per share, in the three months ended June 30, 2020. The increase in net income was primarily the result of a $4.3 million increase in noninterest income. Other items contributing to the growth in net income include a $1.5 million increase in net interest income and a $1.4 million decrease in the provision for credit losses.

For the three months ended June 30, 2021, the Company’s return on average equity was 10.82% and its return on average assets was 1.26%, compared to 8.95% and 1.06%, respectively, for the three months ended June 30, 2020.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $68.5 million in the second quarter of 2021, compared to $67.0 million for the same period in 2020. This increase was the result of $0.5 billion of growth in average interest-earning assets. However, the positive impact of this growth was more than offset by the impact of lower interest rates, which contributed to a 12 basis points decrease 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 72.3% and 75.4% for the three months ended June 30, 2021 and 2020, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.17% and 3.29% for the three months ended June 30, 2021 and June 30, 2020, respectively. The decrease in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The taxable equivalent yield on interest-earning assets was 3.35% for the three months ended June 30, 2021, a decrease of 35 basis points compared to the 3.70% yield for the same period in 2020. This is largely due to a decrease in the loan portfolio yield, which declined by 17 basis points when compared to the three months ended June 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 5.1%. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $4.2 million. These loans increased the average balance of loans by $429.9 million for the second quarter of 2021, causing a 9 basis point increase in the yield on loans and a 10 basis point increase in the net interest margin. The yield on the investment portfolio decreased 50 basis points in comparison to the prior year.

The cost of interest-bearing liabilities decreased to 0.27% for the three months ended June 30, 2021, from 0.59% for the same period in 2020, primarily due to a decrease in the cost of interest-bearing deposits and short-term borrowings. Lower market interest rates resulted in the cost of interest-bearing demand deposits decreasing 3 basis points and short-term borrowings decreasing 8 basis points in comparison to the same period last year. The cost of long-term debt increased by 24 basis points due to the maturity of borrowings with lower interest rates.

For the three months ended June 30, 2021, changes in interest rates negatively impacted net interest income by $1.3 million when compared with the same period in 2020. The lower yield on interest-earning assets negatively impacted net interest income by $4.5 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $3.2 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $2.7 million in the three months ended June 30, 2021, as compared to the same period in 2020. Higher levels of interest-earning assets resulted in an increase of $1.5 million in interest income while changes in the volume and mix of interest-bearing liabilities decreased interest expense by $1.2 million. Average interest-earning assets for the three months ended June 30, 2021 increased $467.7 million, or 5.7%, compared to the same period in 2020. Average loans for the comparable period decreased $6.2 million, or 0.1%.

Net interest income also benefited from a $520.1 million increase in average net free funds at June 30, 2021 as compared to June 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 $473.9 million, or 22.2%, in noninterest-bearing demand deposit average balances. Average time deposits for the three months ended June 30, 2021 decreased by $318.3 million compared to the comparable period in 2020, decreasing interest expense by $1.2 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 June 30:


	2021		2020
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	72,051	$	74,981
Adjustment to fully taxable equivalent basis	290		359
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	72,341		75,340
Interest expense	3,852		8,295
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	68,489	$	67,045

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 June 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	$	358,595	$	90	0.10	%	$	166,282	$	32	0.08	%
Tax-free investment securities	29,385		195		2.66		44,171		338		3.08
Taxable investment securities	1,498,204		6,440		1.72		1,201,822		6,606		2.21
Loans, net of unearned income (b)(c)	6,771,722		65,616		3.89		6,777,883		68,364		4.06
Total interest-earning assets	8,657,906		72,341		3.35		8,190,158		75,340		3.70
Noninterest-earning assets:
Cash	93,627						94,223
Allowance for credit losses	(102,303)						(80,717)
Other assets	802,453						839,890
Total noninterest-earning assets	793,777						853,396
Total Assets	$	9,451,683					$	9,043,554
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,560,713	$	112	0.03	%	$	1,573,595	$	254	0.06	%
Savings deposits (d)	3,297,818		779		0.09		2,994,607		2,507		0.34
Time deposits	458,638		541		0.47		776,892		2,925		1.51
Short-term borrowings	114,966		27		0.09		112,063		47		0.17
Long-term debt	206,495		2,393		4.65		233,819		2,562		4.41
Total interest-bearing liabilities	5,638,630		3,852		0.27		5,690,976		8,295		0.59
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	2,604,695						2,130,775
Other liabilities	110,264						150,254
Shareholders’ equity	1,098,094						1,071,549
Total noninterest-bearing funding sources	3,813,053						3,352,578
Total Liabilities and Shareholders’ Equity	$	9,451,683					$	9,043,554
Net Interest Income and Net Yield on Interest-Earning Assets			$	68,489	3.17	%			$	67,045	3.29	%

