0000712537 us-gaap:ConsumerLoanMember us-gaap:DoubtfulMember fcf:OriginatedLoansMember 2019-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, ~~2018~~2019



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



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

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

~~724-349-7220~~724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

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

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

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of November ~~7, 2018~~5, 2019, was ~~99,423,275~~98,316,233.

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~~

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

~~ITEM 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	49

~~ITEM 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	71

~~ITEM 4.~~	~~Controls and Procedures~~	71

~~PART II.~~	~~Other Information~~

~~ITEM 1.~~	~~Legal Proceedings~~	72

~~ITEM 1A.~~	~~Risk Factors~~	72

~~ITEM 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	72

~~ITEM 3.~~	~~Defaults Upon Senior Securities~~	72

~~ITEM 4.~~	~~Mine Safety Disclosures~~	72

~~ITEM 5.~~	~~Other Information~~	72

~~ITEM 6.~~	~~Exhibits~~	73

	~~Signatures~~	74

~~Table of Contents~~

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)~~

September 30, 2018 December 31, 2017

(dollars in thousands,
except share data)
Assets
Cash and due from banks $ 93,162
$ 98,624
Interest-bearing bank deposits 3,022
8,668
Securities available for sale, at fair value 889,056
731,358
Securities held to maturity, at amortized cost (Fair value of $373,933 and $418,249 at September 30, 2018 and December 31, 2017, respectively) 389,621
422,096
Other investments 25,029
29,837
Loans held for sale 8,287
14,850
Loans:
Portfolio loans 5,662,782
5,407,376
Allowance for credit losses (50,746 ) (48,298 )
Net loans 5,612,036
5,359,078
Premises and equipment, net 80,426
81,339
Other real estate owned 3,874
2,765
Goodwill 274,202
255,353
Amortizing intangibles, net 13,826
15,007
Bank owned life insurance 214,322
212,099
Other assets 79,482
77,465
Total assets $ 7,686,345
$ 7,308,539
Liabilities
Deposits (all domestic):
Noninterest-bearing $ 1,451,284
$ 1,416,771
Interest-bearing 4,443,859
4,163,934
Total deposits 5,895,143
5,580,705
Short-term borrowings 587,806
707,466
Subordinated debentures 170,249
72,167
Other long-term debt 7,706
8,161
Capital lease obligation 7,311
7,590
Total long-term debt 185,266
87,918
Other liabilities 45,199
44,323
Total liabilities 6,713,414
6,420,412
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued —
—
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 shares issued at September 30, 2018 and December 31, 2017, and 100,361,434 and 97,456,478 shares outstanding at September 30, 2018 and December 31, 2017, respectively 113,915
113,915
Additional paid-in capital 492,262
470,123
Retained earnings 493,392
437,416
Accumulated other comprehensive loss, net (20,657 ) (6,173 )
Treasury stock (13,553,468 and 16,458,424 shares at September 30, 2018 and December 31, 2017, respectively) (105,981 ) (127,154 )
Total shareholders’ equity 972,931
888,127
Total liabilities and shareholders’ equity $ 7,686,345
$ 7,308,539

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

~~Table of Contents~~

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data (Continued)~~

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~CONDENSED~~ FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

	Consolidated Statements of Financial Condition (Unaudited)	3
	Consolidated Statements of Income (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
	Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to the Unaudited Consolidated Financial Statements	9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	70

ITEM 4.	Controls and Procedures	70

PART II.	Other Information

ITEM 1.	Legal Proceedings	71

ITEM 1A.	Risk Factors	71

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

ITEM 3.	Defaults Upon Senior Securities	71

ITEM 4.	Mine Safety Disclosures	71

ITEM 5.	Other Information	71

ITEM 6.	Exhibits	72

	Signatures	73

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~INCOME (Unaudited)~~FINANCIAL CONDITION

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(dollars in thousands, except share data)
Interest Income
Interest and fees on loans $ 66,105
$ 57,335
$ 188,529
$ 160,548
Interest and dividends on investments:
Taxable interest 7,899
7,219
23,031
21,577
Interest exempt from federal income taxes 410
410
1,231
1,212
Dividends 420
417
1,412
1,276
Interest on bank deposits 39
30
109
97
Total interest income 74,873
65,411
214,312
184,710
Interest Expense
Interest on deposits 6,006
2,491
14,639
6,511
Interest on short-term borrowings 2,603
2,427
7,387
6,373
Interest on subordinated debentures 2,302
772
4,664
2,215
Interest on other long-term debt 76
81
228
245
Interest on lease obligations 73
77
221
156
Total interest expense 11,060
5,848
27,139
15,500
Net Interest Income 63,813
59,563
187,173
169,210
Provision for credit losses 2,961
1,214
11,032
2,834
Net Interest Income after Provision for Credit Losses 60,852
58,349
176,141
166,376
Noninterest Income
Net securities gains —
92
8,102
695
Trust income 2,206
2,147
6,014
5,275
Service charges on deposit accounts 4,589
4,803
13,418
13,858
Insurance and retail brokerage commissions 1,872
2,128
5,560
6,652
Income from bank owned life insurance 1,579
1,472
5,241
4,213
Gain on sale of mortgage loans 1,542
1,418
4,267
3,710
Gain on sale of other loans and assets 643
503
3,548
1,267
Card-related interchange income 5,044
4,780
14,929
13,873
Derivatives mark to market —
(14 ) 789
(49 )
Swap fee income 528
217
1,115
458
Other income 1,754
2,244
5,125
5,674
Total noninterest income 19,757
19,790
68,108
55,626
Noninterest Expense
Salaries and employee benefits 26,553
26,169
77,580
74,933
Net occupancy expense 4,341
3,715
12,932
11,597
Furniture and equipment expense 3,424
3,342
10,611
9,753
Data processing expense 2,853
2,229
7,764
6,659
Advertising and promotion expense 1,200
941
3,185
2,735
Pennsylvania shares tax expense 1,248
1,093
3,398
3,070
Intangible amortization 817
844
2,430
2,262
Collection and repossession expense 630
402
2,060
1,342
Other professional fees and services 962
1,300
3,000
3,355
FDIC insurance 217
696
1,590
2,466
Loss on sale or write-down of assets 181
167
875
1,486
Litigation and operational losses 435
598
811
1,107
Merger and acquisition related 24
(69 ) 1,634
10,412
Other operating expenses 6,645
5,934
17,662
17,212
Total noninterest expense 49,530
47,361
145,532
148,389
Income Before Income Taxes 31,079
30,778
98,717
73,613
Income tax provision 5,930
9,495
18,217
22,429
Net Income $ 25,149
$ 21,283
$ 80,500
$ 51,184
Average Shares Outstanding 100,226,647
97,402,816
98,998,497
94,536,472
Average Shares Outstanding Assuming Dilution 100,490,812
97,457,470
99,197,568
94,578,490
Per Share Data:
Basic Earnings per Share $ 0.25
$ 0.22
$ 0.81
$ 0.54
Diluted Earnings per Share $ 0.25
$ 0.22
$ 0.81
$ 0.54
Cash Dividends Declared per Common Share $ 0.09
$ 0.08
$ 0.26
$ 0.24



	September 30, 2019			December 31, 2018
	(Unaudited)
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	112,241		$	95,934
Interest-bearing bank deposits	16,408			3,013
Securities available for sale, at fair value	812,383			909,247
Securities held to maturity, at amortized cost (Fair value of $360,224 and $383,993 at September 30, 2019 and December 31, 2018, respectively)	357,890			393,855
Other investments	11,561			32,126
Loans held for sale	20,288			11,881
Loans:
Portfolio loans	6,099,561			5,774,139
Allowance for credit losses	(50,035		)	(47,764		)
Net loans	6,049,526			5,726,375
Premises and equipment, net	138,112			80,474
Other real estate owned	1,622			3,935
Goodwill	303,632			274,202
Amortizing intangibles, net	16,873			13,038
Bank owned life insurance	219,685			215,766
Other assets	91,806			68,409
Total assets	$	8,152,027		$	7,828,255
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,657,507		$	1,466,213
Interest-bearing	5,020,489			4,431,779
Total deposits	6,677,996			5,897,992
Short-term borrowings	83,735			721,823
Subordinated debentures	170,409			170,288
Other long-term debt	57,078			7,551
Capital lease obligation	6,917			7,217
Total long-term debt	234,404			185,056
Other liabilities	116,862			47,995
Total liabilities	7,112,997			6,852,866
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 shares issued at September 30, 2019 and December 31, 2018, and 98,319,081 and 98,518,668 shares outstanding at September 30, 2019 and December 31, 2018, respectively	113,915			113,915
Additional paid-in capital	493,737			492,273
Retained earnings	560,360			511,409
Accumulated other comprehensive income (loss), net	6,077			(11,341		)
Treasury stock (15,595,821 and 15,396,234 shares at September 30, 2019 and December 31, 2018, respectively)	(135,059		)	(130,867		)
Total shareholders’ equity	1,039,030			975,389
Total liabilities and shareholders’ equity	$	8,152,027		$	7,828,255

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data(Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE~~ INCOME (Unaudited)

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(dollars in thousands)
Net Income $ 25,149
$ 21,283
$ 80,500
$ 51,184
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period (5,382 ) 1,690
(8,704 ) 5,935
Less: reclassification adjustment for gains on securities included in net income —
(92 ) (8,102 ) (695 )
Unrealized holding gains (losses) on derivatives arising during the period 198
(49 ) 165
(631 )
Less: reclassification adjustment for losses on derivatives included in net income —
20
10
93
Total other comprehensive (loss) income, before tax benefit (expense) (5,184 ) 1,569
(16,631 ) 4,702
Income tax benefit (expense) related to items of other comprehensive (loss) income 1,088
(549 ) 3,491
(1,646 )
Total other comprehensive (loss) income (4,096 ) 1,020
(13,140 ) 3,056
Comprehensive Income $ 21,053
$ 22,303
$ 67,360
$ 54,240



	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2019			2018		2019			2018
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	74,714		$	66,105	$	218,524		$	188,529
Interest and dividends on investments:
Taxable interest	6,995			7,899		22,871			23,031
Interest exempt from federal income taxes	398			410		1,231			1,231
Dividends	387			420		1,419			1,412
Interest on bank deposits	81			39		181			109
Total interest income	82,575			74,873		244,226			214,312
Interest Expense
Interest on deposits	9,846			6,006		27,298			14,639
Interest on short-term borrowings	1,620			2,603		8,075			7,387
Interest on subordinated debentures	2,232			2,302		6,930			4,664
Interest on other long-term debt	362			76		656			228
Interest on lease obligations	70			73		210			221
Total interest expense	14,130			11,060		43,169			27,139
Net Interest Income	68,445			63,813		201,057			187,173
Provision for credit losses	2,708			2,961		9,638			11,032
Net Interest Income after Provision for Credit Losses	65,737			60,852		191,419			176,141
Noninterest Income
Net securities gains	9			—		15			8,102
Trust income	2,325			2,206		6,221			6,014
Service charges on deposit accounts	4,954			4,589		13,792			13,418
Insurance and retail brokerage commissions	1,912			1,872		5,887			5,560
Income from bank owned life insurance	1,540			1,579		4,408			5,241
Gain on sale of mortgage loans	2,599			1,542		6,101			4,267
Gain on sale of other loans and assets	970			643		3,831			3,548
Card-related interchange income	5,629			5,044		15,800			14,929
Derivatives mark to market	(45		)	—		(88		)	789
Swap fee income	421			528		1,634			1,115
Other income	1,865			1,754		5,356			5,125
Total noninterest income	22,179			19,757		62,957			68,108
Noninterest Expense
Salaries and employee benefits	28,674			26,553		83,205			77,580
Net occupancy	4,521			4,341		13,878			12,932
Furniture and equipment	3,904			3,424		11,396			10,611
Data processing	2,825			2,853		7,988			7,764
Advertising and promotion	1,140			1,200		3,611			3,185
Pennsylvania shares tax	1,189			1,248		3,365			3,398
Intangible amortization	865			817		2,364			2,430
Collection and repossession	649			630		1,656			2,060
Other professional fees and services	969			962		2,755			3,000
FDIC insurance	35			217		1,164			1,590
Loss on sale or write-down of assets	152			181		1,398			875
Litigation and operational losses	308			435		1,264			811
Merger and acquisition related	3,738			24		3,772			1,634
Other operating	5,928			6,645		19,040			17,662
Total noninterest expense	54,897			49,530		156,856			145,532
Income Before Income Taxes	33,019			31,079		97,520			98,717
Income tax provision	6,375			5,930		19,007			18,217
Net Income	$	26,644		$	25,149	$	78,513		$	80,500
Average Shares Outstanding	98,267,229			100,226,647		98,363,539			98,998,497
Average Shares Outstanding Assuming Dilution	98,547,898			100,490,812		98,615,787			99,197,568
Per Share Data:
Basic Earnings per Share	$	0.27		$	0.25	$	0.80		$	0.81
Diluted Earnings per Share	$	0.27		$	0.25	$	0.80		$	0.81
Cash Dividends Declared per Common Share	$	0.10		$	0.09	$	0.30		$	0.26

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data(Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~COMPREHENSIVE INCOME (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, 2017 97,456,478
$ 113,915
$ 470,123
$ 437,416
$ (6,173 ) $ (127,154 ) $ 888,127
Cumulative effect of adoption of ASU 2018-02 1,344
(1,344 ) —
January 1, 2018 97,456,478
113,915
470,123
438,760
(7,517 ) (127,154 ) 888,127
Net income 80,500
80,500
Other comprehensive loss (13,140 ) (13,140 )
Cash dividends declared ($0.26 per share) (25,868 ) (25,868 )
Treasury stock acquired (75,778 ) (1,136 ) (1,136 )
Treasury stock reissued 2,908,234
21,579
—
22,447
44,026
Restricted stock 72,500
—
560
—
(138 ) 422
Balance at September 30, 2018 100,361,434
$ 113,915
$ 492,262
$ 493,392
$ (20,657 ) $ (105,981 ) $ 972,931



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Net Income	$	26,644		$	25,149		$	78,513		$	80,500
Other comprehensive income (loss), before tax (expense) benefit:
Unrealized holding gains (losses) on securities arising during the period	3,152			(5,382		)	22,055			(8,704		)
Less: reclassification adjustment for gains on securities included in net income	(9		)	—			(15		)	(8,102		)
Unrealized holding (losses) gains on derivatives arising during the period	(124		)	198			9			165
Less: reclassification adjustment for losses on derivatives included in net income	—			—			—			10
Total other comprehensive income (loss), before tax (expense) benefit	3,019			(5,184		)	22,049			(16,631		)
Income tax (expense) benefit related to items of other comprehensive income (loss)	(635		)	1,088			(4,631		)	3,491
Total other comprehensive income (loss)	2,384			(4,096		)	17,418			(13,140		)
Comprehensive Income	$	29,028		$	21,053		$	95,931		$	67,360

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, 2016 89,007,077
$ 105,563
$ 366,426
$ 412,764
$ (7,027 ) $ (127,797 ) $ 749,929
Net income 51,184
51,184
Other comprehensive income 3,056
3,056
Cash dividends declared ($0.24 per share) (22,717 ) (22,717 )
Treasury stock acquired (85,160 ) (1,187 ) (1,187 )
Treasury stock reissued 181,211
1,170
—
1,387
2,557
Restricted stock 21,000
—
138
—
600
738
Common stock issuance 8,351,447
8,352
102,389

110,741
Balance at September 30, 2017 97,475,575
$ 113,915
$ 470,123
$ 441,231
$ (3,971 ) $ (126,997 ) $ 894,301

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data(Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended
September 30,
2018 2017
Operating Activities (dollars in thousands)
Net income $ 80,500
$ 51,184
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses 11,032
2,834
Deferred tax expense 2,969
3,411
Depreciation and amortization 5,620
6,711
Net gains on securities and other assets (15,816 ) (3,821 )
Net amortization of premiums and discounts on securities 2,343
2,685
Income from increase in cash surrender value of bank owned life insurance (4,364 ) (4,213 )
Increase in interest receivable (2,483 ) (588 )
Mortgage loans originated for sale (129,552 ) (116,699 )
Proceeds from sale of mortgage loans 139,685
114,819
Increase in interest payable 1,672
678
(Decrease) increase in income taxes payable (3,412 ) 3,288
Distribution from unconsolidated subsidiary 9,000
—
Other-net (3,655 ) 2,963
Net cash provided by operating activities 93,539
63,252
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions 37,007
36,620
Purchases (5,506 ) (101,372 )
Transactions with securities available for sale:
Proceeds from sales 15,939
143,660
Proceeds from maturities and redemptions 111,800
100,620
Purchases (292,249 ) (150,892 )
Purchases of FHLB stock (38,947 ) (35,346 )
Proceeds from the redemption of FHLB stock 43,754
42,791
Proceeds from bank owned life insurance 2,140
—
Proceeds from sale of loans 32,745
9,986
Proceeds from sale of other assets 2,486
3,835
Acquisition, net of cash acquired 705
3,188
Net increase in loans (109,060 ) (132,079 )
Purchases of premises and equipment and other assets (6,862 ) (8,960 )
Net cash used in investing activities (206,048 ) (87,949 )
Financing Activities
Net increase in federal funds purchased 6,500
—
Net decrease in other short-term borrowings (126,160 ) (62,118 )
Net increase in deposits 173,553
123,455
Repayments of other long-term debt (23,443 ) (440 )
Repayments of capital lease obligation (279 ) (173 )
Proceeds from issuance of other long-term debt 98,026
—
Dividends paid (25,868 ) (22,717 )
Proceeds from reissuance of treasury stock 208
228
Purchase of treasury stock (1,136 ) (1,187 )
Net cash provided by financing activities 101,401
37,048
Net (decrease) increase in cash and cash equivalents (11,108 ) 12,351
Cash and cash equivalents at January 1 107,292
115,677
Cash and cash equivalents at September 30 $ 96,184
$ 128,028



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2018	98,518,668		$	113,915	$	492,273	$	511,409		$	(11,341	)	$	(130,867	)	$	975,389
Net income							78,513									78,513
Other comprehensive income										17,418						17,418
Cash dividends declared ($0.30 per share)							(29,562		)							(29,562		)
Treasury stock acquired	(482,608	)											(6,200		)	(6,200		)
Treasury stock reissued	205,021				1,014		—						1,729			2,743
Restricted stock	78,000		—		450		—						279			729
Balance at September 30, 2019	98,319,081		$	113,915	$	493,737	$	560,360		$	6,077		$	(135,059	)	$	1,039,030



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2017	97,456,478		$	113,915	$	470,123	$	437,416		$	(6,173	)	$	(127,154	)	$	888,127
Cumulative effect of adoption of ASU 2018-02							1,344			(1,344		)				—
January 1, 2018	97,456,478		113,915		470,123		438,760			(7,517		)	(127,154		)	888,127
Net income							80,500									80,500
Other comprehensive loss										(13,140		)				(13,140		)
Cash dividends declared ($0.26 per share)							(25,868		)							(25,868		)
Treasury stock acquired	(75,778	)											(1,136		)	(1,136		)
Treasury stock reissued	2,908,234				21,579		—						22,447			44,026
Restricted stock	72,500		—		560		—						(138		)	422
Balance at September 30, 2018	100,361,434		$	113,915	$	492,262	$	493,392		$	(20,657	)	$	(105,981	)	$	972,931

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data(Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net		Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at June 30, 2019	98,499,937		$	113,915	$	493,737	$	543,566		$	3,693	$	(133,080	)	$	1,021,831
Net income							26,644								26,644
Other comprehensive income										2,384					2,384
Cash dividends declared ($0.10 per share)							(9,850		)						(9,850		)
Treasury stock acquired	(180,856	)										(2,240		)	(2,240		)
Treasury stock reissued	—				—		—					—			—
Restricted stock	—		—		—		—					261			261
Balance at September 30, 2019	98,319,081		$	113,915	$	493,737	$	560,360		$	6,077	$	(135,059	)	$	1,039,030



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at June 30, 2018	100,364,567		$	113,915	$	492,262	$	477,276		$	(16,561	)	$	(106,107	)	$	960,785
Net income							25,149									25,149
Other comprehensive loss										(4,096		)				(4,096		)
Cash dividends declared ($0.09 per share)							(9,033		)							(9,033		)
Treasury stock acquired	(3,133	)			—								(52		)	(52		)
Treasury stock reissued	—				—		—						—			—
Restricted stock	—		—		—		—						178			178
Balance at September 30, 2018	100,361,434		$	113,915	$	492,262	$	493,392		$	(20,657	)	$	(105,981	)	$	972,931

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data(Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	For the Nine Months Ended
	September 30,
	2019			2018
Operating Activities	(dollars in thousands)
Net income	$	78,513		$	80,500
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	9,638			11,032
Deferred tax expense	2,613			2,969
Depreciation and amortization	7,777			5,620
Net gains on securities and other assets	(8,545		)	(15,816		)
Net amortization of premiums and discounts on securities	2,871			2,343
Income from increase in cash surrender value of bank owned life insurance	(4,405		)	(4,364		)
Increase in interest receivable	(110		)	(2,483		)
Mortgage loans originated for sale	(178,911		)	(129,552		)
Proceeds from sale of mortgage loans	173,961			139,685
Increase in interest payable	1,180			1,672
Decrease in income taxes payable	(556		)	(3,412		)
Distribution from unconsolidated subsidiary	—			9,000
Other	(7,193		)	(3,655		)
Net cash provided by operating activities	76,833			93,539
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	35,163			37,007
Purchases	(200		)	(5,506		)
Transactions with securities available for sale:
Proceeds from sales	—			15,939
Proceeds from maturities and redemptions	134,453			111,800
Purchases	(17,401		)	(292,249		)
Purchases of FHLB stock	(29,538		)	(38,947		)
Proceeds from the redemption of FHLB stock	50,103			43,754
Proceeds from bank owned life insurance	—			2,140
Proceeds from sale of loans	28,098			32,745
Proceeds from sale of other assets	5,390			2,486
Acquisition, net of cash acquired	332,465			705
Net increase in loans	(256,168		)	(109,060		)
Purchases of premises and equipment and other assets	(14,060		)	(6,862		)
Net cash provided by (used in) investing activities	268,305			(206,048		)
Financing Activities
Net (decrease) increase in federal funds purchased	(4,000		)	6,500
Net decrease in other short-term borrowings	(634,088		)	(126,160		)
Net increase in deposits	308,976			173,553
Repayments of other long-term debt	(473		)	(23,443		)
Repayments of capital lease obligation	(300		)	(279		)
Proceeds from issuance of other long-term debt	50,000			98,026
Dividends paid	(29,562		)	(25,868		)
Proceeds from reissuance of treasury stock	211			208
Purchase of treasury stock	(6,200		)	(1,136		)
Net cash (used in) provided by financing activities	(315,436		)	101,401
Net increase (decrease) in cash and cash equivalents	29,702			(11,108		)
Cash and cash equivalents at January 1	98,947			107,292
Cash and cash equivalents at September 30	$	128,649		$	96,184

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 ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ 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 ~~condensed~~ 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.

~~The results of operations for the~~ ~~nine months endedSeptember 30, 2018~~ ~~are not necessarily indicative of the results that may be expected for the full year of~~ ~~2018. These interim financial statements should be read~~ Certain information and Note disclosures normally included in ~~conjunction with First Commonwealth’s~~ ~~2017~~ ~~Annual Report on Form 10-K.~~

~~Adoption of New Accounting Standards~~

On January 1, 2018, First Commonwealth adopted ASU 2014-09, "Revenue from Contracts with Customers" ("ASC 606") and all subsequent amendments to the ASU, which creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain(loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company's revenues come from interest income and other sources, including loans and securities, that are outside the scope of ASC 606. The Company's services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include trust income, service charges on deposits, insurance and retail brokerage commissions, interchange fees and gain(loss) on other real estate owned ("OREO"). Refer to Note 15, "Revenue Recognition" for further discussion on the Company's accounting policies for revenue sources within the scope of ASC 606. The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reportedConsolidated Financial Statements prepared in accordance with ~~legacy GAAP. The adoption of ASC 606 did not result in a significant change~~GAAP have been condensed or omitted pursuant to the ~~accounting for any~~rules and regulations of the ~~in-scope revenue streams; as such, no cumulative effect adjustment was recorded.~~

On January 1, 2018, First Commonwealth elected to adopt ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." As part of this adoption, First Commonwealth has elected to reclassify the income tax effects resulting from tax reform from accumulated other comprehensive income to retained earnings on a portfolio basis. ASU 2018-02 provides for the reclassification of the stranded tax effects resulting from the Tax Cuts and Jobs Act. As of January 1, 2018, First Commonwealth reclassified $1.3 million from accumulated other comprehensive income to retained earnings in relation to the stranded tax effect which included accumulated other comprehensive income recognized on available-for-sale investment securities, interest rate swaps and other post-retirement benefits. This reclassification is shown as an adjustment to the beginning of the year balances and can be seen in the Condensed Consolidated Statements of Changes in Shareholders' Equity.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and when that assessment indicates that impairment exists, requiring the entity to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with this ASU, and as reflected in Note 11, "Fair Values of Assets and Liabilities," the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion.SEC.

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

The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year of 2019. These interim financial statements should be read in conjunction with First Commonwealth’s 2018 Annual Report on Form 10-K.

Adoption of New Accounting Standards

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

Note 2 Acquisition

Santander Branch Acquisition

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



Consideration received
Cash received	$	329,530
Total consideration received			$	329,530

Fair Value of Assets Acquired
Cash and cash equivalents	2,935
Loans	100,025
Premises and other equipment	3,637
Core deposit intangible	5,277
Other assets	736
Total assets acquired	112,610

Fair Value of Liabilities Assumed
Deposits	471,383
Other Liabilities	187
Total liabilities assumed	471,570

Total Fair Value of Identifiable Net Assets			(358,960		)

Goodwill			$	29,430

The Company determined that this acquisition constitutes a business combination as defined in FASB ASC Topic 805, “Business Combinations.” Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” Acquired loans were recorded at fair value with no carryover of the related allowance for loan losses. At the date of acquisition, none of the loans were accounted for under the guidance of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The fair value of acquired loans and certificate of deposits is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments. The $100.0 million fair value of acquired loans is the result of $101.2 million in loans acquired from Santander and the recognition of a net combined yield and credit mark adjustment of $1.2 million. The $471.4 million fair value of acquired deposits is the result of $471.0 million in deposits acquired and the recognition of a yield mark adjustment of $0.4 million on the certificate of deposits. A $5.3 million core deposit intangible was recognized for core deposits acquired.

The fair value of the acquired loans, customer deposit intangible, other assets and assumed deposits may change during the provisional period, which may last up to twelve months subsequent to the acquisition date as we are in the process of finalizing our valuations. The Company may obtain additional information to refine the valuation of the aforementioned items and adjust the recorded fair value, although such adjustments are not expected to be significant. Adjustments recorded to the acquired assets and liabilities will be applied prospectively in accordance with ASU No. 2015-16, “Business Combinations.”

The goodwill of $29.4 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with the branches acquired from Santander. The goodwill for this transaction is expected to be deducted over a 15 year period for income tax purposes.

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

Garfield Acquisition Corporation

On May 1, 2018, the Company completed its acquisition of Garfield Acquisition Corporation ("Garfield") and its banking subsidiary, Foundation Bank, for consideration of $17.4 million in cash and 2.7 million shares of the Company's common stock. Through the acquisition, the Company obtained five full-service banking offices which are operating under the First

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Commonwealth name. This acquisition expands the Company's presence into the Cincinnati, Ohio market and added $184.5 million in loans and $141.3 million in deposits to the Company's balance sheet.

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



Consideration Paid
Cash paid to shareholders	$	17,400
Shares issued to shareholders (2,745,098 shares)	41,561
Total consideration paid			$	58,961

Fair Value of Assets Acquired
Cash and cash equivalents	18,105
FHLB Stock	3,261
Loans	184,506
Premises and other equipment	409
Intangible assets	1,248
Other assets	1,747
Total assets acquired	209,276

Fair Value of Liabilities Assumed
Deposits	141,281
FHLB borrowings	22,988
Other liabilities	5,068
Total liabilities assumed	169,337

Total Fair Value of Identifiable Net Assets			39,939

Goodwill			$	19,022

Consideration Paid
   Cash paid to shareholders $ 17,400

   Shares issued to shareholders (2,745,098 shares) 41,561

Total consideration paid $ 58,961

Fair Value of Assets Acquired
   Cash and cash equivalents 18,105

   FHLB Stock 3,261

   Loans 184,506

   Premises and other equipment 409

   Intangible assets 1,248

   Other assets 1,747

     Total assets acquired 209,276

Fair Value of Liabilities Assumed
   Deposits 141,281

   Federal Home Loan Bank borrowings 22,988

   Other liabilities 5,068

      Total liabilities assumed 169,337

Total Fair Value of Identifiable Net Assets 39,939

Goodwill $ 19,022

The goodwill of $19.0 million arising from the acquisition represents the value of synergies and economies of scale expected from combining the operations of the Company with Garfield Acquisition Corporation.

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

rate for like maturities and risk instruments. At the date of acquisition, none of the loans were accounted for under the guidance of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The $184.5 million fair value of acquired loans is the result of $183.7 million in net loans acquired from Garfield, the recognition of a net combined yield and credit mark adjustment of $4.3 million and the $5.1 million reversal of Garfield's allowance as well as prior fair value marks recorded by Garfield.

The fair value of the 2,745,098 common shares issued was determined based on the market price of the Company's common shares on the acquisition date.

Costs related to the acquisition totaled $1.6 million. These amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the ~~Condensed~~ Consolidated Statements of Income.

As a result of the full integration of the operations of Garfield, it is not practicable to determine revenue or net income included in the Company's operating results relating to Garfield since the date of acquisition as Garfield’s results cannot be separately identified.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 Supplemental Comprehensive Income Disclosures

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

For the Nine Months Ended September 30,
2018 2017
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 $ (8,704 ) $ 1,828
$ (6,876 ) $ 5,935
$ (2,077 ) $ 3,858
Reclassification adjustment for gains on securities included in net income (8,102 ) 1,701
(6,401 ) (695 ) 243
(452 )
Total unrealized (losses) gains on securities (16,806 ) 3,529
(13,277 ) 5,240
(1,834 ) 3,406
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period 165
(35 ) 130
(631 ) 221
(410 )
Reclassification adjustment for losses on derivatives included in net income 10
(3 ) 7
93
(33 ) 60
Total unrealized gains (losses) on derivatives 175
(38 ) 137
(538 ) 188
(350 )
Total other comprehensive (loss) income $ (16,631 ) $ 3,491
$ (13,140 ) $ 4,702
$ (1,646 ) $ 3,056



	For the Nine Months Ended September 30,
	2019									2018
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	$	22,055		$	(4,632	)	$	17,423		$	(8,704	)	$	1,828		$	(6,876	)
Reclassification adjustment for gains on securities included in net income	(15		)	3			(12		)	(8,102		)	1,701			(6,401		)
Total unrealized gains (losses) on securities	22,040			(4,629		)	17,411			(16,806		)	3,529			(13,277		)
Unrealized gains on derivatives:
Unrealized holding gains on derivatives arising during the period	9			(2		)	7			165			(35		)	130
Reclassification adjustment for losses on derivatives included in net income	—			—			—			10			(3		)	7
Total unrealized gains on derivatives	9			(2		)	7			175			(38		)	137
Total other comprehensive income (loss)	$	22,049		$	(4,631	)	$	17,418		$	(16,631	)	$	3,491		$	(13,140	)



	For the Three Months Ended September 30,
	2019									2018
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	$	3,152		$	(663	)	$	2,489		$	(5,382	)	$	1,130		$	(4,252	)
Reclassification adjustment for gains on securities included in net income	(9		)	2			(7		)	—			—			—
Total unrealized gains (losses) on securities	3,143			(661		)	2,482			(5,382		)	1,130			(4,252		)
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period	(124		)	26			(98		)	198			(42		)	156
Reclassification adjustment for losses on derivatives included in net income	—			—			—			—			—			—
Total unrealized (losses) gains on derivatives	(124		)	26			(98		)	198			(42		)	156
Total other comprehensive income (loss)	$	3,019		$	(635	)	$	2,384		$	(5,184	)	$	1,088		$	(4,096	)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Three Months Ended September 30,
2018 2017
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 $ (5,382 ) $ 1,130
$ (4,252 ) $ 1,690
$ (591 ) $ 1,099
Reclassification adjustment for gains on securities included in net income —
—
—
(92 ) 32
(60 )
Total unrealized (losses) gains on securities (5,382 ) 1,130
(4,252 ) 1,598
(559 ) 1,039
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period 198
(42 ) 156
(49 ) 17
(32 )
Reclassification adjustment for losses on derivatives included in net income —
—
—
20
(7 ) 13
Total unrealized gains (losses) on derivatives 198
(42 ) 156
(29 ) 10
(19 )
Total other comprehensive (loss) income $ (5,184 ) $ 1,088
$ (4,096 ) $ 1,569
$ (549 ) $ 1,020

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



	2019											2018
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)
	(dollars in thousands)
Balance at December 31	$	(11,697	)	$	461	$	(105	)	$	(11,341	)	$	(6,166	)	$	299	$	(306	)	$	(6,173	)
Cumulative effect of adoption of ASU 2018-02	—			—		—			—			(1,344		)	—		—			(1,344		)
Balance at January 1	(11,697		)	461		(105		)	(11,341		)	(7,510		)	299		(306		)	(7,517		)
Other comprehensive income (loss) before reclassification adjustment	17,423			—		7			17,430			(6,876		)	—		130			(6,746		)
Amounts reclassified from accumulated other comprehensive (loss) income	(12		)	—		—			(12		)	(6,401		)	—		7			(6,394		)
Net other comprehensive income (loss) during the period	17,411			—		7			17,418			(13,277		)	—		137			(13,140		)
Balance at September 30	$	5,714		$	461	$	(98	)	$	6,077		$	(20,787	)	$	299	$	(169	)	$	(20,657	)

2018 2017
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 $ (6,166 ) $ 299
$ (306 ) $ (6,173 ) $ (7,455 ) $ 225
$ 203
$ (7,027 )
Cumulative effect of adoption of ASU 2018-02 (1,344 ) —
—
(1,344 ) —
—
—
—
Balance at January 1 (7,510 ) 299
(306 ) (7,517 ) (7,455 ) 225
203
(7,027 )
Other comprehensive (loss) income before reclassification adjustment (6,876 ) —
130
(6,746 ) 3,858
—
(410 ) 3,448
Amounts reclassified from accumulated other comprehensive (loss) income (6,401 ) —
7
(6,394 ) (452 ) —
60
(392 )
Net other comprehensive (loss) income during the period (13,277 ) —
137
(13,140 ) 3,406
—
(350 ) 3,056
Balance at September 30 $ (20,787 ) $ 299
$ (169 ) $ (20,657 ) $ (4,049 ) $ 225
$ (147 ) $ (3,971 )

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



	2019											2018
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)
	(dollars in thousands)
Balance at June 30	$	3,232		$	461	$	—		$	3,693		$	(16,535	)	$	299	$	(325	)	$	(16,561	)
Other comprehensive income (loss) before reclassification adjustment	2,489			—		(98		)	2,391			(4,252		)	—		156			(4,096		)
Amounts reclassified from accumulated other comprehensive (loss) income	(7		)	—		—			(7		)	—			—		—			—
Net other comprehensive income (loss) during the period	2,482			—		(98		)	2,384			(4,252		)	—		156			(4,096		)
Balance at September 30	$	5,714		$	461	$	(98	)	$	6,077		$	(20,787	)	$	299	$	(169	)	$	(20,657	)

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Note 4 Supplemental Cash Flow Disclosures

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



	2019			2018
	(dollars in thousands)
Cash paid during the period for:
Interest	$	42,195		$	25,780
Income taxes	16,994			18,750
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	2,754			3,346
Loans transferred from held to maturity to held for sale	21,620			29,765
Gross increase (decrease) in market value adjustment to securities available for sale	22,041			(16,806		)
Gross increase in market value adjustment to derivatives	9			175
Noncash treasury stock reissuance	2,531			2,257
Net (liabilities) assets acquired through acquisition	(361,895		)	21,834
Proceeds from death benefit on bank-owned life insurance not received	486			—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2018 2017
(dollars in thousands)
Cash paid during the period for:
Interest $ 25,780
$ 14,995
Income taxes 18,750
17,394
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets 3,346
2,154
Loans transferred from held to maturity to held for sale 29,765
13,292
Gross (decrease) increase in market value adjustment to securities available for sale (16,806 ) 5,240
Gross increase (decrease) in market value adjustment to derivatives 175
(538 )
Noncash treasury stock reissuance 2,257
2,258
Net assets acquired through acquisition 21,834
36,926
Proceeds from death benefit on bank-owned life insurance not received —
897

Note 5 Earnings per Share

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Weighted average common shares issued	113,914,902			113,914,902			113,914,902			113,914,902
Average treasury stock shares	(15,496,941		)	(13,550,710		)	(15,396,215		)	(14,783,078		)
Average deferred compensation shares	(37,411		)	(37,411		)	(37,411		)	(37,411		)
Average unearned nonvested shares	(113,321		)	(100,134		)	(117,737		)	(95,916		)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	98,267,229			100,226,647			98,363,539			98,998,497
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	243,258			226,754			214,837			161,660
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share	37,411			37,411			37,411			37,411
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	98,547,898			100,490,812			98,615,787			99,197,568
Basic Earnings per Share	$	0.27		$	0.25		$	0.80		$	0.81
Diluted Earnings per Share	$	0.27		$	0.25		$	0.80		$	0.81

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017
Weighted average common shares issued 113,914,902
113,914,902
113,914,902
111,100,495
Average treasury stock shares (13,550,710 ) (16,436,228 ) (14,783,078 ) (16,465,984 )
Average deferred compensation shares (37,411 ) —
(37,411 ) —
Average unearned nonvested shares (100,134 ) (75,858 ) (95,916 ) (98,039 )
Weighted average common shares and common stock equivalents used to calculate basic earnings per share 100,226,647
97,402,816
98,998,497
94,536,472
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share 226,754
54,654
161,660
42,018
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share 37,411
—
37,411
—
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share 100,490,812
97,457,470
99,197,568
94,578,490

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the nine months ended September 30 because to do so would have been antidilutive.



	2019					2018
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Restricted Stock	95,054	$	12.99	$	15.44	66,332	$	8.84	$	14.49
Restricted Stock Units	24,782	$	16.62	$	16.62	—	$	—	$	—

2018 2017
Price Range Price Range
Shares From To Shares From To
Restricted Stock 66,332
$ 8.84
$ 14.49
22,802
$ 8.55
$ 13.96
Restricted Stock Units —
$ —
$ —
22,750
$ 15.09
$ 15.09

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Note 6 Commitments and Contingent Liabilities

Commitments and Letters of Credit

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

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



	September 30, 2019		December 31, 2018
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,990,464	$	1,883,914
Financial standby letters of credit	18,289		18,298
Performance standby letters of credit	25,249		22,027
Commercial letters of credit	783		887

September 30, 2018 December 31, 2017
(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 1,846,575
$ 1,840,180
Financial standby letters of credit 18,486
17,946
Performance standby letters of credit 21,460
20,472
Commercial letters of credit 927
1,149

The notional amounts outstanding as of September 30, ~~2018~~2019 include amounts issued in ~~2018~~2019 of ~~$1.1~~$6.9 million in performance standby letters of credit and $0.8 million in financial standby letters of ~~credit and~~ ~~$0.7 million~~ ~~in performance standby letters of~~ credit. There were no0 commercial letters of credit issued

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

in ~~2018.~~2019. A liability of $0.2 million has been recorded as of both September 30, ~~2018~~2019 and December 31, ~~2017~~2018, 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 $~~5.2~~4.8 million and $5.0 million as of ~~both~~ September 30, ~~2018~~2019 and December 31, ~~2017~~.2018, respectively. This liability is reflected in "Other liabilities" in the ~~Condensed~~ Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal Proceedings

First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, ~~2018,~~2019, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $1 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.