(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 June 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 June 30, 2021 compared with June 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	$	58	$	38	$	20
Tax-free investment securities	(143)		(113)		(30)
Taxable investment securities	(166)		1,629		(1,795)
Loans	(2,748)		(62)		(2,686)
Total interest income (b)	(2,999)		1,492		(4,491)
Interest-bearing liabilities:
Interest-bearing demand deposits	(142)		(2)		(140)
Savings deposits	(1,728)		256		(1,984)
Time deposits	(2,384)		(1,195)		(1,189)
Short-term borrowings	(20)		1		(21)
Long-term debt	(169)		(300)		131
Total interest expense	(4,443)		(1,240)		(3,203)
Net interest income	$	1,444	$	2,732	$	(1,288)

(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 June 30:


	2021				2020
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	3,449	82	%	$	(1,350)	(19)	%
Time and demand	3,450		82
Commercial credit cards	(1)		—
Real estate construction	129		3		360		5
Residential real estate	(56)		(1)		1,517		22
Residential first lien	21		1
Residential junior lien/home equity	(77)		(2)
Commercial real estate	(1,867)		(45)		4,134		60
Multifamily	128		3
Nonowner occupied	(972)		(23)
Owner occupied	(1,023)		(25)
Loans to individuals	2,547		61		2,198		32
Automobile	2,404		57
Consumer credit cards	(107)		(2)
Consumer other	250		6

Provision for credit losses on loans	$	4,202	100	%	$	6,859	100	%
Provision for off-balance sheet credit exposure	1,211				—
Total provision for credit losses	$	5,413			$	6,859

The provision for credit losses on loans for the three months ended June 30, 2021 decreased in comparison to the three months ended June 30, 2020 by $2.7 million. The level of provision expense in the second quarter of 2021 is primarily a result of a $3.6 million charge-off related to one commercial borrower and $1.2 million related to reserves for off-balance sheet commitments. Net charge-offs for the three months ended June 30, 2021 were $3.9 million.

The level of provision expense in the second 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. Charge-offs for the three months ended June 30, 2020 were $4.5 million, of which $2.7 million was provided for in prior quarters.

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 June 30, 2021 and 2020 and the year-ended December 31, 2020:


	6/30/2021		6/30/2020		12/31/2020
	(dollars in thousands)
Balance, beginning of period	$	96,763	$	79,075	$	51,637
Adoption of accounting standard - ASU 2016-13(1)	—		—		13,393
Loans charged off:
Commercial, financial, agricultural and other	3,887		1,285		6,318
Real estate construction	—		—		—
Residential real estate	14		73		1,040
Commercial real estate	7		2,151		4,939
Loans to individuals	931		1,397		6,953
Total loans charged off	4,839		4,906		19,250
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	103		51		314
Real estate construction	135		26		26
Residential real estate	174		71		414
Commercial real estate	1		—		312
Loans to individuals	499		265		991
Total recoveries	912		413		2,057
Net charge-offs	3,927		4,493		17,193
Provision for credit losses on loans charged to expense	4,202		6,859		53,472
Balance, end of period	$	97,038	$	81,441	$	101,309

Noninterest Income

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


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	2,706	$	2,109	$	597	28	%
Service charges on deposit accounts	4,310		3,286		1,024		31
Insurance and retail brokerage commissions	1,978		1,831		147		8
Income from bank owned life insurance	1,509		1,800		(291)		(16)
Card-related interchange income	7,406		5,886		1,520		26
Swap fee income	1,252		609		643		106
Other income	1,997		1,680		317		19
Subtotal	21,158		17,201		3,957		23
Net securities gains	10		8		2		25
Gain on sale of mortgage loans	3,084		4,243		(1,159)		(27)
Gain on sale of other loans and assets	2,111		581		1,530		263
Derivatives mark to market	(277)		(221)		(56)		25

Total noninterest income	$	26,086	$	21,812	$	4,274	20	%

Total noninterest income for the three months ended June 30, 2021 increased $4.3 million, or 20%, in comparison to the three months ended June 30, 2020. The most significant changes include a $1.5 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 $1.5 million and service charges on deposits increased $1.0 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 $1.2 million for the three months ended June 30, 2021 compared to the comparable period in 2020 due to a lower level of sold mortgages.