First Commonwealth Financial Corporation and First Commonwealth Bank were named defendants in an action commenced August 27, 2015 by eight named plaintiffs that filed in the Court of Common Pleas of Jefferson County, Pennsylvania. The plaintiffs alleged that the Bank repossessed motor vehicles, sold the vehicles and sought to collect deficiency balances in a manner that did not comply with the notice requirements of the Pennsylvania Uniform Commercial Code (UCC), charged inappropriate costs and fees, including storage costs for dates that a repossessed vehicle was not in storage, and wrongly filed forms with the Department of Motor Vehicles asserting that the Bank had complied with applicable laws relating to the repossession of the vehicles. First Commonwealth Financial Corporation, First Commonwealth Bank, the plaintiffs, the plaintiffs’ counsel and First Commonwealth’s liability insurer entered into a Class Action Settlement Agreement and Release in

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

which, among other things, First Commonwealth and its insurer agreed to pay certain amounts into a settlement fund to be distributed among the class members and class counsel, First Commonwealth agreed to satisfy the remaining deficiency balances of the class members and request that credit reporting agencies delete the tradeline relating to the repossession from each class member’s credit report, and the class members released all claims against First Commonwealth and its insurer. At a hearing on July 23, 2018, the Court granted final approval of the settlement and dismissed all claims against First Commonwealth. In August 2018, this settlement was completed. The cost of the settlement to First Commonwealth was recorded as a liability in the second quarter of 2016.

Note 7 Investment Securities

Securities Available for Sale

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



	September 30, 2019									December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	8,112	$	655	$	—		$	8,767	$	9,011	$	479	$	(84	)	$	9,406
Mortgage-Backed Securities – Commercial	168,006		3,585		—			171,591		169,633		214		(2,103		)	167,744
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	583,158		4,260		(2,594		)	584,824		686,906		1,846		(15,391		)	673,361
Other Government-Sponsored Enterprises	1,000		—		(2		)	998		10,000		12		—			10,012
Obligations of States and Political Subdivisions	21,959		209		—			22,168		27,592		126		(6		)	27,712
Corporate Securities	22,914		1,121		—			24,035		20,912		321		(221		)	21,012
Total Securities Available for Sale	$	805,149	$	9,830	$	(2,596	)	$	812,383	$	924,054	$	2,998	$	(17,805	)	$	909,247

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2018 December 31, 2017
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 $ 9,276
$ 484
$ (132 ) $ 9,628
$ 10,556
$ 789
$ (7 ) $ 11,338
Mortgage-Backed Securities – Commercial 170,086
—
(2,675 ) 167,411
24,611
—
(462 ) 24,149
Obligations of U.S. Government-Sponsored Enterprises:

Mortgage-Backed Securities – Residential 685,721
987
(25,079 ) 661,629
632,422
2,622
(9,489 ) 625,555
Other Government-Sponsored Enterprises 100
—
—
100
1,098
—
(1 ) 1,097
Obligations of States and Political Subdivisions 27,590
56
(129 ) 27,517
27,083
327
—
27,410
Corporate Securities 20,907
473
(279 ) 21,101
15,907
590
(4 ) 16,493
Pooled Trust Preferred Collateralized Debt Obligations —
—
—
—
27,499
526
(4,379 ) 23,646
Total Debt Securities 913,680
2,000
(28,294 ) 887,386
739,176
4,854
(14,342 ) 729,688
Equities 1,670
—
—
1,670
1,670
—
—
1,670
Total Securities Available for Sale $ 915,350
$ 2,000
$ (28,294 ) $ 889,056
$ 740,846
$ 4,854
$ (14,342 ) $ 731,358

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The amortized cost and estimated fair value of debt securities available for sale at September 30, ~~2018~~2019, by contractual maturity, are shown below.


	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(dollars in thousands)				(dollars in thousands)
Due within 1 year	$	4,099	$	4,089	$	1,527	$	1,531
Due after 1 but within 5 years	15,730		15,464		36,106		36,779
Due after 5 but within 10 years	26,342		26,269		8,240		8,891
Due after 10 years	2,426		2,896		—		—
	48,597		48,718		45,873		47,201
Mortgage-Backed Securities (a)	865,083		838,668		759,276		765,182
Total Debt Securities	$	913,680	$	887,386	$	805,149	$	812,383

(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 $~~179.4~~176.1 million and a fair value of $~~177.0~~180.4 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $~~685.7~~583.2 million and a fair value of $~~661.6~~584.8 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the nine months ended September 30:



	2019		2018
	(dollars in thousands)
Proceeds from sales	$	—	$	15,939
Gross gains (losses) realized:
Sales transactions:
Gross gains	$	—	$	4,719
Gross losses	—		—
	—		4,719
Maturities
Gross gains	15		3,383
Gross losses	—		—
	15		3,383
Net gains and impairment	$	15	$	8,102

2018 2017
(dollars in thousands)
Proceeds from sales $ 15,939
$ 143,660
Gross gains (losses) realized:
Sales Transactions:
Gross gains $ 4,719
$ 359
Gross losses —
(316 )
4,719
43
Maturities and impairment
Gross gains 3,383
712
Gross losses —
(60 )
3,383
652
Net gains and impairment $ 8,102
$ 695

Gross gains from maturities recognized in 2019 were the result of calls on five municipal securities. Gross gains from sales transactions of $4.7 million ~~were~~ recognized in 2018 ~~as a~~were the result of the sale of the remaining ~~pooled~~pool trust preferred security portfolio. Gross gains from maturities ~~and impairment~~ of $3.4 million ~~were~~ recognized in 2018 ~~as a~~were the result of successful auction calls on PreSTL XIV and PreSTL IX, two of our pooled trust preferred securities. ~~Gross gains of $0.7 million were recognized in 2017 due to the early redemption of another of our trust preferred securities, PreSTL VII.~~

Securities available for sale with an estimated fair value of ~~$680.9~~$629.4 million and ~~$569.0~~$636.3 million were pledged as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018, respectively, to secure public deposits and for other purposes required or permitted by law.

1516

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity

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



	September 30, 2019									December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	3,549	$	57	$	—		$	3,606	$	3,635	$	—	$	(97	)	$	3,538
Mortgage-Backed Securities- Commercial	54,244		173		(106		)	54,311		55,221		—		(2,327		)	52,894
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	245,238		1,762		(297		)	246,703		279,109		212		(7,254		)	272,067
Mortgage-Backed Securities – Commercial	12,361		123		—			12,484		13,159		—		(258		)	12,901
Obligations of States and Political Subdivisions	41,898		626		—			42,524		42,331		175		(313		)	42,193
Debt Securities Issued by Foreign Governments	600		—		(4		)	596		400		—		—			400
Total Securities Held to Maturity	$	357,890	$	2,741	$	(407	)	$	360,224	$	393,855	$	387	$	(10,249	)	$	383,993

September 30, 2018 December 31, 2017
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential $ 3,663
$ —
$ (156 ) $ 3,507
$ 3,925
$ —
$ (14 ) $ 3,911
Mortgage-Backed Securities- Commercial 55,726
—
(2,742 ) 52,984
58,249
—
(1,394 ) 56,855
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential 273,972
—
(11,468 ) 262,504
305,126
10
(2,552 ) 302,584
Mortgage-Backed Securities – Commercial 13,413
—
(427 ) 12,986
14,056
—
(71 ) 13,985
Obligations of States and Political Subdivisions 42,447
5
(895 ) 41,557
40,540
335
(161 ) 40,714
Debt Securities Issued by Foreign Governments 400
—
(5 ) 395
200
—
—
200
Total Securities Held to Maturity $ 389,621
$ 5
$ (15,693 ) $ 373,933
$ 422,096
$ 345
$ (4,192 ) $ 418,249

The amortized cost and estimated fair value of debt securities held to maturity at September 30, ~~2018,~~2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(dollars in thousands)				(dollars in thousands)
Due within 1 year	$	85	$	85	$	512	$	512
Due after 1 but within 5 years	3,814		3,778		8,084		8,144
Due after 5 but within 10 years	37,329		36,491		33,902		34,464
Due after 10 years	1,619		1,598		—		—
	42,847		41,952		42,498		43,120
Mortgage-Backed Securities (a)	346,774		331,981		315,392		317,104
Total Debt Securities	$	389,621	$	373,933	$	357,890	$	360,224

(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 ~~$59.4~~$57.8 million and a fair value of ~~$56.5~~$57.9 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of ~~$287.4~~$257.6 million and a fair value of ~~$275.5~~$259.2 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 ~~$298.9~~$324.9 million and ~~$338.3~~$250.3 million were pledged as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, to secure public deposits and for other purposes required or permitted by law.

1617

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018, no0 other-than-temporary impairment charges were recognized.

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

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

The following table presents the gross unrealized losses and estimated fair values at September 30, ~~2018~~2019 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Commercial	$	—	$	—		$	18,120	$	(106	)	$	18,120	$	(106	)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	115,615		(342		)	239,861		(2,549		)	355,476		(2,891		)
Other Government-Sponsored Enterprises	998		(2		)	—		—			998		(2		)
Debt Securities Issued by Foreign Governments	596		(4		)	—		—			596		(4		)
Total Securities	$	117,209	$	(348	)	$	257,981	$	(2,655	)	$	375,190	$	(3,003	)

Less Than 12 Months 12 Months or More Total
Estimated
Fair Value Gross
Unrealized
Losses Estimated
Fair Value Gross
Unrealized
Losses Estimated
Fair Value Gross
Unrealized
Losses
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential $ 7,267
$ (288 ) $ —
$ —
$ 7,267
$ (288 )
Mortgage-Backed Securities – Commercial 144,211
(1,538 ) 76,183
(3,879 ) 220,394
(5,417 )
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential 399,505
(10,329 ) 489,431
(26,218 ) 888,936
(36,547 )
Mortgage-Backed Securities – Commercial 12,986
(427 ) —
—
12,986
(427 )
Other Government-Sponsored Enterprises —
—
100
—
100
—
Obligations of States and Political Subdivisions 44,422
(635 ) 5,781
(389 ) 50,203
(1,024 )
Debt securities issued by foreign governments 395
(5 ) —
—
395
(5 )
Corporate Securities 18,702
(279 ) —
—
18,702
(279 )
Total Securities $ 627,488
$ (13,501 ) $ 571,495
$ (30,486 ) $ 1,198,983
$ (43,987 )

At September 30, ~~2018,~~2019, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised ~~84%~~96% and ~~13%~~4%, respectively, of total unrealized losses due to changes in market interest rates. At September 30, ~~2018~~2019, there are ~~183~~40 debt securities in an unrealized loss position.

1718

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at December 31, ~~2017~~2018 by investment category and time frame for which securities have been in a continuous unrealized loss position:



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

Less Than 12 Months 12 Months or More Total
Estimated
Fair Value Gross
Unrealized
Losses Estimated
Fair Value Gross
Unrealized
Losses Estimated
Fair Value Gross
Unrealized
Losses
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential $ 5,584
$ (21 ) $ —
$ —
$ 5,584
$ (21 )
Mortgage-Backed Securities - Commercial 48,322
(962 ) 32,683
(894 ) 81,005
(1,856 )
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential 351,222
(2,295 ) 400,984
(9,746 ) 752,206
(12,041 )
Mortgage-Backed Securities – Commercial 13,985
(71 ) —
—
13,985
(71 )
Other Government-Sponsored Enterprises 997
(1 ) 99
—
1,096
(1 )
Obligation of States and Political Subdivisions 7,144
(32 ) 3,653
(129 ) 10,797
(161 )
Corporate Securities 3,993
(4 ) —
—
3,993
(4 )
Pooled Trust Preferred Collateralized Debt Obligations —
—
19,120
(4,379 ) 19,120
(4,379 )
Total Securities $ 431,247
$ (3,386 ) $ 456,539
$ (15,148 ) $ 887,786
$ (18,534 )

As of September 30, ~~2018~~2019, our corporate securities had an amortized cost and an estimated fair value of ~~$20.9~~$22.9 million and ~~$21.1~~$24.0 million,, respectively. As of December 31, ~~2017,~~2018, our corporate securities had an amortized cost and estimated fair value of ~~$15.9~~$20.9 million and ~~$16.5~~$21.0 million, respectively. Corporate securities are comprised of debt ~~for~~issued by large regional banks. There were ~~four~~0 corporate securities in an unrealized loss position as of September 30, ~~2018~~2019 and ~~one~~4 corporate ~~security~~securities in an unrealized loss position as of December 31, ~~2017~~2018. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

During ~~the first six months of~~ 2018, all of our pooled trust preferred collateralized debt obligations were liquidated either through a successful auction call or sale. ~~At December 31, 2017, the pooled trust preferred securities had an amortized cost and estimated fair value of $27.5 million and $23.6 million, respectively.~~ Other-than-temporary impairment charges were recognized on the pooled trust preferred securities in 2008, 2009 and 2010. The following table provides a cumulative roll forward of credit losses recognized in earnings for the trust preferred securities:


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,						For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017			2018			2017			2019		2018		2019		2018
	(dollars in thousands)											(dollars in thousands)
Balance, beginning (a)	$	—	$	16,610		$	12,208		$	17,056		$	—	$	—	$	—	$	12,208
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—		—			—			—			—		—		—		—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—		—			—			—			—		—		—		—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	—		(219		)	(223		)	(665		)	—		—		—		(223		)
Reduction for debt securities sold during the period	—		—			(9,164		)	—			—		—		—		(9,164		)
Reduction for debt securities called during the period	—		—			(2,821		)	—			—		—		—		(2,821		)
Balance, ending	$	—	$	16,391		$	—		$	16,391		$	—	$	—	$	—	$	—


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


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

~~During the nine-months ended September 30,~~ ~~2018, there were no gains or losses recognized through earnings on equity securities. During the nine-months ended September 30,~~ ~~2017~~, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of~~ ~~September 30, 2018~~ ~~and~~ ~~2017, there were~~ no ~~equity securities in an unrealized loss position.~~

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of September 30, ~~2018~~2019 and

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, ~~2017~~,2018, our FHLB stock totaled ~~$25.0~~$9.9 million and ~~$29.8~~$30.5 million,, respectively, and is included in “Other investments” on the ~~Condensed~~ Consolidated Statements of Financial Condition.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three and nine months ended September 30, ~~2018.~~2019.

As of both September 30, 2019 and December 31, 2018, "Other investments" also includes $1.7 million in equity securities. These securities do not have a readily determinable fair value and are carried at cost. During the nine-months ended September 30, 2019 and 2018, there were 0 gains or losses recognized through earnings on equity securities. On a quarterly basis, management evaluates equity securities by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information.

Note 9 Loans and Allowance for Credit Losses

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



	September 30, 2019						December 31, 2018
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,173,070	$	37,866	$	1,210,936	$	1,100,947	$	37,526	$	1,138,473
Real estate construction	413,562		6,719		420,281		353,008		5,970		358,978
Residential real estate	1,380,486		285,734		1,666,220		1,313,645		248,760		1,562,405
Commercial real estate	1,947,533		176,707		2,124,240		1,922,349		201,195		2,123,544
Loans to individuals	662,838		15,046		677,884		585,347		5,392		590,739
Total loans	$	5,577,489	$	522,072	$	6,099,561	$	5,275,296	$	498,843	$	5,774,139

September 30, 2018 December 31, 2017
Originated Acquired Total Originated Acquired Total
(dollars in thousands)
Commercial, financial, agricultural and other $ 1,079,537
$ 36,667
$ 1,116,204
$ 1,122,741
$ 40,642
$ 1,163,383
Real estate construction 291,645
6,750
298,395
242,905
5,963
248,868
Residential real estate 1,277,427
255,911
1,533,338
1,206,119
220,251
1,426,370
Commercial real estate 1,929,219
207,212
2,136,431
1,892,185
126,911
2,019,096
Loans to individuals 572,696
5,718
578,414
543,411
6,248
549,659
Total loans $ 5,150,524
$ 512,258
$ 5,662,782
$ 5,007,361
$ 400,015
$ 5,407,376

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Credit Quality Information

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



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



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



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



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

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

The following tables represent our credit risk profile by creditworthiness:


	September 30, 2018												September 30, 2019
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total		Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)												(dollars in thousands)
Originated loans
Pass	$	1,023,855	$	282,713	$	1,266,805	$	1,876,336	$	572,504	$	5,022,213	$	1,115,341	$	413,535	$	1,371,231	$	1,902,969	$	662,535	$	5,465,611
Non-Pass
OAEM	40,624		8,932		1,135		32,825		—		83,516		49,258		27		487		22,709		—		72,481
Substandard	10,740		—		9,487		20,058		192		40,477		8,471		—		8,768		21,855		303		39,397
Doubtful	4,318		—		—		—		—		4,318		—		—		—		—		—		—
Total Non-Pass	55,682		8,932		10,622		52,883		192		128,311		57,729		27		9,255		44,564		303		111,878
Total	$	1,079,537	$	291,645	$	1,277,427	$	1,929,219	$	572,696	$	5,150,524	$	1,173,070	$	413,562	$	1,380,486	$	1,947,533	$	662,838	$	5,577,489

Acquired loans
Pass	$	30,328	$	6,104	$	252,769	$	204,074	$	5,703	$	498,978	$	30,986	$	6,134	$	283,171	$	169,935	$	15,033	$	505,259
Non-Pass
OAEM	6,238		646		652		460		—		7,996		2,143		585		637		2,126		—		5,491
Substandard	101		—		2,490		2,678		15		5,284		4,737		—		1,926		4,646		13		11,322
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Total Non-Pass	6,339		646		3,142		3,138		15		13,280		6,880		585		2,563		6,772		13		16,813
Total	$	36,667	$	6,750	$	255,911	$	207,212	$	5,718	$	512,258	$	37,866	$	6,719	$	285,734	$	176,707	$	15,046	$	522,072

2021

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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

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

December 31, 2017
Commercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals Total
(dollars in thousands)
Originated loans
Pass $ 1,061,147
$ 242,905
$ 1,194,352
$ 1,855,253
$ 543,175
$ 4,896,832
Non-Pass
OAEM 26,757
—
1,435
13,326
—
41,518
Substandard 30,431
—
10,332
23,606
236
64,605
Doubtful 4,406
—
—
—
—
4,406
Total Non-Pass 61,594
—
11,767
36,932
236
110,529
Total $ 1,122,741
$ 242,905
$ 1,206,119
$ 1,892,185
$ 543,411
$ 5,007,361

Acquired loans
Pass $ 34,573
$ 5,963
$ 217,824
$ 121,536
$ 6,231
$ 386,127
Non-Pass
OAEM 5,567
—
798
3,517
—
9,882
Substandard 502
—
1,629
1,858
17
4,006
Doubtful —
—
—
—
—
—
Total Non-Pass 6,069
—
2,427
5,375
17
13,888
Total $ 40,642
$ 5,963
$ 220,251
$ 126,911
$ 6,248
$ 400,015

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 ~~our~~ lending departments and oversight is provided by the ~~credit committee~~Credit Committee of the First Commonwealth Board of Directors.

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of September 30, ~~2018~~2019. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

2122

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.