Noninterest Expense

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


	2021		2020		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	28,347	$	28,773	$	(426)	(1)	%
Net occupancy	3,881		4,397		(516)		(12)
Furniture and equipment	3,866		3,657		209		6
Data processing	3,192		2,596		596		23
Advertising and promotion	1,355		1,535		(180)		(12)
Pennsylvania shares tax	1,258		1,254		4		—
Intangible amortization	863		919		(56)		(6)

Other professional fees and services	1,091		920		171		19
FDIC insurance	438		733		(295)		(40)

Other operating	6,442		7,094		(652)		(9)
Subtotal	50,733		51,878		(1,145)		(2)
Loss on sale or write-down of assets	43		140		(97)		(69)



COVID-19 related	232		419		(187)		(45)

Branch consolidation	(22)		—		(22)		—
Litigation and operational losses	556		319		237		74
Total noninterest expense	$	51,542	$	52,756	$	(1,214)	(2)	%

Noninterest expense decreased $1.2 million, or 2%, for the three months ended June 30, 2021 compared to the same period in 2020. Net occupancy expense decreased $0.5 million and salary and employee benefit expense decreased $0.4 million. These decreases are largely attributable to the consolidation of 20% of the Bank’s branch facilities in the fourth quarter of 2020. Other operating expense decreased $0.7 million as a result of a $0.9 million decrease in unfunded commitment expense recognized in 2020. 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 $2.7 million for the three months ended June 30, 2021, compared to the corresponding period in 2020. The effective tax rate increased 330 basis points from 17.4% to 20.7% due to a $8.4 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 six months of 2021, the maturity and redemption of investment securities provided $344.4 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 June 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 0.37% and an average original term of 303 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 June 30, 2021, the borrowing capacity under this program totaled $931.4 million and there was no balance outstanding. As of June 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 $5.9 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 June 30, 2021. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $620.3 million with no outstanding balance as of June 30, 2021.

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


	June 30, 2021		December 31, 2020
	(dollars in thousands)
Noninterest-bearing demand deposits(a)	$	2,617,651	$	2,319,958
Interest-bearing demand deposits(a)	269,451		250,353
Savings deposits(a)	4,566,815		4,305,391
Time deposits	431,102		562,964
Total	$	7,885,019	$	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 six months of 2021, total deposits increased $446.4 million. Interest-bearing demand and savings deposits increased $280.5 million, noninterest-bearing demand deposits increased $297.7 million and time deposits decreased $131.9 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 0.54 and 0.51 at June 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 June 30, 2021 and December 31, 2020:


	June 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	$	609,441		$	605,333		$	1,039,491		$	2,254,265		$	3,583,352		$	838,620
Investments	107,866			108,841			185,831			402,538			767,692			427,536
Other interest-earning assets	194,948			—			—			194,948			—			—
Total interest-sensitive assets (ISA)	912,255			714,174			1,225,322			2,851,751			4,351,044			1,266,156
Certificates of deposit	107,630			77,552			119,690			304,872			124,303			1,854
Other deposits	4,836,266			—			—			4,836,266			—			—
Borrowings	179,737			198			396			180,331			3,167			101,959
Total interest-sensitive liabilities (ISL)	5,123,633			77,750			120,086			5,321,469			127,470			103,813
Gap	$	(4,211,378)		$	636,424		$	1,105,236		$	(2,469,718)		$	4,223,574		$	1,162,343
ISA/ISL	0.18			9.19			10.20			0.54			34.13			12.20
Gap/Total assets	44.79		%	6.77		%	11.75		%	26.27		%	44.92		%	12.36		%


	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)
June 30, 2021 ($)	$	(6,202)		$	(3,286)		$	2,944		$	5,000
June 30, 2021 (%)	(2.21)		%	(1.17)		%	1.05		%	1.78		%

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)
June 30, 2021 ($)	$	(18,723)		$	(12,395)		$	7,574		$	13,947
June 30, 2021 (%)	(6.68)		%	(4.42)		%	2.70		%	4.98		%

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 six months ended June 30, 2021 and 2020, the cost of our interest-bearing liabilities averaged 0.31% and 0.72%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.49% and 3.97%, respectively.