	September 30, 2018														September 30, 2019
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total		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)														(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	340	$	—	$	66	$	11,506	$	11,912	$	1,067,625	$	1,079,537	$	165	$	345	$	26	$	4,808	$	5,344	$	1,167,726	$	1,173,070
Real estate construction	—		—		—		—		—		291,645		291,645		—		—		—		—		—		413,562		413,562
Residential real estate	2,994		1,084		486		5,890		10,454		1,266,973		1,277,427		4,756		1,438		935		6,465		13,594		1,366,892		1,380,486
Commercial real estate	1,351		383		270		9,805		11,809		1,917,410		1,929,219		671		406		103		7,590		8,770		1,938,763		1,947,533
Loans to individuals	2,204		644		573		193		3,614		569,082		572,696		3,090		775		845		302		5,012		657,826		662,838
Total	$	6,889	$	2,111	$	1,395	$	27,394	$	37,789	$	5,112,735	$	5,150,524	$	8,682	$	2,964	$	1,909	$	19,165	$	32,720	$	5,544,769	$	5,577,489

Acquired loans
Commercial, financial, agricultural and other	$	—	$	—	$	20	$	73	$	93	$	36,574	$	36,667	$	10	$	—	$	4	$	4,693	$	4,707	$	33,159	$	37,866
Real estate construction	1,126		—		—		—		1,126		5,624		6,750		—		—		—		—		—		6,719		6,719
Residential real estate	391		95		191		2,395		3,072		252,839		255,911		394		101		119		1,818		2,432		283,302		285,734
Commercial real estate	43		—		—		1,920		1,963		205,249		207,212		—		—		—		1,612		1,612		175,095		176,707
Loans to individuals	25		22		41		15		103		5,615		5,718		220		16		22		13		271		14,775		15,046
Total	$	1,585	$	117	$	252	$	4,403	$	6,357	$	505,901	$	512,258	$	624	$	117	$	145	$	8,136	$	9,022	$	513,050	$	522,072

2223

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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

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

December 31, 2017
30 - 59
days
past due 60 - 89
days
past
due 90 days
and
greater
and still
accruing Nonaccrual Total past
due and
nonaccrual Current Total
(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other $ 378
$ 61
$ 40
$ 18,741
$ 19,220
$ 1,103,521
$ 1,122,741
Real estate construction 199
—
—
—
199
242,706
242,905
Residential real estate 4,618
1,025
1,076
6,225
12,944
1,193,175
1,206,119
Commercial real estate 2,198
28
6
3,240
5,472
1,886,713
1,892,185
Loans to individuals 1,899
769
623
236
3,527
539,884
543,411
Total $ 9,292
$ 1,883
$ 1,745
$ 28,442
$ 41,362
$ 4,965,999
$ 5,007,361

Acquired loans
Commercial, financial, agricultural and other $ 6
$ 7
$ —
$ 436
$ 449
$ 40,193
$ 40,642
Real estate construction —
—
—
—
—
5,963
5,963
Residential real estate 148
9
83
705
945
219,306
220,251
Commercial real estate —
—
—
1,077
1,077
125,834
126,911
Loans to individuals 36
20
26
17
99
6,149
6,248
Total $ 190
$ 36
$ 109
$ 2,235
$ 2,570
$ 397,445
$ 400,015

Nonaccrual Loans

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans, which are placed on nonaccrual status at 150 days past due.

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

Impaired Loans

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

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, there were ~~no nonaccrual~~0 impaired loans held for sale. During the nine months ended, September 30, ~~2018, a gain~~2019, gains of $0.4 million were recognized on the sale of an impaired commercial real estate loan. There were gains of $1.2 million ~~was~~ recognized on the sale of an impaired commercial, financial, agricultural and other relationship during the nine months ended September 30, 2018.

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~other relationship. There were $21 thousand in gains recognized in the same period in 2017 on the sale of an impaired commercial, financial, agricultural and other loan.~~

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on their period-end allowance position.


	September 30, 2018						December 31, 2017						September 30, 2019						December 31, 2018
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)												(dollars in thousands)
Originated loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	3,177	$	9,585			$	5,548	$	12,153			$	1,638	$	7,014			$	8,735	$	16,442
Real estate construction	—		—				—		—				—		—				—		—
Residential real estate	10,302		12,163				10,625		12,470				9,760		11,516				10,726		12,571
Commercial real estate	4,951		7,559				5,155		5,489				3,274		3,502				3,599		3,812
Loans to individuals	287		414				347		383				392		593				281		408
Subtotal	18,717		29,721				21,675		30,495				15,064		22,625				23,341		33,233
With an allowance recorded:
Commercial, financial, agricultural and other	9,998		10,219		$	3,474	16,866		21,094		$	3,478	4,644		6,386		$	1,054	3,042		3,181		$	797
Real estate construction	—		—		—		—		—		—		—		—		—		—		—		—
Residential real estate	596		602		167		456		478		107		920		976		4		486		495		107
Commercial real estate	6,094		6,161		1,722		954		954		128		6,408		6,543		469		1,866		1,878		596
Loans to individuals	—		—		—		—		—		—		—		—		—		—		—		—
Subtotal	16,688		16,982		5,363		18,276		22,526		3,713		11,972		13,905		1,527		5,394		5,554		1,500
Total	$	35,405	$	46,703	$	5,363	$	39,951	$	53,021	$	3,713	$	27,036	$	36,530	$	1,527	$	28,735	$	38,787	$	1,500

2425

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	September 30, 2018						December 31, 2017						September 30, 2019						December 31, 2018
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)												(dollars in thousands)
Acquired loans
With no related allowance recorded:
Commercial, financial, agricultural and other	$	73	$	73			$	436	$	449			$	4,693	$	4,717			$	73	$	73
Real estate construction	—		—				—		—				—		—				—		—
Residential real estate	2,436		3,006				666		965				1,971		2,413				2,031		2,604
Commercial real estate	1,920		2,919				940		1,842				1,459		2,843				1,042		2,052
Loans to individuals	15		17				17		17				13		15				15		17
Subtotal	4,444		6,015				2,059		3,273				8,136		9,988				3,161		4,746
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—		$	—	—		—		$	—	131		131		$	131
Real estate construction	—		—		—		—		—		—		—		—		—		—		—		—
Residential real estate	—		—		—		93		122		4		—		—		—		—		—		—
Commercial real estate	—		—		—		137		150		29		153		165		19		—		—		—
Loans to individuals	—		—		—		—		—		—		—		—		—		—		—		—
Subtotal	—		—		—		230		272		33		153		165		19		131		131		131
Total	$	4,444	$	6,015	$	—	$	2,289	$	3,545	$	33	$	8,289	$	10,153	$	19	$	3,292	$	4,877	$	131


	For the Nine Months Ended September 30,																For the Nine Months Ended September 30,
	2018								2017								2019								2018
	Originated Loans				Acquired Loans				Originated Loans				Acquired Loans				Originated Loans				Acquired Loans				Originated Loans				Acquired Loans
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
	(dollars in thousands)																(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	17,838	$	576	$	261	$	10	$	11,627	$	142	$	48	$	1	$	2,129	$	10	$	2,255	$	—	$	17,838	$	576	$	261	$	10
Real estate construction	—		—		—		—		—		—		33		—		—		—		—		—		—		—		—		—
Residential real estate	10,639		191		1,779		3		11,417		245		487		—		10,751		280		1,966		6		10,639		191		1,779		3
Commercial real estate	7,632		146		1,558		—		6,439		522		2,076		—		3,854		129		636		18		7,632		146		1,558		—
Loans to individuals	322		6		16		—		350		16		2		—		356		11		14		—		322		6		16		—
Subtotal	36,431		919		3,614		13		29,833		925		2,646		1		17,090		430		4,871		24		36,431		919		3,614		13
With an allowance recorded:
Commercial, financial, agricultural and other	5,979		16		—		—		8,984		77		316		—		4,064		36		—		—		5,979		16		—		—
Real estate construction	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Residential real estate	532		11		—		—		266		—		68		—		347		6		—		—		532		11		—
Commercial real estate	1,787		3		—		—		354		14		159		—		5,357		2		160		—		1,787		3		—		—
Loans to individuals	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal	8,298		30		—		—		9,604		91		543		—		9,768		44		160		—		8,298		30		—		—
Total	$	44,729	$	949	$	3,614	$	13	$	39,437	$	1,016	$	3,189	$	1	$	26,858	$	474	$	5,031	$	24	$	44,729	$	949	$	3,614	$	13

2526

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	For the Three Months Ended September 30,																For the Three Months Ended September 30,
	2018								2017								2019								2018
	Originated Loans				Acquired Loans				Originated Loans				Acquired Loans				Originated Loans				Acquired Loans				Originated Loans				Acquired Loans
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)																(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	5,697	$	8	$	73	$	10	$	7,106	$	62	$	72	$	1	$	1,902	$	3	$	4,697	$	—	$	5,697	$	8	$	73	$	10
Real estate construction	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Residential real estate	10,627		59		2,541		2		11,217		82		653		—		10,254		86		1,950		1		10,627		59		2,541		2
Commercial real estate	6,810		59		1,955		—		5,928		452		3,078		—		3,582		28		666		—		6,810		59		1,955		—
Loans to individuals	320		2		16		—		366		5		6		—		389		4		13		—		320		2		16		—
Subtotal	23,454		128		4,585		12		24,617		601		3,809		1		16,127		121		7,326		1		23,454		128		4,585		12
With an allowance recorded:
Commercial, financial, agricultural and other	10,298		4		—		—		8,510		32		786		—		4,677		8		—		—		10,298		4		—		—
Real estate construction	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Residential real estate	565		2		—		—		377		—		95		—		740		1		—		—		565		2		—		—
Commercial real estate	4,342		1		—		—		315		4		154		—		6,443		1		155		—		4,342		1		—		—
Loans to individuals	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal	15,205		7		—		—		9,202		36		1,035		—		11,860		10		155		—		15,205		7		—		—
Total	$	38,659	$	135	$	4,585	$	12	$	33,819	$	637	$	4,844	$	1	$	27,987	$	131	$	7,481	$	1	$	38,659	$	135	$	4,585	$	12

Unfunded commitments related to nonperforming loans were ~~$1.5~~$0.2 million at September 30, ~~2018~~2019 and ~~$2.4~~$1.6 million at December 31, ~~2017~~2018. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $12 thousand ~~and $0.2 million~~ was established for these off balance sheet exposures at both September 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~

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



	September 30, 2019		December 31, 2018
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	8,024	$	8,757
Nonaccrual status	11,074		11,761
Total	$	19,098	$	20,518
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	131		1,027
Total	$	191	$	1,087

September 30, 2018 December 31, 2017
(dollars in thousands)
Troubled debt restructured loans
Accrual status $ 8,052
$ 11,563
Nonaccrual status 13,876
11,222
Total $ 21,928
$ 22,785
Commitments
Letters of credit $ 60
$ 60
Unused lines of credit 895
54
Total $ 955
$ 114

2627

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Nine Months Ended September 30, 2018													For the Nine Months Ended September 30, 2019
		Type of Modification													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		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)													(dollars in thousands)
Commercial, financial, agricultural and other	3	$	74	$	—	$	8,250	$	8,324	$	7,393	$	2,811	2	$	—	$	—	$	156	$	156	$	157	$	—
Residential real estate	24	85		145		959		1,189		1,108		—		14	17		149		842		1,008		933		1
Commercial real estate	2	—		—		966		966		943		—		3	—		—		6,119		6,119		5,740		397
Loans to individuals	13	—		77		44		121		103		—		7	—		—		98		98		87		—
Total	42	$	159	$	222	$	10,219	$	10,600	$	9,547	$	2,811	26	$	17	$	149	$	7,215	$	7,381	$	6,917	$	398



	For the Nine Months Ended September 30, 2018
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	3	$	74	$	—	$	8,250	$	8,324	$	7,393	$	2,811
Residential real estate	24	85		145		959		1,189		1,108		—
Commercial real estate	2	—		—		966		966		943		—
Loans to individuals	13	—		77		44		121		103		—
Total	42	$	159	$	222	$	10,219	$	10,600	$	9,547	$	2,811

For the Nine Months Ended September 30, 2017
Type of Modification
Number
of
Contracts Extend
Maturity Modify
Rate Modify
Payments Total
Pre-Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other 6
$ 6,768
$ 1,786
$ 47
$ 8,601
$ 6,307
$ 669
Residential real estate 15
129
204
513
846
777
2
Commercial real estate 4
179
—
111
290
280
—
Loans to individuals 8
—
17
60
77
62
—
Total 33
$ 7,076
$ 2,007
$ 731
$ 9,814
$ 7,426
$ 671

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a re-amortization of the principal and an extension of the maturity. For both the nine months ended September 30, 2019 and 2018, ~~and 2017, $0.2~~$0.1 million and ~~$0.3~~$0.2 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both ~~2018~~2019 and ~~2017~~2018 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

2728

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Three Months Ended September 30, 2018													For the Three Months Ended September 30, 2019
		Type of Modification													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		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)													(dollars in thousands)
Commercial, financial, agricultural and other	1	$	74	$	—	$	—	$	74	$	74	$	—	1	$	—	$	—	$	95	$	95	$	96	$	—
Residential real estate	7	65		70		230		365		338		—		3	—		32		53		85		85		—
Loans to individuals	6	—		26		17		43		40		—		2	—		—		37		37		34		—
Total	14	$	139	$	96	$	247	$	482	$	452	$	—	6	$	—	$	32	$	185	$	217	$	215	$	—


	For the Three Months Ended, September 30, 2017													For the Three Months Ended, September 30, 2018
		Type of Modification													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		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)													(dollars in thousands)
Commercial, financial, agricultural and other	1	$	—	$	—	$	47	$	47	$	47	$	—	1	$	74	$	—	$	—	$	74	$	74	$	—
Residential real estate	4	—		17		100		117		106		—		7	65		70		230		365		338		—
Commercial real estate	1	—		—		27		27		25		—
Loans to individuals	1	—		—		12		12		11		—		6	—		26		17		43		40		—
Total	7	$	—	$	17	$	186	$	203	$	189	$	—	14	$	139	$	96	$	247	$	482	$	452	$	—

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a re-amortization of the principal and an extension of the maturity. For the three months ended September 30, 2019 and 2018, ~~and 2017, $96~~$32 thousand and ~~$17~~$96 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 ~~2018~~2019 and ~~2017~~2018 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to loans that were restructured within the past twelve months and that were considered to be in default during the nine months ended September 30:


	2018			2017			2019			2018
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)						(dollars in thousands)
Commercial, financial, agricultural and other	1	$	272	—	$	—	—	$	—	1	$	272
Residential real estate	1	$	49	1	$	9	3	70		1	49
Loans to individuals	1	8		1	2		—	—		1	8
Total	3	$	329	2	$	11	3	$	70	3	$	329

2829

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides information related to loans that were restructured within the past twelve months and that were considered to be in default during the three months ended September 30:



	2019			2018
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	2	$	49	1	$	49
Loans to individuals	—	$	—	1	$	8
Total	2	$	49	2	$	57

2018 2017
Number of
Contracts Recorded
Investment Number of
Contracts Recorded
Investment
(dollars in thousands)
Residential real estate 1
$ 49
—
$ —
Loans to individuals 1
$ 8
1
$ 2
Total 2
$ 57
1
$ 2

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


	For the Nine Months Ended September 30, 2018																		For the Nine Months Ended September 30, 2019
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total			Commercial, financial, agricultural and other			Real estate construction		Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)																		(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	23,418		$	1,349		$	2,753		$	17,328		$	3,404		$	48,252		$	19,235		$	2,002	$	3,934		$	18,382		$	4,033		$	47,586
Charge-offs	(3,443		)	—			(949		)	(2,411		)	(3,321		)	(10,124		)	(1,584		)	—		(617		)	(305		)	(4,049		)	(6,555		)
Recoveries	671			93			222			123			460			1,569			180			158		190			160			419			1,107
Provision (credit)	1,343			150			1,584			4,623			3,274			10,974			2,109			250		409			790			4,310			7,868
Ending balance	21,989			1,592			3,610			19,663			3,817			50,671			19,940			2,410		3,916			19,027			4,713			50,006
Acquired loans:
Beginning balance	11			—			6			29			—			46			139			—		35			4			—			178
Charge-offs	(93		)	—			(57		)	—			(15		)	(165		)	(601		)	—		(46		)	(1,376		)	(9		)	(2,032		)
Recoveries	31			6			75			—			24			136			53			—		46			—			14			113
Provision (credit)	71			(6		)	23			(21		)	(9		)	58			416			—		(34		)	1,393			(5		)	1,770
Ending balance	20			—			47			8			—			75			7			—		1			21			—			29
Total ending balance	$	22,009		$	1,592		$	3,657		$	19,671		$	3,817		$	50,746		$	19,947		$	2,410	$	3,917		$	19,048		$	4,713		$	50,035
Ending balance: individually evaluated for impairment	$	3,474		$	—		$	167		$	1,722		$	—		$	5,363		$	1,054		$	—	$	4		$	488		$	—		$	1,546
Ending balance: collectively evaluated for impairment	18,535			1,592			3,490			17,949			3,817			45,383			18,893			2,410		3,913			18,560			4,713			48,489
Loans:
Ending balance	1,116,204			298,395			1,533,338			2,136,431			578,414			5,662,782			1,210,936			420,281		1,666,220			2,124,240			677,884			6,099,561
Ending balance: individually evaluated for impairment	12,864			—			4,522			12,012			—			29,398			10,417			—		4,102			10,825			—			25,344
Ending balance: collectively evaluated for impairment	1,103,340			298,395			1,528,816			2,124,419			578,414			5,633,384			1,200,519			420,281		1,662,118			2,113,415			677,884			6,074,217

2930

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Nine Months Ended September 30, 2018
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	23,418		$	1,349		$	2,753		$	17,328		$	3,404		$	48,252
Charge-offs	(3,443		)	—			(949		)	(2,411		)	(3,321		)	(10,124		)
Recoveries	671			93			222			123			460			1,569
Provision (credit)	1,343			150			1,584			4,623			3,274			10,974
Ending balance	21,989			1,592			3,610			19,663			3,817			50,671
Acquired loans:
Beginning balance	11			—			6			29			—			46
Charge-offs	(93		)	—			(57		)	—			(15		)	(165		)
Recoveries	31			6			75			—			24			136
Provision (credit)	71			(6		)	23			(21		)	(9		)	58
Ending balance	20			—			47			8			—			75
Total ending balance	$	22,009		$	1,592		$	3,657		$	19,671		$	3,817		$	50,746
Ending balance: individually evaluated for impairment	$	3,474		$	—		$	167		$	1,722		$	—		$	5,363
Ending balance: collectively evaluated for impairment	18,535			1,592			3,490			17,949			3,817			45,383
Loans:
Ending balance	1,116,204			298,395			1,533,338			2,136,431			578,414			5,662,782
Ending balance: individually evaluated for impairment	12,864			—			4,522			12,012			—			29,398
Ending balance: collectively evaluated for impairment	1,103,340			298,395			1,528,816			2,124,419			578,414			5,633,384


	For the Nine Months Ended September 30, 2017																		For the Three Months Ended September 30, 2019
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total			Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)																		(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	35,974		$	577		$	2,492		$	6,619		$	4,504		$	50,166		$	20,678		$	2,491		$	4,133		$	19,287		$	4,407		$	50,996
Charge-offs	(5,776		)	—			(954		)	(95		)	(3,185		)	(10,010		)	(742		)	—			(383		)	(6		)	(1,571		)	(2,702		)
Recoveries	3,819			465			259			206			355			5,104			41			74			6			81			162			364
Provision (credit)	(11,353		)	299			1,095			10,593			1,752			2,386			(37		)	(155		)	160			(335		)	1,715			1,348
Ending balance	22,664			1,341			2,892			17,323			3,426			47,646			19,940			2,410			3,916			19,027			4,713			50,006
Acquired loans:
Beginning balance	—			—			19			—			—			19			15			—			25			25			—			65
Charge-offs	—			—			(26		)	—			(17		)	(43		)	(49		)	—			—			(1,376		)	(3		)	(1,428		)
Recoveries	1			5			45			4			51			106			21			—			11			—			—			32
Provision (credit)	479			(5		)	(32		)	40			(34		)	448			20			—			(35		)	1,372			3			1,360
Ending balance	480			—			6			44			—			530			7			—			1			21			—			29
Total ending balance	$	23,144		$	1,341		$	2,898		$	17,367		$	3,426		$	48,176		$	19,947		$	2,410		$	3,917		$	19,048		$	4,713		$	50,035
Ending balance: individually evaluated for impairment	$	1,818		$	—		$	102		$	261		$	—		$	2,181
Ending balance: collectively evaluated for impairment	21,326			1,341			2,796			17,106			3,426			45,995
Loans:
Ending balance	1,154,225			259,129			1,423,422			1,990,264			548,807			5,375,847
Ending balance: individually evaluated for impairment	15,995			—			7,142			8,189			—			31,326
Ending balance: collectively evaluated for impairment	1,138,230			259,129			1,416,280			1,982,075			548,807			5,344,521

For the Three Months Ended September 30, 2018
Commercial,
financial,
agricultural
and other Real estate
construction Residential
real estate Commercial
real estate Loans to
individuals Total
(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance $ 25,082
$ 1,262
$ 3,556
$ 17,731
$ 3,527
$ 51,158
Charge-offs (2,582 ) —
(268 ) —
(1,076 ) (3,926 )
Recoveries 53
92
26
36
153
360
Provision (credit) (564 ) 238
296
1,896
1,213
3,079
Ending balance 21,989
1,592
3,610
19,663
3,817
50,671
Acquired loans:
Beginning balance 23
—
127
6
—
156
Charge-offs —
—
(9 ) —
(4 ) (13 )
Recoveries 13
—
25
—
12
50
Provision (credit) (16 ) —
(96 ) 2
(8 ) (118 )
Ending balance 20
—
47
8
—
75
Total ending balance $ 22,009
$ 1,592
$ 3,657
$ 19,671
$ 3,817
$ 50,746

3031

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three Months Ended, September 30, 2018
	Commercial, financial, agricultural and other			Real estate construction		Residential real estate			Commercial real estate		Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	25,082		$	1,262	$	3,556		$	17,731	$	3,527		$	51,158
Charge-offs	(2,582		)	—		(268		)	—		(1,076		)	(3,926		)
Recoveries	53			92		26			36		153			360
Provision (credit)	(564		)	238		296			1,896		1,213			3,079
Ending balance	21,989			1,592		3,610			19,663		3,817			50,671
Acquired loans:
Beginning balance	23			—		127			6		—			156
Charge-offs	—			—		(9		)	—		(4		)	(13		)
Recoveries	13			—		25			—		12			50
Provision (credit)	(16		)	—		(96		)	2		(8		)	(118		)
Ending balance	20			—		47			8		—			75
Total ending balance	$	22,009		$	1,592	$	3,657		$	19,671	$	3,817		$	50,746

For the Three Months Ended, September 30, 2017
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 $ 33,372
$ 768
$ 2,116
$ 7,307
$ 4,332
$ 47,895
Charge-offs (499 ) —
(344 ) (35 ) (1,015 ) (1,893 )
Recoveries 183
369
67
60
107
786
Provision (credit) (10,392 ) 204
1,053
9,991
2
858
Ending balance 22,664
1,341
2,892
17,323
3,426
47,646
Acquired loans:
Beginning balance 118
—
4
50
—
172
Charge-offs —
—
(17 ) —
(9 ) (26 )
Recoveries 1
4
18
—
5
28
Provision (credit) 361
(4 ) 1
(6 ) 4
356
Ending balance 480
—
6
44
—
530
Total ending balance $ 23,144
$ 1,341
$ 2,898
$ 17,367
$ 3,426
$ 48,176

Note 10 Leases

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

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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table represents the Consolidated Statements of Condition classification of the Company’s ROU assets and lease liabilities, lease costs and other lease information as of and for the nine months ended September 30, 2019 (dollars in thousands).



Balance sheet:
Operating lease asset classified as premises and equipment	$	49,548
Operating lease liability classified as other liabilities	53,737
Income statement:
Operating lease cost classified as occupancy and equipment expense for the nine months ended September 30, 2019	$	3,959
Operating lease cost classified as occupancy and equipment expense for the three months ended September 30, 2019	1,275
Weighted average lease term, in years	15.44
Weighted average discount rate	3.42		%
Operating cash flows	$	3,351

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

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

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2019 were as follows (dollars in thousands):



For the twelve months ended:
September 30, 2020	$	5,223
September 30, 2021	5,084
September 30, 2022	4,989
September 30, 2023	4,954
September 30, 2024	4,824
Thereafter	45,583
Total future minimum lease payments	70,657
Less remaining imputed interest	16,920
Present value of future minimum lease payments	$	53,737

Note 11 Income Taxes

At In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes”, at September 30, ~~2018~~2019 and December 31, ~~2017~~,2018, First Commonwealth had no0 material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. ~~Federal~~

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, 2016 are no longer open to examination by federal and state ~~returns for tax years 2014 and forward remain open for examination as of September 30, 2018.~~taxing authorities.

During the first quarter of 2018, First Commonwealth adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". Adoption of this ASU reclassified the stranded other accumulated income of $1.3 million resulting from the tax reform passed in December 2017 from accumulated other comprehensive income to retained earnings. There was no impact to total equity as a result of the adoption of this update. ~~During the first quarter of 2017, First Commonwealth adopted ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718)." Adoption of this ASU resulted in a $0.1 million tax benefit.~~

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1112 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 ~~Condensed~~ Consolidated Statements of Financial Condition or in the “Other assets” category of the ~~Condensed~~ 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:

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

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

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

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

Other investments recorded in the ~~Condensed~~ 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 8, “Impairment of Investment Securities.”

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

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' ~~(loan~~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 ~~12,~~13, “Derivatives.”

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

We also utilize this approach to estimate our own credit risk on derivative liability positions. In ~~2018~~2019, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.

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

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

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

Level 3 assets at December 31, 2017 included pooled trust preferred collateralized debt obligations with an estimated fair value of $23.6 million. During the first six-months of 2018, the entire portfolio of trust preferred securities were liquidated either by a successful auction call or by sale. These securities were considered level 3 because there was little or no active trading since 2009; therefore, it is more appropriate to determine estimated fair value using a discounted cash flow analysis. When determining the fair value of these securities, the discount rate applied to the cash flows was determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security.

The estimated fair value of ~~the non-marketable equity~~other investments included in Level 3 is based on ~~par~~carrying value as these securities do not have a readily determinable fair value.

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

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

In accordance with ASU No. 2011-4, "Fair Value Measurements (Topic 820)," the following table provides information related to quantitative inputs and assumptions used in September 30, ~~2018~~2019 Level 3 fair value measurements.

Fair Value (dollars
in thousands)

Valuation
Technique

Unobservable Inputs

Range /
(weighted average)

Fair Value (dollars
in thousands)

Valuation
Technique

Unobservable Inputs

Range /
(weighted average)

Equities

1,670

Par Value

N/A

Other Investments

1,670

CarryingValue

N/A

Impaired Loans

1,184

(a)

Reserve study

Discount rate

10.00%

932

(a)

Reserve study

Discount rate

10.00%

Gas per MMBTU

$2.81 - $3.35 (b)

Gas per MMBTU

$2.61 - $3.49 (b)

Oil per BBL/d

$51.59 - $59.55 (b)

Oil per BBL/d

$47.09 - $53.14 (b)

7,883

(a)

Discounted Cash Flow

Discount Rate

1.9% - 9.5%

2,539

(a)

Discounted Cash Flow

Discount Rate

3.84% - 9.50%

Limited Partnership Investments

2,521

Par Value

N/A

4,131

Par Value

N/A


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


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

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

3335

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	September 30, 2018								September 30, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in thousands)								(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	9,628	$	—	$	9,628	$	—	$	8,767	$	—	$	8,767
Mortgage-Backed Securities - Commercial	—		167,411		—		167,411		—		171,591		—		171,591
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		661,629		—		661,629		—		584,824		—		584,824
Other Government-Sponsored Enterprises	—		100		—		100		—		998		—		998
Obligations of States and Political Subdivisions	—		27,517		—		27,517		—		22,168		—		22,168
Corporate Securities	—		21,101		—		21,101		—		24,035		—		24,035
Total Debt Securities	—		887,386		—		887,386
Equities	—		—		1,670		1,670
Total Securities Available for Sale	—		887,386		1,670		889,056		—		812,383		—		812,383
Other Investments	—		25,029		—		25,029		—		9,891		1,670		11,561
Loans Held for Sale	—		8,287		—		8,287		—		20,288		—		20,288
Other Assets(a)	—		9,046		2,521		11,567		—		27,571		4,131		31,702
Total Assets	$	—	$	929,748	$	4,191	$	933,939	$	—	$	870,133	$	5,801	$	875,934
Other Liabilities(a)	$	—	$	9,410	$	—	$	9,410	$	—	$	27,784	$	—	$	27,784
Total Liabilities	$	—	$	9,410	$	—	$	9,410	$	—	$	27,784	$	—	$	27,784


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


	December 31, 2017								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in thousands)								(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	11,338	$	—	$	11,338	$	—	$	9,406	$	—	$	9,406
Mortgage-Backed Securities - Commercial	—		24,149		—		24,149		—		167,744		—		167,744
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		625,555		—		625,555		—		673,361		—		673,361
Other Government-Sponsored Enterprises	—		1,097		—		1,097		—		10,012		—		10,012
Obligations of States and Political Subdivisions	—		27,410		—		27,410		—		27,712		—		27,712
Corporate Securities	—		16,493		—		16,493		—		21,012		—		21,012
Pooled Trust Preferred Collateralized Debt Obligations	—		—		23,646		23,646
Total Debt Securities	—		706,042		23,646		729,688
Equities	—		—		1,670		1,670
Total Securities Available for Sale	—		706,042		25,316		731,358		—		909,247		—		909,247
Other Investments	—		29,837		—		29,837		—		30,456		1,670		32,126
Loans Held for Sale	—		14,850		—		14,850		—		11,881		—		11,881
Other Assets(a)	—		1,778		2,143		3,921		—		1,769		2,696		4,465
Total Assets	$	—	$	752,507	$	27,459	$	779,966	$	—	$	953,353	$	4,366	$	957,719
Other Liabilities(a)	$	—	$	3,079	$	—	$	3,079	$	—	$	2,081	$	—	$	2,081
Total Liabilities	$	—	$	3,079	$	—	$	3,079	$	—	$	2,081	$	—	$	2,081


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

3436

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	2018											2019
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Other Assets			Total			Other Investments		Other Assets		Total
	(dollars in thousands)											(dollars in thousands)
Balance, beginning of period	$	23,646		$	1,670	$	2,143		$	27,459		$	1,670	$	2,696	$	4,366
Total gains or losses
Included in earnings	8,102			—		—			8,102			—		198		198
Included in other comprehensive income	(118		)	—		—			(118		)	—		—		—
Purchases, issuances, sales and settlements
Purchases	—			—		426			426			—		1,237		1,237
Issuances	—			—		—			—			—		—		—
Sales	(12,289		)	—		—			(12,289		)	—		—		—
Settlements	(19,341		)	—		(48		)	(19,389		)	—		—		—
Transfers from Level 3	—			—		—			—			—		—		—
Transfers into Level 3	—			—		—			—			—		—		—
Balance, end of period	$	—		$	1,670	$	2,521		$	4,191		$	1,670	$	4,131	$	5,801



	2018
	Pooled Trust Preferred Collateralized Debt Obligations			Other Investments		Other Assets			Total
	(dollars in thousands)
Balance, beginning of period	$	23,646		$	1,670	$	2,143		$	27,459
Total gains or losses
Included in earnings	8,102			—		—			8,102
Included in other comprehensive income	(118		)	—		—			(118		)
Purchases, issuances, sales and settlements
Purchases	—			—		426			426
Issuances	—			—		—			—
Sales	(12,289		)	—		—			(12,289		)
Settlements	(19,341		)	—		(48		)	(19,389		)
Transfers from Level 3	—			—		—			—
Transfers into Level 3	—			—		—			—
Balance, end of period	$	—		$	1,670	$	2,521		$	4,191

2017
Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets Total
(dollars in thousands)
Balance, beginning of period $ 33,292
$ 1,670
$ 930
$ 35,892
Total gains or losses
Included in earnings —
—
—
—
Included in other comprehensive income 1,391
—
—
1,391
Purchases, issuances, sales and settlements
Purchases —
—
638
638
Issuances —
—
—
—
Sales —
—
—
—
Settlements (54 ) —
(6 ) (60 )
Transfers from Level 3 —
—

—
Transfers into Level 3 —
—
—
—
Balance, end of period $ 34,629
$ 1,670
$ 1,562
$ 37,861

During the nine ~~months endedSeptember 30, 2018~~ ~~and 2017, there were~~ no ~~transfers between fair value Levels~~ 1, 2 ~~or 3. There were~~ no ~~gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at~~ ~~September 30, 2018~~ ~~and~~ ~~2017~~.

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~For the three~~ months ended September 30, ~~changes in Level 3 assets~~2019 and ~~liabilities measured at fair value on a recurring basis are summarized as follows:~~

2018
Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets Total
(dollars in thousands)
Balance, beginning of period $ —
$ 1,670
$ 2,297
$ 3,967
Total gains or losses
Included in earnings —
—
—
—
Included in other comprehensive income —
—
—
—
Purchases, issuances, sales and settlements
Purchases —
—
272
272
Issuances —
—
—
—
Sales —
—
—
—
Settlements —
—
(48 ) (48 )
Transfers from Level 3 —
—
—
—
Transfers into Level 3 —
—
—
—
Balance, end of period $ —
$ 1,670
$ 2,521
$ 4,191

2017
Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets Total
(dollars in thousands)
Balance, beginning of period $ 33,648
$ 1,670
$ 1,477
$ 36,795
Total gains or losses
Included in earnings —
—
—
—
Included in other comprehensive income 981
—
—
981
Purchases, issuances, sales and settlements
Purchases —
—
91
91
Issuances —
—
—
—
Sales —
—
—
—
Settlements —
—
(6 ) (6 )
Transfers from Level 3 —
—
—
—
Transfers into Level 3 —
—
—
—
Balance, end of period $ 34,629
$ 1,670
$ 1,562
$ 37,861

~~During the three months ended September 30,~~ 2018, ~~and 2017,~~ there were no0 transfers between fair value Levels 1, 2 or 3. There were no0 gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at September 30, ~~2018~~2019 and ~~2017.~~2018.

3637

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



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



	2018
	Other Investments		Other Assets			Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	2,297		$	3,967
Total gains or losses
Included in earnings	—		—			—
Included in other comprehensive income	—		—			—
Purchases, issuances, sales and settlements
Purchases	—		272			272
Issuances	—		—			—
Sales	—		—			—
Settlements	—		(48		)	(48		)
Transfers from Level 3	—		—			—
Transfers into Level 3	—		—			—
Balance, end of period	$	1,670	$	2,521		$	4,191

During the three months ended September 30, 2019 and 2018, there were 0 transfers between fair value Levels 1, 2 or 3. There were 0 gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at September 30, 2019 and 2018.

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


	September 30, 2018								September 30, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in thousands)								(dollars in thousands)
Impaired loans	$	—	$	14,940	$	19,546	$	34,486	$	—	$	20,407	$	13,372	$	33,779
Other real estate owned	—		4,164		—		4,164		—		1,981		—		1,981
Total Assets	$	—	$	19,104	$	19,546	$	38,650	$	—	$	22,388	$	13,372	$	35,760

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017
Level 1 Level 2 Level 3 Total
(dollars in thousands)
Impaired loans $ —
$ 23,249
$ 15,245
$ 38,494
Other real estate owned —
3,264
—
3,264
Total Assets $ —
$ 26,513
$ 15,245
$ 41,758



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

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Impaired loans	$	(954	)	$	(239	)	$	(2,606	)	$	(6,659	)
Other real estate owned	(42		)	(128		)	(51		)	(544		)
Total losses	$	(996	)	$	(367	)	$	(2,657	)	$	(7,203	)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017
(dollars in thousands)
Impaired loans $ (239 ) $ (156 ) $ (6,659 ) $ 160
Other real estate owned (128 ) (116 ) (544 ) (1,196 )
Total losses $ (367 ) $ (272 ) $ (7,203 ) $ (1,036 )

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

The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned, determined using an internal valuation, is classified as Level 3. OREO has a current carrying value of ~~$3.9~~$1.6 million as of September 30, ~~2018~~2019 and consists primarily of residential and commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note ~~13,~~14, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the nine months endedSeptember 30, ~~2018~~2019.

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was $0.2 million at both September 30, ~~2018~~2019 and December 31, ~~2017~~.2018, respectively. See Note 6, “Commitments and Contingent Liabilities,” for additional information.

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

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

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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


	September 30, 2018										September 30, 2019
			Fair Value Measurements Using:										Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3		Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)										(dollars in thousands)
Financial assets
Cash and due from banks	$	93,162	$	93,162	$	93,162	$	—	$	—	$	112,241	$	112,241	$	112,241	$	—	$	—
Interest-bearing deposits	3,022		3,022		3,022		—		—		16,408		16,408		16,408		—		—
Securities available for sale	889,056		889,056		—		887,386		1,670		812,383		812,383		—		812,383		—
Securities held to maturity	389,621		373,933		—		373,933		—		357,890		360,224		—		360,224		—
Other investments	25,029		25,029		—		25,029		—		11,561		11,561		—		9,891		1,670
Loans held for sale	8,287		8,287		—		8,287		—		20,288		20,288		—		20,288		—
Loans	5,662,782		5,643,537		—		14,940		5,628,597		6,099,561		6,213,529		—		20,407		6,193,122
Financial liabilities
Deposits	5,895,143		5,894,839		—		5,894,839		—		6,677,996		6,685,082		—		6,685,082		—
Short-term borrowings	587,806		587,776		—		587,776		—		83,735		83,698		—		83,698		—
Subordinated debt	170,249		173,533		—		—		173,533		170,409		169,601		—		—		169,601
Long-term debt	7,706		7,781		—		7,781		—		57,078		57,389		—		57,389		—
Capital lease obligation	7,311		7,311		—		7,311		—		6,917		6,917		—		6,917		—

December 31, 2017
Fair Value Measurements Using:
Carrying
Amount Total Level 1 Level 2 Level 3
(dollars in thousands)
Financial assets
Cash and due from banks $ 98,624
$ 98,624
$ 98,624
$ —
$ —
Interest-bearing deposits 8,668
8,668
8,668
—
—
Securities available for sale 731,358
731,358
—
706,042
25,316
Securities held to maturity 422,096
418,249
—
418,249
—
Other investments 29,837
29,837
—
29,837
—
Loans held for sale 14,850
14,850
—
14,850
—
Loans 5,407,376
5,443,434
—
23,249
5,420,185
Financial liabilities
Deposits 5,580,705
5,580,812
—
5,580,812
—
Short-term borrowings 707,466
707,263
—
707,263
—
Subordinated debt 72,167
65,785
—
—
65,785
Long-term debt 8,161
8,548
—
8,548
—
Capital lease obligation 7,590
7,590
—
7,590
—

3940

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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

Note 1213 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 5035 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 ~~twelve~~12 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. ~~These derivatives~~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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives Designated as Hedging Instruments

~~The~~In 2015, the Company ~~has~~ entered into an interest rate swap contract that was designated as a cash flow hedge. ~~The interest rate swap has~~This contract, which had a notional amount of $65.0 million, ~~with an original maturity of four years. The maturity date for this contract is~~matured on March 4, 2019. The periodic net settlement of interest rate swaps was recorded as an adjustment to "Interest and fees on loans" in the Consolidated Statements of Income. For the nine months ended September 30, 2019 there was a $0.1 million negative impact on net interest income as a result of these interest rate swaps.

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 ~~this hedge~~these hedges is to reduce its exposure to variability in expected future cash flows related to interest payments made on ~~commercial loans~~subordinated debentures benchmarked to the ~~1-month~~3-month LIBOR rate. Therefore, the interest rate ~~swap converts~~swaps convert the interest ~~payments~~rate benchmark on the first ~~$65.0~~$70.0 million of ~~a 1-month~~3-month LIBOR based ~~commercial loan into~~subordinated debentures to a fixed ~~rate payments.~~rate.

The periodic net settlement of these interest rate swaps isare recorded as an adjustment to "Interest ~~and fees~~ on ~~loans"~~subordinated debentures" in the ~~Condensed~~ Consolidated Statements of Income. For the three and nine months ended September 30, ~~2018~~2019 there was a ~~$0.2~~$0.1 million ~~and $0.4 million negative~~positive impact on net interest income as a result of these interest rate swaps. Changes in the fair value of the ~~effective portion of~~ 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 ~~and fees~~ on ~~loans,"~~subordinated debentures", the same line item in the ~~Condensed~~ Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at September 30, ~~2018 and December 31, 2017,~~2019, and changes in the fair value attributed to hedge ineffectiveness were not material.