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

Credit Risk

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

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 $5.5 million at June 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 six months of 2021, fourteen loans totaling $13.4 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans increased $7.3 million from December 31, 2020. Changes during the first six months of 2021 can be attributed to new restructurings in conjunction with bankruptcy, including two commercial relationships totaling $13.0 million, offset by payments received on existing troubled debt restructured loans, including the payoff of $1.7 million of two commercial loan relationships and the pay down of one commercial relationship of $2.7 million. 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 June 30, 2021, loan customers with an aggregate principal balance of $59.5 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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 $1.3 million to $52.8 million at June 30, 2021 compared to $54.1 million at December 31, 2020. During the six months ended June 30, 2021, $15.4 million of loans were moved to nonaccrual, including the transfer of one commercial real estate relationships totaling $6.3 million and a $3.9 million commercial, financial, industrial loan to one borrower. Offsetting these additions was a sale of a $5.0 million commercial real estate relationship, a $1.0 million payoff of a commercial, financial, agriculture and other relationship, a $0.8 million payoff of a commercial real estate relationship and a $1.4 million charge-off of a commercial real estate relationship. Subsequent to June 30, 2021, a $6.7 million payoff on a commercial real estate nonaccrual loan was received from the borrower.

The allowance for credit losses as a percentage of nonperforming loans was 183.81% as of June 30, 2021, compared to 187.43% at December 31, 2020, and 145.37% at June 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 $2.9 million and general reserves of $94.1 million as of June 30, 2021. Specific reserves decreased $2.0 million from December 31, 2020, and $3.9 million from June 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 June 30, 2021.

Criticized loans totaled $250.4 million at June 30, 2021 and represented 3.7% of the loan portfolio. The level of criticized loans decreased as of June 30, 2021 when compared to December 31, 2020, by $52.4 million, or 17.3%. Classified loans totaled $56.0 million at June 30, 2021 compared to $76.2 million at December 31, 2020, a decrease of $20.2 million, or 27%. 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 increased $5.4 million, or 44%, the majority of which are residential real estate and consumer loans.

The allowance for credit losses was $97.0 million at June 30, 2021, or 1.44% of total loans outstanding, compared to 1.50% reported at December 31, 2020, and 1.18% at June 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 1.41% at June 30, 2021 compared to 1.43% at December 31, 2020 and 1.09% at June 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 June 30, 2021. The increase in general reserves from June 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:


	June 30,								December 31, 2020
	2021				2020
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	22,219			$	44,968			$	30,801

Troubled debt restructured loans on nonaccrual basis	23,981				3,600				14,740
Troubled debt restructured loans on accrual basis	6,593				7,455				8,512
Total nonperforming loans	$	52,793			$	56,023			$	54,053
Loans past due 30 to 90 days and still accruing	$	5,895			$	6,077			$	10,638
Loans past due in excess of 90 days and still accruing	$	903			$	1,421			$	1,523
Other real estate owned	$	394			$	1,634			$	1,215
Loans held for sale at end of period	$	19,530			$	30,409			$	33,436
Portfolio loans outstanding at end of period	$	6,740,535			$	6,922,075			$	6,761,183
Average loans outstanding	$	6,776,560		(a)	$	6,516,854		(a)	$	6,737,339		(b)
Nonperforming loans as a percentage of total loans	0.78		%		0.81		%		0.80		%
Provision for credit losses	$	2,926		(a)	$	37,826		(a)	$	53,472		(b)
Allowance for credit losses	$	97,038			$	81,441			$	101,309
Net charge-offs	$	7,197		(a)	$	8,022		(a)	$	17,193		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.21		%		0.25		%		0.26		%
Provision for credit losses as a percentage of net charge-offs	40.66		%	(a)	471.53		%	(a)	311.01		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	1.44		%		1.18		%		1.50		%
Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans (c)	1.50		%		1.28		%		1.61		%