The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Other noninterest ~~expense"~~income" in the ~~Condensed~~ Consolidated Statements of Income. The impact to noninterest ~~expense~~income for ~~both~~ the three and nine months ended September 30, ~~2018~~2019 was an increase of ~~$0.1 million.~~$12 thousand and $0.5 million, respectively.

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At September 30, ~~2018,~~2019, the underlying funded

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

mortgage loan commitments had a carrying value of ~~$7.6~~$23.4 million and a fair value of ~~$8.2~~$24.8 million, while the underlying unfunded mortgage loan commitments had a notional amount of ~~$16.7~~$32.7 million. At December 31, ~~2017,~~2018, the underlying funded mortgage loan commitments had a carrying value of ~~$14.3~~$6.9 million and a fair value of ~~$14.7~~$7.6 million, while the underlying unfunded mortgage loan commitments had a notional amount of ~~$13.8~~$9.9 million. The interest rate lock commitments ~~increased~~decreased other noninterest ~~expense~~income by $0.2 million and $0.1 million for ~~both~~ the three and nine months ended September 30, ~~2018.~~2019, respectively.

In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the ~~Condensed~~ Consolidated Statements of Income. The ~~impact on~~increase in other noninterest expense for the nine months ended September 30, ~~2018~~2019 totaled ~~$10 thousand.~~$4 thousand and $3 thousand for the three months ended September 30, 2019. At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the underlying loans had a carrying value of ~~$4.0~~$4.9 million and ~~$10.0~~$1.9 million, respectively, and a fair value of ~~$4.0~~$4.8 million and ~~$10.1~~$1.9 million, respectively.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	September 30, 2019			December 31, 2018
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(91	)	$	(3	)
Notional amount:
Interest rate derivatives	480,872			411,645
Interest rate caps	87,401			36,111
Interest rate collars	35,354			—
Risk participation agreements	178,502			162,139
Sold credit protection on risk participation agreements	(70,016		)	(59,315		)
Interest rate options	32,720			9,900
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	(124		)	(133		)
Notional amount	70,000			65,000
Interest rate forwards:
Fair value adjustment	(48		)	(170		)
Notional amount	47,000			15,000
Foreign exchange forwards:
Fair value adjustment	50			(6		)
Notional amount	4,874			1,927

September 30, 2018 December 31, 2017
(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment $ (1 ) $ (791 )
Notional amount:
Interest rate derivatives 402,840
401,304
Interest rate caps 36,194
�� 46,444
Risk participation agreements 201,989
197,660
Sold credit protection on risk participation agreements (64,182 ) (46,170 )
Interest rate options 16,718
—
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment (294 ) 459
Notional amount 65,000
150,000
Interest rate forwards:
Fair value adjustment (77 ) 19
Notional amount 19,000
17,000
Foreign exchange forwards:
Fair value adjustment 6
(70 )
Notional amount 4,058
10,077

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Non-hedging interest rate derivatives
(Decrease) increase in other income	$	(33	)	$	—		$	420		$	789
Increase (decrease) in other expense	—			221			—			(432		)
Hedging interest rate derivatives
Decrease in interest and fees on loans	—			(193		)	(118		)	(424		)
Decrease in interest from subordinated debentures	(70		)	—			(70		)	—
Increase in other expense	—			—			7			10
Hedging interest rate forwards
Increase in other income	201			—			122			—
Increase in other expense	—			125			—			96
Hedging foreign exchange forwards
Increase in other expense	3			2			4			10

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017
(dollars in thousands)
Non-hedging interest rate derivatives
(Decrease) increase in other income $ —
$ (13 ) $ 789
$ (49 )
Increase (decrease) in other expense 221
—
(432 ) —
Hedging interest rate derivatives
(Decrease) increase in interest and fees on loans (193 ) 35
(424 ) 420
Increase in other expense —
9
10
82
Hedging interest rate forwards
Increase (decrease) in other expense 125
61
96
(34 )
Hedging foreign exchange forwards
Increase in other expense 2
2
10
3

The fair value of our derivatives is included in a table in Note ~~11,~~12, “Fair Values of Assets and Liabilities,” in the line items

“Other assets” and “Other liabilities.”

Note 1314 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

impaired. Goodwill is also required to be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. When triggering events or circumstances indicate that goodwill testing is required, an assessment of qualitative factors can be completed before performing the two step goodwill impairment test. ASU No. 2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step goodwill impairment test is not required.

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 was $303.6 million and $274.2 million, ~~and $255.4 million,~~ respectively. ~~Goodwill increased $18.8 million~~The increase in goodwill during 2019 is the ~~nine months ended September 30, 2018 primarily as a~~ result of the acquisition of ~~Garfield~~14 branches from Santander, completed in ~~May 2018.~~ Nothe third quarter of 2019. NaN impairment charges on goodwill or other intangible assets were incurred in ~~2018~~2019 or ~~2017.~~2018.

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

As of September 30, ~~2018~~2019, goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Note 1415 Subordinated Debentures

Subordinated ~~Debentures~~debentures outstanding are as follows:



		September 30, 2019			December 31, 2018
	Due	Amount		Rate	Amount		Rate
		(dollars in thousands)
Owed to:
First Commonwealth Bank	2028	$	49,198	4.875% until June 1, 2023, then LIBOR + 1.845%	$	49,131	4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank	2033	49,044		5.50% until June 1, 2028, then LIBOR + 2.37%	48,990		5.50% until June 1, 2028, then LIBOR + 2.37%
First Commonwealth Capital Trust II	2034	30,929		LIBOR + 2.85%	30,929		LIBOR + 2.85%
First Commonwealth Capital Trust III	2034	41,238		LIBOR + 2.85%	41,238		LIBOR + 2.85%
Total		$	170,409		$	170,288

September 30, 2018 December 31, 2017
Due Amount Rate Amount Rate
(dollars in thousands)
Owed to:
First Commonwealth Bank 2028 $ 49,109
4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank 2033 $ 48,973
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 $ 170,249
$ 72,167

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

accrued and unpaid interest to the date of the redemption. Deferred issuance costs of ~~$630 thousand~~$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 ~~$471 thousand~~$0.5 million are being amortized on a straight-line basis over the term of the securities.

Note 1516 Revenue Recognition

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

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

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

The Company also evaluated whether it has any significant contract balances. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration resulting in a contract receivable or before payment is due resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the Company has already received payment from the customer. First Commonwealth’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as trust income which is based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company did not have any significant contract balances.

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Trust Income

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

Service Charges on Deposit Accounts

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Insurance and Retail Brokerage Commissions

Insurance income primarily consists of commissions received from execution of personal, business and health insurance policies when acting as an agent on behalf of insurance carriers. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Because the Company’s contracts with the insurance carriers are generally cancellable by either party, with minimal notice, insurance commissions are recognized during the policy period as received. Also, the majority of insurance commissions are received on a monthly basis during the policy ~~period,~~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 ~~$0.4~~$0.3 million per year, is recognized as received due to the immaterial amount.

Retail brokerage income primarily consists of commissions received on annuity and investment product sales through a third-party service provider. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy or the execution of an investment transaction. The Company does not earn a significant amount of trailer fees on annuity sales. However, after considering the factors impacting these trailer fees, such as the uncertainty of investor behavior and changes in the market value of assets, First Commonwealth determined that it would recognize trailing fees as received because it could not reasonably estimate an amount of future trailing commissions for which collection is probable. Commissions from the third-party service provider are received on a monthly basis based upon customer activity for the month. The fees are recognized monthly with a receivable until commissions are received from the third-party service provider the following month. Because the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does not control the services rendered to the customers, retail brokerage fees are presented net of related costs, including $2.3 million and $1.7 million in commission ~~expense.~~expense as of September 30, 2019 and 2018, respectively.

Card Related Interchange Income

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Income

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

Gains(losses) on sales of OREO

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~The impact on the condensed consolidated statements of income of adopting ASC 606 is outlined below:~~

For the Three Months Ended For the Nine Months Ended
September 30, 2018 September 30, 2018
As Reported Under Legacy GAAP Impact of ASC 606 As Reported Under Legacy GAAP Impact of ASC 606
(dollars in thousands)
Noninterest Income
Net securities gains $ —
$ —
$ —
$ 8,102
$ 8,102
$ —
Trust income 2,206
2,206
—
6,014
6,014
—
Service charges on deposit accounts 4,589
4,589
—
13,418
13,418
—
Insurance and retail brokerage commissions 1,872
2,531
(659 ) 5,560
7,272
(1,712 )
Income from bank owned life insurance 1,579
1,579
—
5,241
5,241
—
Gain on sale of mortgage loans 1,542
1,542
—
4,267
4,267
—
Gain on sale of other loans and assets 643
643
—
3,548
3,548
—
Card-related interchange income 5,044

5,044
—
14,929
14,929
—
Derivatives mark to market —
—
—
789
789
—
Swap fee income 528
528
—
1,115
1,115
—
Other income 1,754
2,033
(279 ) 5,125
5,877
(752 )
Total noninterest income 19,757
20,695
(938 ) 68,108
70,572
(2,464 )
Noninterest Expense
Salaries and employee benefits 26,553
27,212
(659 ) 77,580
79,292
(1,712 )
Net occupancy expense 4,341
4,341
—
12,932
12,932
—
Furniture and equipment expense 3,424
3,424
—
10,611
10,611
—
Data processing expense 2,853
2,983
(130 ) 7,764
8,067
(303 )
Advertising and promotion expense 1,200
1,200
—
3,185
3,185
—
Pennsylvania shares tax expense 1,248
1,248
—
3,398
3,398
—
Intangible amortization 817
817
—
2,430
2,430
—
Collection and repossession expense 630
630
—
2,060
2,060
—
Other professional fees and services 962
962
—
3,000
3,000
—
FDIC insurance 217
217
—
1,590
1,590
—
Loss on sale or write-down of assets 181
181
—
875
875
—
Litigation and operational losses 435
435
—
811
811
—
Merger and acquisition related 24
24
—
1,634
1,634
—
Other operating expenses 6,645
6,794
(149 ) 17,662
18,111
(449 )
Total noninterest expense $ 49,530
$ 50,468
(938 ) $ 145,532
$ 147,996
(2,464 )
Net Impact $ —
$ —

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income	$	2,325	$	2,206	$	6,221	$	6,014
Service charges on deposit accounts	4,954		4,589		13,792		13,418
Insurance and retail brokerage commissions	1,912		1,872		5,887		5,560
Card-related interchange income	5,629		5,044		15,800		14,929
Gain on sale of other loans and assets	181		335		861		726
Other income	937		928		2,789		2,800
Noninterest Income (in-scope of Topic 606)	15,938		14,974		45,350		43,447
Noninterest Income (out-of-scope of Topic 606)	6,241		4,783		17,607		24,661
Total Noninterest Income	$	22,179	$	19,757	$	62,957	$	68,108

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017
(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income $ 2,206
$ 2,147
$ 6,014
$ 5,275
Service charges on deposit accounts 4,589
4,803
13,418
13,858
Insurance and retail brokerage commissions 1,872
2,128
5,560
6,652
Card-related interchange income 5,044
4,780
14,929
13,873
Gain on sale of other loans and assets 335
181
726
542
Other income 928
1,238
2,800
3,116
Noninterest Income (in-scope of Topic 606) 14,974
15,277
43,447
43,316
Noninterest Income (out-of-scope of Topic 606) 4,783
4,513
24,661
12,310
Total Noninterest Income $ 19,757
$ 19,790
$ 68,108
$ 55,626

Note 1617 New Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Additionally, the FASB issued ASU No. 2018-01, "Leases (Topic 842)" in January 2018 and ASU No. 2018-11, "Leases - Targeted Improvements" in July 2018. Both of these ASU's provide certain improvements and optional practical expedients to Topic 842. Under this new guidance, all entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. First Commonwealth has elected the transition option provided in ASU No. 2018-11, which provides for the modified retrospective approach to be applied on January 1, 2019. We have established a lease implementation team, which includes members of finance, facilities, information technology and operations. The implementation team has analyzed data on leased assets, assessed the impact of the new standard on disclosures, processes and internal controls over financial reporting and evaluated the election of certain practical expedients. During the third quarter of 2018, the implementation of a third-party software was completed in order to assist with evaluating the impact of this ASU. The implementation team continues to validate data input into the third-party software as well as finalize disclosures and internal controls. This new standard will increase assets and liabilities for the right-of-use assets and associated lease liabilities but is not expected to have a material impact on First Commonwealth's financial condition or results of operations.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The Current Expected Credit Loss ("CECL") methodology requires the use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the Company as of January 1, 2020.

We have established a CECL implementation team, which includes members from the finance and credit areas, with oversight by the Chief Executive Officer, Chief Financial Officer and Chief Credit Officer. ~~During the third quarter,~~ Management completed the ~~implementation~~engagement of a ~~third~~3^rd party ~~software~~service provider to assist with this ~~ASU. Management is currently evaluating~~ASU during the third quarter of 2018. In the fourth quarter of 2018, a 3^rd party was engaged to assist with evaluation of data and methodologies related to this standard.

To date, management has completed methodologies, assumptions, inputs and processes related to the CECL model. During the fourth quarter of 2019, we will have our model validated by a 3^rd party, perform a full parallel run, and continue to refine the methodology, processes and internal controls.

The impact of adopting this ASU cannot be reasonably estimated until model validation and development of qualitative components are complete. The Company anticipates that an increase to the ~~amended guidance~~allowance for credit losses will be recognized upon

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

adoption. The estimated impact at adoption will depend on ~~First Commonwealth’s financial condition or results~~the composition, characteristics and quality of ~~operations.~~the loan portfolio as well as the economic environment and forecasts as of the adoption date.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment should be recognized for the amount by which the carrying

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships to better portray the economic results of risk management activities in its financial statements. The main provisions of this ASU update the hedge accounting model to expand the ability to hedge risk, reduce complexity, and ease certain documentation and assessment requirements. It also eliminates the requirement to separately measure and report hedge ineffectiveness, and generally requires the change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 22)" allowing a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act. This amendment also requires certain disclosures about the stranded tax effects, including disclosure of the policy for releasing income tax effects from accumulated other comprehensive income and the impact if the entity elected to reclassify the income tax effects or, if the entity did not elect to reclassify, a statement that the entity did not elect to reclassify. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted this ASU as of January 1, 2018. Adoption of this ASU did not have a material impact on First Commonwealth's financial condition or results of operations.

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

~~Note 17 Subsequent Event~~

On October 23, 2018, a share repurchase program was authorized by the Board of Directors for up to $25.0 million in shares of the Company’s common stock. Under this program, management is authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. Depending on market conditions and other factors, repurchases may be made at any time or from time to time, without prior notice. First Commonwealth may suspend or discontinue the program at any time.

Table of Contents

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018, and should be read in conjunction with the ~~Condensed~~ Consolidated Financial Statements and notes thereto included in this Form 10-Q.

Forward-Looking Statements

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

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

Explanation of Use of Non-GAAP Financial Measure

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe these non-GAAP financial measures provide information 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-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 ~~Condensed~~ Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on ~~pages~~page 52 and 5958 for the nine and three months ended September 30, ~~2018~~2019 and ~~2017~~2018, respectively.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Selected Financial Data

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(dollars in thousands, except per share data)												(dollars in thousands, except per share data)
Net Income	$	25,149		$	21,283		$	80,500		$	51,184		$	26,644		$	25,149		$	78,513		$	80,500
Per Share Data:
Basic Earnings per Share	$	0.25		$	0.22		$	0.81		$	0.54		$	0.27		$	0.25		$	0.80		$	0.81
Diluted Earnings per Share	0.25			0.22			0.81			0.54			0.27			0.25			0.80			0.81
Cash Dividends Declared per Common Share	0.09			0.08			0.26			0.24			0.10			0.09			0.30			0.26
Average Balance:
Total assets	$	7,662,029		$	7,377,373		$	7,495,490		$	7,158,451		$	8,050,052		$	7,662,029		$	7,972,438		$	7,495,490
Total equity	970,402			888,781			933,489			839,846			1,033,903			970,402			1,010,227			933,489
End of Period Balance:
Net loans ⁽¹⁾							$	5,620,323		$	5,344,771								$	6,069,814		$	5,620,323
Total assets							7,686,345			7,384,339									8,152,027			7,686,345
Total deposits							5,895,143			5,555,057									6,677,996			5,895,143
Total equity							972,931			894,301									1,039,030			972,931
Key Ratios:
Return on average assets	1.30		%	1.14		%	1.44		%	0.96		%	1.31		%	1.30		%	1.32		%	1.44		%
Return on average equity	10.28		%	9.50		%	11.53		%	8.15		%	10.22		%	10.28		%	10.39		%	11.53		%
Dividends payout ratio	36.00		%	36.36		%	32.10		%	44.44		%	37.04		%	36.00		%	37.50		%	32.10		%
Average equity to average assets ratio	12.67		%	12.05		%	12.45		%	11.73		%	12.84		%	12.67		%	12.67		%	12.45		%
Net interest margin	3.67		%	3.61		%	3.71		%	3.55		%	3.76		%	3.67		%	3.75		%	3.71		%
Net loans to deposits ratio							95.34		%	96.21		%							90.89		%	95.34		%

⁽¹⁾Includes loans held for sale.

Results of Operations

Nine Months EndedSeptember 30, 2019 Compared to Nine Months EndedSeptember 30, 2018 ~~Compared to~~ ~~Nine Months EndedSeptember 30, 2017~~

Net Income

For the nine months endedSeptember 30, ~~2018~~2019, First Commonwealth had net income of $~~80.5~~78.5 million, or $~~0.81~~0.80 diluted earnings per share, compared to net income of $~~51.2~~80.5 million, or $~~0.54~~0.81 diluted earnings per share, in the nine months endedSeptember 30, ~~2017~~2018. ~~Growth~~The decline in net income iswas primarily the result of $8.1 million in securities gains recognized in the first nine months of 2018 as a result of ~~increases in net interest income~~the successful sale and ~~noninterest income, as well as a decrease in noninterest expense, offset by an increase in~~auction calls of the ~~provision for credit losses. Also contributing to the increase in net income is a decrease in the statutory Federal tax rate from 35% in 2017 to 21% in 2018.~~Company's remaining pooled trust preferred security portfolio.

For the nine months ended September 30, ~~2018,~~2019, the Company’s return on average equity was ~~11.53%~~10.39% and its return on average assets was ~~1.44%~~1.32%, compared to ~~8.15%~~11.53% and ~~0.96%~~1.44%, respectively, for the nine months ended September 30, ~~2017.~~2018.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $~~188.7~~202.4 million in the first nine months of ~~2018~~2019, compared to $~~172.4~~188.7 million for the same period in ~~2017~~2018. This increase was due to both growth in average interest earning assets of ~~$302.6~~$416.5 million and a 384 basis point increase in the ~~yield~~net interest margin, on ~~interest earning assets.~~a fully taxable equivalent basis. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at ~~73%~~76% and ~~75%~~73% for the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.75% and 3.71% for the nine months ended September 30, 2019 and ~~3.55%~~September 30, 2018, respectively. The net interest margin for the nine months ended September 30, 2018 ~~and September 30, 2017, respectively. The 16 basis point increase in the net interest margin is attributable to both~~included a

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

3 basis point benefit from the recognition of $1.5 million in previously unrecognized interest due to the sale of an impaired commercial loan and the successful sale and auction call of our pooled trust preferred portfolio. The increase in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing ~~liabilities, as well as three basis points attributable to the recognition of previously unrecognized interest income on assets that had previously been impaired.~~liabilities.

The taxable equivalent yield on interest-earning assets was ~~4.25%~~4.55% for the nine months endedSeptember 30, ~~2018~~2019, an increase of 3830 basis points compared to the ~~3.87%~~4.25% yield for the same period in ~~2017~~2018. This increase is largely due to ~~an increase in~~ the loan portfolio yield, which improved by 4137 basis points when compared to the nine months ended September 30, ~~2017.~~2018. Contributing to this increase was ~~an increase in~~ the yield on our adjustable and variable rate commercial loan ~~portfolios,~~portfolio, which increased 7237 basis points largely due to the Federal Reserve increasing ~~short term~~short-term interest rates ~~150 basis points since December 2016. The yield on the investment portfolio increased 15~~by 100 basis points in ~~comparison to~~2018. Since the ~~prior year. The majority~~end of ~~this increase can be attributed to investment security runoff being replaced with higher yielding investments. Additionally, three~~2018, the Federal Reserve has decreased the target Federal Funds rate by 50 basis ~~points~~points. While not reflected in the comparison of the ~~increase~~periods presented, such decreases in rates have the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing liabilities, and any additional rate decreases would be expected to have a similar effect. Additionally, the 2018 loan portfolio yield ~~on interest-earnings assets can be attributed to~~included a 3 basis point benefit from the recognition of ~~$1.5~~$1.1 million inof previously unrecognized interest due to the sale of ~~one previously~~an impaired commercial ~~loan~~loan. The investment portfolio yield decreased 6 basis points in comparison to the prior year primarily due to a 4 basis point benefit in 2018 from the recognition of previously unrecognized interest as a result of the successful sale and auction call of our pooled trust preferred security portfolio. Investment portfolio purchases during the nine months ended September 30, ~~2018~~2019 have been primarily in ~~mortgage-related assets with approximate durations~~corporate securities, obligations of ~~30-64 months~~U.S. government agencies and ~~corporate securities~~obligations of other government-sponsored enterprises with durations of approximately five years and municipal securities with a duration of approximately ten years. ~~The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities at higher rates if interest rates rise.~~

The cost of interest-bearing liabilities increased to ~~0.71%~~1.08% for the nine months endedSeptember 30, ~~2018~~2019, from ~~0.42%~~0.71% for the same period in ~~2017~~2018, primarily due to an increase in the cost of short-term borrowings and an increase in ~~long term~~long-term debt ~~as a result of~~largely due to the issuance of $100 million of subordinated debt in the second quarter of 2018. Deposits acquired in our recent acquisitions, along with approximately $50 million of the subordinated debt proceeds, the maturity extension on $50.0 million of short-term borrowings and organic growth in consumer checking and savings deposits, contributed to a decline in average short-term borrowings of ~~$273.4~~$124.5 million for the nine months ended September 30, ~~2018~~2019 compared to the same period in ~~2017.~~2018. Higher market interest rates resulted in the cost of interest-bearing deposits increasing 2021 basis points and short-term borrowings increasing 6560 basis points in comparison to the same period last year. The impact of the subordinated debt on the cost of interest-bearing liabilities was 314 basis points for the nine months ended September 30, ~~2018.~~

~~For~~2019 compared to 3 basis points for the nine months endedSeptember 30, ~~2018~~,2018.

For the nine months ended September 30, 2019, changes in interest rates positively impacted net interest income by $~~7.1~~2.7 million when compared with the same period in ~~2017~~2018. The higher yield on interest-earning assets positively impacted net interest income by $~~18.3~~15.8 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $~~11.2~~13.1 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $~~9.2~~11.0 million in for the nine months endedSeptember 30, ~~2018~~2019, as compared to the same period in ~~2017~~2018. Higher levels of interest-earning assets resulted in an increase of $~~9.7~~14.0 million in interest income, and changes in the volume of interest-bearing liabilities increased interest expense by $~~0.5~~2.9 million, primarily due to an increase in ~~long term~~long-term borrowings as a result of the subordinated debt issued in May 2018. Average earning assets for the nine months ended September 30, ~~2018~~2019 increased ~~$302.6~~$416.5 million, or ~~4.7%~~6.1%, compared to the same period in ~~2017.~~2018. Average loans for the comparable period increased ~~$315.3~~$393.8 million, or ~~6.0%~~7.1%.

Net interest income also benefited from a $~~151.5~~148.0 million increase in average net free funds at September 30, ~~2018~~2019 as compared to September 30, ~~2017~~2018. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of ~~$89.2~~$81.3 million, or ~~6.7%~~5.7%, in noninterest-bearing demand deposit average balances. Average time deposits for the nine months endedSeptember 30, ~~2018~~2019 increased by $~~146.0~~148.6 million at higher costs compared to the comparable period in ~~2017~~2018, increasing interest expense by ~~$2.9~~$5.4 million. Increases in market interest rates negatively impacted interest expense by ~~$11.2~~$13.1 million, while changes in the mix of interest-bearing liabilities had a ~~$0.5~~$2.9 million negative impact.

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 ~~Condensed~~ Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the nine months ended September 30:


	2018		2017		2019		2018
	(dollars in thousands)				(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	214,312	$	184,710
Interest income per Consolidated Statements of Income					$	244,226	$	214,312
Adjustment to fully taxable equivalent basis	1,509		3,171		1,341		1,509
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	215,821		187,881		245,567		215,821
Interest expense	27,139		15,500		43,169		27,139
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	188,682	$	172,381	$	202,398	$	188,682

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis for the nine months ended September 30:


	2018							2017							2019							2018
	Average Balance			Income / Expense (a)		Yield or Rate		Average Balance			Income / Expense (a)		Yield or Rate		Average Balance			Income / Expense (a)		Yield or Rate		Average Balance			Income / Expense (a)		Yield or Rate
	(dollars in thousands)														(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks	$	5,068		$	109	2.88	%	$	12,838		$	97	1.01	%	$	5,591		$	181	4.33	%	$	5,068		$	109	2.88	%
Tax-free investment securities	67,694			1,559		3.08		67,202			1,865		3.71		67,158			1,557		3.10		67,694			1,559		3.08
Taxable investment securities	1,178,190			24,443		2.77		1,183,574			22,852		2.58		1,200,845			24,290		2.70		1,178,190			24,443		2.77
Loans, net of unearned income (b)(c)	5,541,600			189,710		4.58		5,226,320			163,067		4.17		5,935,427			219,539		4.95		5,541,600			189,710		4.58
Total interest-earning assets	6,792,552			215,821		4.25		6,489,934			187,881		3.87		7,209,021			245,567		4.55		6,792,552			215,821		4.25
Noninterest-earning assets:
Cash	92,517							90,072							91,954							92,517
Allowance for credit losses	(52,885		)					(51,493		)					(51,192		)					(52,885		)
Other assets	663,306							629,938							722,655							663,306
Total noninterest-earning assets	702,938							668,517							763,417							702,938
Total Assets	$	7,495,490						$	7,158,451						$	7,972,438						$	7,495,490
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,181,295		$	3,244	0.37	%	$	1,045,242		$	962	0.12	%	$	1,272,065		$	5,511	0.58	%	$	1,181,295		$	3,244	0.37	%
Savings deposits (d)	2,446,013			5,884		0.32		2,353,186			2,905		0.17		2,524,703			10,906		0.58		2,446,013			5,884		0.32
Time deposits	718,164			5,511		1.03		572,128			2,644		0.62		866,746			10,881		1.68		718,164			5,511		1.03
Short-term borrowings	614,103			7,387		1.61		887,463			6,373		0.96		489,562			8,075		2.21		614,103			7,387		1.61
Long-term debt	135,368			5,113		5.05		85,843			2,616		4.07		210,353			7,796		4.96		135,368			5,113		5.05
Total interest-bearing liabilities	5,094,943			27,139		0.71		4,943,862			15,500		0.42		5,363,429			43,169		1.08		5,094,943			27,139		0.71
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,426,566							1,337,328							1,507,826							1,426,566
Other liabilities	40,492							37,415							90,956							40,492
Shareholders’ equity	933,489							839,846							1,010,227							933,489
Total Noninterest-Bearing Funding Sources	2,400,547							2,214,589							2,609,009							2,400,547
Total Liabilities and Shareholders’ Equity	$	7,495,490						$	7,158,451						$	7,972,438						$	7,495,490
Net Interest Income and Net Yield on Interest-Earning Assets				$	188,682	3.71	%				$	172,381	3.55	%				$	202,398	3.75	%				$	188,682	3.71	%


(a)	Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the nine months ended September 30, ~~2018~~2019 and ~~the 35% federal income tax statutory rate for the nine months ended September 30, 2017.~~2018.


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


(c)	Loan income includes loan fees earned.


(d)	Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the nine months endedSeptember 30, 2019 compared with September 30, 2018 ~~compared with~~ ~~September 30, 2017~~:


	Analysis of Year-to-Year Changes in Net Interest Income									Analysis of Year-to-Year Changes in Net Interest Income
	Total Change			Change Due To Volume			Change Due To Rate (a)			Total Change			Change Due To Volume			Change Due To Rate (a)
	(dollars in thousands)									(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	12		$	(59	)	$	71		$	72		$	11		$	61
Tax-free investment securities	(306		)	14			(320		)	(2		)	(12		)	10
Taxable investment securities	1,591			(104		)	1,695			(153		)	469			(622		)
Loans	26,643			9,833			16,810			29,829			13,491			16,338
Total interest income (b)	27,940			9,684			18,256			29,746			13,959			15,787
Interest-bearing liabilities:
Interest-bearing demand deposits	2,282			122			2,160			2,267			251			2,016
Savings deposits	2,979			118			2,861			5,022			188			4,834
Time deposits	2,867			677			2,190			5,370			1,145			4,225
Short-term borrowings	1,014			(1,963		)	2,977			688			(1,500		)	2,188
Long-term debt	2,497			1,508			989			2,683			2,832			(149		)
Total interest expense	11,639			462			11,177			16,030			2,916			13,114
Net interest income	$	16,301		$	9,222		$	7,079		$	13,716		$	11,043		$	2,673


(a)	Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.


(b)	Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.

Provision for Credit Losses

The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed for probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.

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


	2018				2017					2019				2018
	Dollars		Percentage		Dollars			Percentage		Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)									(dollars in thousands)
Commercial, financial, agricultural and other	$	1,414	13	%	$	(10,874	)	(384	)%	$	2,525	26	%	$	1,414	13	%
Real estate construction	144		1		294			10		250		2		144		1
Residential real estate	1,607		15		1,063			38		375		4		1,607		15
Commercial real estate	4,602		42		10,633			375		2,183		23		4,602		42
Loans to individuals	3,265		29		1,718			61		4,305		45		3,265		29
Total	$	11,032	100	%	$	2,834		100	%	$	9,638	100	%	$	11,032	100	%

The provision for credit losses for the nine months endedSeptember 30, ~~2018increased~~2019decreased in comparison to the nine months endedSeptember 30, ~~2017~~2018 by ~~$8.2 million~~.$1.4 million. The level of provision expense in the first nine months of 2019 is primarily a result of $7.4 million in net charge-offs, growth in the loan portfolio and an increase in the qualitative reserves as a result of a higher probability of slightly less favorable economic conditions.

The level of provision expense in the first nine months of 2018 is was primarily a result of a $1.2 million increase in specific reserves for two commercial real estate loans and a $2.2 million charge-off for another commercial real estate loan. ~~The increase in~~Also impacting the provision ~~for commercial, financial, agricultural and other loans is related to a $2.8 million specific reserve for one borrower. The provision expense for loans to individuals is a result of~~was $2.9 million in net charge-offs ~~recognized during the~~ ~~nine months ended~~ ~~September 30, 2018, with $1.6 million of the charge-offs~~ related to indirect auto loans and $0.9 million to personal lines of credit. The majority of the provision expense for the residential real estate category can be attributed to growth in the portfolio in comparison to December 31, 2017.

~~The level of provision expense in the first nine months of 2017 is primarily due to net charge-offs in the~~ loans to individuals and commercial, financial, agricultural and other categories, as well as a $1.0 million decrease in specific reserves related to nonperforming loans. Net charge-offs in the loans to individual category totaled $2.8 million for the nine months endedindividuals.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

September 30, 2017, with $1.9 million related to indirect auto loans and $0.7 million to personal lines of credit. Net charge-offs in the commercial, financial, agricultural and other category totaled $2.0 million for the same period. The level of provision expense for the commercial, financial, agricultural and other category was impacted by a decline in outstanding balances, while growth in commercial real estate loans contributed to an increase in provision expense for that loan type. Additionally, the provision expense for both of these categories was impacted by the Company's periodic assessment of the allowance for loan loss methodology, the current lending environment, and associated risks for each portfolio, which resulted in charges to certain qualitative factors, such as collateral recovery rates and vacancy rates.

The allowance for credit losses was $~~50.7~~50.0 million, or ~~0.90%~~0.82%, of total loans outstanding and ~~0.99%~~0.90% of total originated loans outstanding at September 30, ~~2018~~2019, compared to $~~48.3~~47.8 million, or ~~0.89%~~0.83%, and ~~0.96%~~0.91%, respectively, at December 31, ~~2017~~2018 and $~~48.2~~50.7 million, or 0.90%, and ~~0.97%~~0.99%, respectively, at September 30, ~~2017~~2018. Nonperforming loans as a percentage of total loans ~~decreased~~increased to ~~0.70%~~0.58% at September 30, ~~2018~~2019 from ~~0.78%~~0.55% at December 31, ~~2017~~2018 and ~~0.72%~~0.70% as of September 30, ~~2017~~2018. The allowance to nonperforming loan ratio was ~~127.35%~~141.64%, ~~114.34%~~149.14% and ~~124.16%~~127.35% as of September 30, 2019, December 31, 2018 and September 30, 2018, ~~December 31, 2017~~ ~~and~~ ~~September 30, 2017~~, respectively.

Below is an analysis of the consolidated allowance for credit losses for the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018 and the year-ended December 31, ~~2017~~2018:


	September 30, 2018		September 30, 2017		December 31, 2017		September 30, 2019		September 30, 2018		December 31, 2018
	(dollars in thousands)						(dollars in thousands)
Balance, beginning of period	$	48,298	$	50,185	$	50,185	$	47,764	$	48,298	$	48,298
Loans charged off:
Commercial, financial, agricultural and other	3,536		5,776		6,634		2,185		3,536		5,294
Real estate construction	—		—		—		—		—		—
Residential real estate	1,006		980		1,287		663		1,006		1,313
Commercial real estate	2,411		95		340		1,681		2,411		3,930
Loans to individuals	3,336		3,202		4,248		4,058		3,336		4,576
Total loans charged off	10,289		10,053		12,509		8,587		10,289		15,113
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	702		3,820		3,901		233		702		788
Real estate construction	99		470		470		158		99		141
Residential real estate	297		304		371		236		297		361
Commercial real estate	123		210		278		160		123		153
Loans to individuals	484		406		515		433		484		605
Total recoveries	1,705		5,210		5,535		1,220		1,705		2,048
Net credit losses	8,584		4,843		6,974		7,367		8,584		13,065
Provision charged to expense	11,032		2,834		5,087		9,638		11,032		12,531
Balance, end of period	$	50,746	$	48,176	$	48,298	$	50,035	$	50,746	$	47,764

Noninterest Income

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



	2019			2018		$ Change			% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	6,221		$	6,014	$	207		3	%
Service charges on deposit accounts	13,792			13,418		374			3
Insurance and retail brokerage commissions	5,887			5,560		327			6
Income from bank owned life insurance	4,408			5,241		(833		)	(16	)
Card-related interchange income	15,800			14,929		871			6
Swap fee income	1,634			1,115		519			47
Other income	5,356			5,125		231			5
Subtotal	53,098			51,402		1,696			3
Net securities gains	15			8,102		(8,087		)	(100	)
Gain on sale of mortgage loans	6,101			4,267		1,834			43
Gain on sale of other loans and assets	3,831			3,548		283			8
Derivatives mark to market	(88		)	789		(877		)	(111	)
Total noninterest income	$	62,957		$	68,108	$	(5,151	)	(8	)%

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~Noninterest Income~~

~~The following table presents the components of noninterest income for the~~ ~~nine months endedSeptember 30~~:

2018 2017 $ Change % Change
(dollars in thousands)
Noninterest Income:
Trust income $ 6,014
$ 5,275
$ 739
14 %
Service charges on deposit accounts 13,418
13,858
(440 ) (3 )
Insurance and retail brokerage commissions 5,560
6,652
(1,092 ) (16 )
Income from bank owned life insurance 5,241
4,213
1,028
24
Card-related interchange income 14,929
13,873
1,056
8
Swap fee income 1,115
458
657
143
Other income 5,125
5,674
(549 ) (10 )
Subtotal 51,402
50,003
1,399
3
Net securities gains 8,102
695
7,407
1,066
Gain on sale of mortgage loans 4,267
3,710
557
15
Gain on sale of other loans and assets 3,548
1,267
2,281
180
Derivatives mark to market 789
(49 ) 838
(1,710 )
Total noninterest income $ 68,108
$ 55,626
$ 12,482
22 %

~~Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market,~~ ~~increased$1.4 million~~ ~~for the first~~ ~~nine~~ ~~months of~~ ~~2018~~ ~~compared to~~ ~~2017~~. Income from bank owned life insurance increased $1.0 million, primarily due to $0.9 million death claim benefits recognized in the nine months ended September 30, 2018. Card-related interchange income increased $1.1 million during the first nine months of 2018 compared to 2017 due to growth in customer accounts and transactions, including $0.4 million which is attributable to the DCB acquisition. Trust income increased $0.7 million, of which $0.2 million can be attributed to accounts obtained in the DCB acquisition. Swap fee income increased $0.7 million during the first nine months compared to the same period in the prior year due to an increase in the number of interest rate swaps entered into for our commercial loan customers. Insurance and retail brokerage commissions decreased by $1.1 million as a result of $1.7 million in producer commission expense that is netted against revenue in 2018 but was included as salary expense in 2017. This change is a result of Topic 606, the new revenue recognition standard that was adopted January 1, 2018.