Allowance for credit losses as a percentage of nonperforming loans (d)	183.81		%		145.37		%		187.43		%

(a) For the six-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:


	June 30, 2021				December 31, 2020
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,374,177	20	%	$	1,555,986	23	%
Real estate construction	414,816		6		427,221		6
Residential real estate	1,828,783		27		1,750,592		26
Commercial real estate	2,205,758		33		2,211,569		33
Loans to individuals	917,001		14		815,815		12
Total loans and leases net of unearned income	$	6,740,535	100	%	$	6,761,183	100	%

During the six months ended June 30, 2021, loans decreased $20.6 million, or 0.3%, compared to balances outstanding at December 31, 2020.

Commercial, financial, agricultural and other loans decreased $181.8 million due to the payoff of $186.5 million 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 $12.4 million, or 2.9%, primarily due to the completion of both commercial and residential real estate construction. Residential real estate grew $78.2 million, or 4.5%, primarily due to originations of closed-end 1-4 family mortgage loans. Commercial real estate loans decreased $5.8 million, or 0.3%, primarily due to payoffs and less new loan volume. Loans to individuals increased $101.2 million, or 12.4%, as a result of growth in the indirect auto and recreational vehicle portfolio of $116.4 million offset by a decrease in other consumer loans of $15.2 million.

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


	For the Six Months Ended June 30, 2021						As of June 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	$	4,263	59.23	%	0.13	%	$	14,335	27.15	%	0.21	%
Real estate construction	(135)		(1.87)		(0.01)		54		0.10		—
Residential real estate	(92)		(1.28)		—		10,029		19.00		0.15
Commercial real estate	1,517		21.08		0.04		27,899		52.85		0.41
Loans to individuals	1,644		22.84		0.05		476		0.90		0.01
Total loans, net of unearned income	$	7,197	100.00	%	0.21	%	$	52,793	100.00	%	0.78	%

Net charge-offs for the six months ended June 30, 2021 totaled $7.2 million, compared to $8.0 million for the six months ended June 30, 2020. The most significant charge-offs during the six months ended June 30, 2021 included a $3.6 million charge-off related to a commercial loan as well as $1.6 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 June 30, 2021, shareholders’ equity was $1.1 billion, an increase of $37.8 million from December 31, 2020. The increase was primarily the result of $69.4 million in net income, $2.8 million in treasury stock sales and an increase of $10.1 million in the fair value of available for sale investments. These increases were partially offset by $21.6 million of dividends paid to shareholders and $2.7 million of common stock repurchases. Cash dividends declared per common share were $0.225 for the six months ended June 30, 2021 and $0.22 for the six months ended June 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 June 30, 2021, the Company had $292.4 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 June 30, 2021, as we did not utilize the PPP Facility.

As of June 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	$	1,055,710	15.16	%		$	730,988	10.50	%	$	696,179	10.00	%
First Commonwealth Bank	1,008,415		14.52			729,387		10.50		694,654		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	876,014	12.58	%		$	591,752	8.50	%	$	556,943	8.00	%
First Commonwealth Bank	828,719		11.93			590,456		8.50		555,723		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	876,014	9.58	%		$	365,819	4.00	%	$	457,273	5.00	%
First Commonwealth Bank	828,719		9.08			365,012		4.00		456,265		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	806,014	11.58	%		$	487,325	7.00	%	$	452,516	6.50	%
First Commonwealth Bank	828,719		11.93			486,258		7.00		451,525		6.50

On July 27, 2021, First Commonwealth Financial Corporation declared a quarterly dividend of $0.115 per share payable on August 20, 2021 to shareholders of record as of August 6, 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 June 30, 2021, 100,736 common shares had been repurchased under this program at an average price of $13.96 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 second 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*
April 30, 2021	54,311	13.95		54,311	1,645,997
May 31, 2021	—	—		—	1,574,290
June 30, 2021	18,413	13.95		18,413	1,676,878

Total	72,724	$	13.95	72,724

* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $14.49 at April 30, 2021, $15.15 at May 31, 2021 and $14.07 at June 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

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: August 6, 2021						/s/ T. Michael Price
						T. Michael Price President and Chief Executive Officer

DATED: August 6, 2021						/s/ James R. Reske
						James R. Reske Executive Vice President, Chief Financial Officer and Treasurer