Total noninterest income for the nine months endedSeptember 30, ~~2018~~ ~~increased $12.5~~2019 decreased $5.2 million in comparison to the nine months endedSeptember 30, ~~2017~~2018. The most significant ~~change, other than the~~ changes ~~noted above, includes a $7.4~~include an $8.1 million ~~increase~~decline in net securities gains resulting from the redemption ~~of two of our pooled trust preferred securities~~ and ~~the~~ sale of the ~~remaining~~remainder of the pooled trust ~~preferred~~securities portfolio during the second quarter of 2018, a ~~$2.3~~$0.9 million ~~increase in the gain on sale of loans and other assets primarily due to a $1.2 million gain recognized on the sale of a restructured commercial loan, and a $0.8 million increase~~decrease in the mark to market adjustment on interest rate swaps entered into for our commercial loan ~~customers. This adjustment does not reflect a realized gain on the swaps, but rather relates~~customers and an $0.8 million decline in income from bank owned life insurance due to a ~~change~~$0.7 million death claim benefit recognized in ~~fair value due to movements~~the nine months ended September 30, 2018. Partially offsetting these decreases is a $1.8 million increase in ~~corporate bond spreads and swap rates. Gain~~the gain on sale of mortgage loans ~~increased $0.6 million as a result of continued~~due to growth in our mortgage lending ~~area.~~area, a $0.9 million increase in card-related interchange income and a $0.5 million increase in swap fee income as a result of growth in interest rate swaps entered into for our commercial customers.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

Noninterest Expense

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


	2018		2017		$ Change			% Change		2019		2018		$ Change			% Change
	(dollars in thousands)									(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	77,580	$	74,933	$	2,647		4	%	$	83,205	$	77,580	$	5,625		7	%
Net occupancy expense	12,932		11,597		1,335			12
Furniture and equipment expense	10,611		9,753		858			9
Data processing expense	7,764		6,659		1,105			17
Advertising and promotion expense	3,185		2,735		450			16
Pennsylvania shares tax expense	3,398		3,070		328			11
Net occupancy										13,878		12,932		946			7
Furniture and equipment										11,396		10,611		785			7
Data processing										7,988		7,764		224			3
Advertising and promotion										3,611		3,185		426			13
Pennsylvania shares tax										3,365		3,398		(33		)	(1	)
Intangible amortization	2,430		2,262		168			7		2,364		2,430		(66		)	(3	)
Collection and repossession expense	2,060		1,342		718			54
Collection and repossession										1,656		2,060		(404		)	(20	)
Other professional fees and services	3,000		3,355		(355		)	(11	)	2,755		3,000		(245		)	(8	)
FDIC insurance	1,590		2,466		(876		)	(36	)	1,164		1,590		(426		)	(27	)
Other operating expenses	17,662		17,212		450			3
Other operating										19,040		17,662		1,378			8
Subtotal	142,212		135,384		6,828			5		150,422		142,212		8,210			6
Loss on sale or write-down of assets	875		1,486		(611		)	(41	)	1,398		875		523			60
Merger and acquisition related	1,634		10,412		(8,778		)	(84	)%	3,772		1,634		2,138			131
Litigation and operational losses	811		1,107		(296		)	(27	)%	1,264		811		453			56
Total noninterest expense	$	145,532	$	148,389	$	(2,857	)	(2	)%	$	156,856	$	145,532	$	11,324		8	%

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $~~6.8~~8.2 million, or 5%6%, for the nine months endedSeptember 30, ~~2018~~2019 compared to the same period in ~~2017~~2018. Contributing to the higher expenses in ~~2018~~2019 is a ~~$2.6~~$5.6 million increase in salaries and employee benefits as a result of a higher number of full-time equivalent employees, ~~due to the DCB and Garfield acquisitions,~~ annual merit increases and ~~higher incentive compensation.~~a $2.7 million increase in hospitalization expense. The higher number of employees is primarily a result of the acquisition of ~~DCB~~14 branches from Santander in ~~April 2017 and~~September 2019, Garfield in May ~~2018. These~~2018 and continued expansion of our mortgage and commercial banking businesses. The Santander and Garfield acquisitions also accounted for ~~$0.5 million of the $1.3 million increase in net occupancy expense, $0.1~~$0.3 million of the $0.9 million increase in net occupancy expense and $0.3 million of the $0.8 million increase in furniture and equipment ~~expense and all of the $0.2 million increase in intangible amortization. The most significant items~~expense. Expenses contributing to the ~~$0.5 million~~ increase in other operating expense ~~includes a decrease~~include checkbook printing, travel and higher out of ~~$0.4 million in unfunded commitment reserve expense in 2018 as compared to 2017.~~state financial institution tax. Collection and repossession expense ~~increased $0.7~~decreased $0.4 million due to costs related to several OREO ~~properties.~~

~~Total noninterest expense~~properties that occurred in 2018 with no similar activity in 2019. FDIC insurance decreased ~~by $2.9~~$0.4 million ~~or 2%, for the~~ ~~nine months ended~~ ~~September 30, 2018 compared~~in comparison to the ~~same~~prior period as a result of a $0.6 million assessment credit received in ~~2017.~~the third quarter of 2019. This credit is a result of the FDIC deposit insurance fund reaching the required minimum reserve ratio. The ~~decrease is mainly~~company has $1.3 million in remaining credits that will offset FDIC expense in future quarters.

Loss on sale or write-down of assets increased $0.5 million due to a ~~decrease~~$0.5 million write-down of ~~$8.8 million in merger~~an OREO property. Merger and acquisition ~~expense.~~related expenses increased $2.1 million due to the completion of the acquisition of 14 branches from Santander.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Income Tax

The provision for income taxes ~~decreased~~increased$~~4.2~~0.8 million for the nine months endedSeptember 30, ~~2018~~2019, compared to the corresponding period in ~~2017~~2018. ~~Despite a~~ ~~$25.1 million~~ ~~increase in the level of~~While income before taxes decreased in comparison to the ~~lower provision for~~prior year, the effective tax rate increased 40 basis points due to the $0.8 million decrease in tax-free income ~~taxes can be attributed to~~from bank owned life insurance as well as certain deduction limitations included in the Tax Cuts and Jobs Act passed in December ~~2017, which decreased the statutory Federal tax rate from 35% to 21%.~~2017.

We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018.

We generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income. Additionally, the nine months ended September 30, 2018, included a $0.6 million ~~further~~reduction in tax expense due to an adjustment to the deferred tax asset adjustment ~~initially~~ recorded in the fourth quarter of 2017 ~~due to~~as a result of the reduction in the statutory tax rate. These provided for an annual effective tax rate of ~~19.1%~~19.5% and ~~30.5%~~19.1% for the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018, respectively.

As of September 30, ~~2018~~2019, our deferred tax assets totaled $~~26.5~~16.4 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

Results of Operations

Three Months Ended September 30, ~~2018~~2019 Compared to Three Months Ended September 30, ~~2017~~

2018

Net Income

For the three months ended September 30, ~~2018,~~2019, First Commonwealth had net income of $26.6 million, or $0.27 diluted earnings per share, compared to net income of $25.1 million, or $0.25 diluted earnings per share, ~~compared to net income of $21.3 million, or $0.22 diluted earnings per share,~~ in the three months ended September 30, ~~2017. Growth~~2018. The increase in net income iswas primarily the result of an increase in net interest income and noninterest income offset by ~~increases~~an increase in noninterest ~~expense and the provision for credit losses. Also contributing to the increase in net income is a decrease in the statutory Federal tax rate from 35% in 2017 to 21% in 2018.~~expense.

For the three months ended September 30, ~~2018,~~2019, the Company’s return on average equity was ~~10.28%~~10.22% and its return on average assets was ~~1.30%~~1.31%, compared to ~~9.50%~~10.28% and ~~1.14%~~1.30%, respectively, for the three months ended September 30, ~~2017.~~2018.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was ~~$64.3~~$68.9 million in the third quarter of ~~2018,~~2019, compared to ~~$60.7~~$64.3 million for the same period in ~~2017.~~2018. This increase was due to both growth in average interest earning assets of ~~$282.3~~$322.5 million and a 349 basis point increase in the ~~yield on~~net interest ~~earning assets.~~margin. Net interest income comprises athe majority of our operating revenue (net interest income before provision expense plus noninterest income), at 76% and ~~75%~~76% for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

The net interest margin, on a fully taxable equivalent basis, was ~~3.67%~~3.76% and ~~3.61%~~3.67% for the three months ended September 30, ~~2018~~2019 and September 30, ~~2017,~~2018, respectively. The ~~6 basis point~~ increase in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The taxable equivalent yield on interest-earning assets was ~~4.30%~~4.53% for the three months ended September 30, ~~2018,~~2019, an increase of 3423 basis points compared to the ~~3.96%~~4.30% yield for the same period in ~~2017.~~2018. This increase is largely due to an increase in the loan portfolio yield, which improved by 3827 basis points when compared to the three months ended September 30, ~~2017.~~2018. Contributing to this increase was an increase in the yield on our adjustable and variable rate commercial loan ~~portfolios,~~portfolio, which increased 6816 basis points largely due to the Federal Reserve increasing ~~short term~~short-term interest rates ~~150~~during 2018. Since the end of 2018, the Federal Reserve has decreased the target Federal Funds rate by 50 basis ~~points since December 2016.~~points. While not reflected in the comparison of the periods presented, such decreases in rates have the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing liabilities, and any additional rate decreases would be expected to have a similar effect. The yield on the investment portfolio ~~increased 11~~decreased 15 basis points in comparison to the prior year. ~~This increase can be attributed to investment security runoff being replaced with higher yielding investments.~~ Investment portfolio purchases during the three months ended September 30, ~~2018~~2019 have been primarily in ~~mortgage-related assets~~U.S. Agency securities with ~~approximate~~ durations of ~~30-64 months. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities at higher rates if interest rates rise.~~approximately five years.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The cost of interest-bearing liabilities increased to ~~0.84%~~1.05% for the three months ended September 30, ~~2018,~~2019, from ~~0.46%~~0.84% for the same period in ~~2017,~~2018, primarily due to ~~a change in the mix and~~ an increase in the cost of short-term borrowings and an increase in long-term ~~debt.~~debt largely due to the issuance of $100 million of subordinated debt in the second quarter of 2018. Deposits acquired in our recent acquisitions, along with approximately $50 million ~~in proceeds from~~of the ~~issuance of~~ subordinated debt ~~as well as~~proceeds, the maturity extension on $50.0 million of short-term borrowings and organic growth in consumer checking and savings deposits, contributed to a decline in average short-term borrowings of ~~$260.3~~$246.6 million for the three months ended September 30, ~~2018~~2019 compared to the same period in ~~2017.~~2018. Higher market interest rates resulted in the cost of interest-bearing deposits increasing 17 basis points and short-term borrowings increasing 6518 basis ~~points.~~points in comparison to the same period last year. The ~~issuance~~impact of ~~$100 million in~~the subordinated debt ~~in May 2018 had a 7 basis point impact~~ on the cost of interest-bearing liabilities was 14 basis points for the three months ended September 30, 2019 compared to 7 basis points for the three months ended September 30, 2018.

For the three months ended September 30, ~~2018,~~2019, changes in interest rates positively impacted net interest income by ~~$1.3~~$0.4 million when compared with the same period in ~~2017.~~2018. The higher yield on interest-earning assets positively impacted net interest income by ~~$5.9~~$3.5 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by ~~$4.6~~$3.0 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by ~~$2.3~~$4.1 million in the three months ended September 30, ~~2018,~~2019, as compared to the same period in ~~2017.~~2018. Higher levels of interest-earning assets resulted in an increase of ~~$3.0~~$4.2 million in interest income ~~and~~while changes in the volume ~~and mix~~ of interest-bearing liabilities ~~increased~~had a minimal impact on interest ~~expense by $0.7 million, primarily as the result of an increase in long-term debt offset by a decline~~

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~in short-term borrowings.~~expense. Average earning assets for the three months ended September 30, ~~2018~~2019 increased ~~$282.3~~$322.5 million, or ~~4.2%~~4.6%, compared to the same period in ~~2017.~~2018. Average loans for the comparable period increased ~~$258.6~~$385.4 million, or ~~4.8%~~6.8%. Loans acquired with of the Santander branch acquisition contributed $26.1 million to the increase in average loans during the third quarter 2019.

Net interest income also benefited from a ~~$140.4~~$167.6 million increase in average net free funds at September 30, ~~2018~~2019 as compared to September 30, ~~2017.~~2018. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest ~~components~~component of the increase in net free funds was an increase of ~~$54.9~~$112.5 million, or ~~3.9%~~7.8%, in noninterest-bearing demand deposit average balances and an increase of $81.6 million, or 9.2%, in average shareholders' equity. The increase in deposits is largely impacted by deposits acquired from the acquisition of Garfield in May of 2018. Additionally, averagebalances. Average time deposits for the three months ended September 30, ~~2018~~2019 increased by ~~$224.0~~$76.8 million at higher costs compared to the comparable period in ~~2017, decreasing net~~2018, increasing interest ~~income~~expense by ~~$1.4~~$1.2 million. Increases in market interest rates negatively impacted interest expense by ~~$4.6 million.~~$3.0 million, while changes in the mix of interest-bearing liabilities had a minimal impact. Deposits acquired at closing of the Santander branch acquisition contributed $123.0 million to the increase in average deposits during the third quarter of 2019.


	2018		2017		2019		2018
	(dollars in thousands)				(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	74,873	$	65,411
Interest income per Consolidated Statements of Income					$	82,575	$	74,873
Adjustment to fully taxable equivalent basis	498		1,104		430		498
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	75,371		66,515		83,005		75,371
Interest expense	11,060		5,848		14,130		11,060
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	64,311	$	60,667	$	68,875	$	64,311

5958

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis for the three months ended September 30:


	2018							2017							2019							2018
	Average Balance			Income / Expense (a)		Yield or Rate		Average Balance			Income / Expense (a)		Yield or Rate		Average Balance			Income / Expense (a)		Yield or Rate		Average Balance			Income / Expense (a)		Yield or Rate
	(dollars in thousands)														(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks	$	2,188		$	39	7.07	%	$	8,520		$	30	1.40	%	$	9,033		$	81	3.56	%	$	2,188		$	39	7.07	%
Tax-free investment securities	67,669			520		3.05		68,191			631		3.67		65,463			504		3.05		67,669			520		3.05
Taxable investment securities	1,219,321			8,319		2.71		1,188,705			7,635		2.55		1,151,774			7,382		2.54		1,219,321			8,319		2.71
Loans, net of unearned income (b)(c)	5,657,390			66,493		4.66		5,398,815			58,219		4.28		6,042,822			75,038		4.93		5,657,390			66,493		4.66
Total interest-earning assets	6,946,568			75,371		4.30		6,664,231			66,515		3.96		7,269,092			83,005		4.53		6,946,568			75,371		4.30
Noninterest-earning assets:
Cash	95,666							94,880							93,740							95,666
Allowance for credit losses	(52,933		)					(50,478		)					(52,593		)					(52,933		)
Other assets	672,728							668,740							739,813							672,728
Total noninterest-earning assets	715,461							713,142							780,960							715,461
Total Assets	$	7,662,029						$	7,377,373						$	8,050,052						$	7,662,029
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,221,780		$	1,352	0.44	%	$	1,156,313		$	482	0.17	%	$	1,357,281		$	2,092	0.61	%	$	1,221,780		$	1,352	0.44	%
Savings deposits (d)	2,435,659			2,307		0.38		2,420,052			1,103		0.18		2,575,810			3,950		0.61		2,435,659			2,307		0.38
Time deposits	786,912			2,347		1.18		562,868			906		0.64		863,714			3,804		1.75		786,912			2,347		1.18
Short-term borrowings	569,666			2,603		1.81		829,954			2,427		1.16		323,041			1,620		1.99		569,666			2,603		1.81
Long-term debt	185,401			2,451		5.24		88,256			930		4.18		234,497			2,664		4.51		185,401			2,451		5.24
Total interest-bearing liabilities	5,199,418			11,060		0.84		5,057,443			5,848		0.46		5,354,343			14,130		1.05		5,199,418			11,060		0.84
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,447,948							1,393,024							1,560,478							1,447,948
Other liabilities	44,261							38,125							101,328							44,261
Shareholders’ equity	970,402							888,781							1,033,903							970,402
Total noninterest-bearing funding sources	2,462,611							2,319,930							2,695,709							2,462,611
Total Liabilities and Shareholders’ Equity	$	7,662,029						$	7,377,373						$	8,050,052						$	7,662,029
Net Interest Income and Net Yield on Interest-Earning Assets				$	64,311	3.67	%				$	60,667	3.61	%				$	68,875	3.76	%				$	64,311	3.67	%


(a)	Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the three months ended September 30, ~~2018~~2019 and ~~the 35% federal income tax statutory rate for the three months ended September 30, 2017.~~2018.


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


(c)	Loan income includes loan fees earned.


(d)	Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.

6059

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three months ended September 30, ~~2018~~2019 compared with September 30, ~~2017:~~2018:


	Analysis of Year-to-Year Changes in Net Interest Income									Analysis of Year-to-Year Changes in Net Interest Income
	Total Change			Change Due To Volume			Change Due To Rate (a)			Total Change			Change Due To Volume			Change Due To Rate (a)
	(dollars in thousands)									(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	9		$	(22	)	$	31		$	42		$	122		$	(80	)
Tax-free investment securities	(111		)	(5		)	(106		)	(16		)	(17		)	1
Taxable investment securities	684			197			487			(937		)	(461		)	(476		)
Loans	8,274			2,789			5,485			8,545			4,527			4,018
Total interest income (b)	8,856			2,959			5,897			7,634			4,171			3,463
Interest-bearing liabilities:
Interest-bearing demand deposits	870			28			842			740			150			590
Savings deposits	1,204			7			1,197			1,643			134			1,509
Time deposits	1,441			361			1,080			1,457			228			1,229
Short-term borrowings	176			(761		)	937			(983		)	(1,125		)	142
Long-term debt	1,521			1,024			497			213			648			(435		)
Total interest expense	5,212			659			4,553			3,070			35			3,035
Net interest income	$	3,644		$	2,300		$	1,344		$	4,564		$	4,136		$	428


(a)	Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.


(b)	Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.

Provision for Credit Losses

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


	2018					2017					2019					2018
	Dollars			Percentage		Dollars			Percentage		Dollars			Percentage		Dollars			Percentage
	(dollars in thousands)										(dollars in thousands)
Commercial, financial, agricultural and other	$	(580	)	(20	)%	$	(10,031	)	(826	)%	$	(17	)	(1	)%	$	(580	)	(20	)%
Real estate construction	238			8		200			16		(155		)	(6	)	238			8
Residential real estate	200			7		1,054			87		125			5		200			7
Commercial real estate	1,898			64		9,985			823		1,037			38		1,898			64
Loans to individuals	1,205			41		6			—		1,718			64		1,205			41
Total	$	2,961		100	%	$	1,214		100	%	$	2,708		100	%	$	2,961		100	%

The provision for credit losses for the three months ended September 30, ~~2018 increased~~2019 decreased in comparison to the three months ended September 30, ~~2017~~2018 by ~~$1.7~~$0.3 million. The increase in the provision expense related to commercial real estate loans is primarily due to an increase of $1.2 million in specific reserves for two commercial real estate loans. The increase related to loans to individuals is primarily due to net charge-offs of $0.5 million in indirect auto loans and $0.3 million in charge-offs related to personal lines of credit loans. The decrease in provision expense related to commercial, financial, agricultural and other loans can be attributed to a $0.9 million decrease in specific reserves as a result of an updated collateral valuation for one borrower.

~~The 2017 provision expense is primarily due to net charge-offs recognized during the quarter.~~ The level of provision expense ~~for~~in the ~~commercial, financial, agricultural and other category~~third quarter of 2019 is primarily a result of $3.7 million in net charge-offs.

The level of provision expense in the third quarter of 2018 was ~~impacted by~~primarily due to a ~~decline~~$1.2 million increase in ~~outstanding balances, while growth in~~specific reserves related to two commercial real estate loans ~~contributed to an increase~~and $3.5 million in ~~provision expense for that loan type. Additionally, the provision expense for both of these categories was impacted by the Company's periodic assessment of the allowance for loan loss~~net charge-offs.

6160

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~methodology, the current lending environment, and associated risks for each portfolio which resulted in changes to certain qualitative factors, such as collateral recovery rates and vacancy rates.~~

Below is an analysis of the consolidated allowance for credit losses for the three months ended September 30, ~~2018~~2019 and ~~2017~~2018 and the year-ended December 31, ~~2017:~~2018:


	September 30, 2018		September 30, 2017		December 31, 2017		September 30, 2019		September 30, 2018		December 31, 2018
	(dollars in thousands)						(dollars in thousands)
Balance, beginning of period	$	51,314	$	48,067	$	50,185	$	51,061	$	51,314	$	48,298
Loans charged off:
Commercial, financial, agricultural and other	2,582		499		6,634		791		2,582		5,294
Real estate construction	—		—		—		—		—		—
Residential real estate	277		361		1,287		383		277		1,313
Commercial real estate	—		35		340		1,382		—		3,930
Loans to individuals	1,080		1,024		4,248		1,574		1,080		4,576
Total loans charged off	3,939		1,919		12,509		4,130		3,939		15,113
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	66		184		3,901		62		66		788
Real estate construction	92		373		470		74		92		141
Residential real estate	51		85		371		17		51		361
Commercial real estate	36		60		278		81		36		153
Loans to individuals	165		112		515		162		165		605
Total recoveries	410		814		5,535		396		410		2,048
Net credit losses	3,529		1,105		6,974		3,734		3,529		13,065
Provision charged to expense	2,961		1,214		5,087		2,708		2,961		12,531
Balance, end of period	$	50,746	$	48,176	$	48,298	$	50,035	$	50,746	$	47,764

Noninterest Income

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


	2018		2017			$ Change			% Change		2019			2018		$ Change			% Change
	(dollars in thousands)										(dollars in thousands)
Noninterest Income:
Trust income	$	2,206	$	2,147		$	59		3	%	$	2,325		$	2,206	$	119		5	%
Service charges on deposit accounts	4,589		4,803			(214		)	(4	)	4,954			4,589		365			8
Insurance and retail brokerage commissions	1,872		2,128			(256		)	(12	)	1,912			1,872		40			2
Income from bank owned life insurance	1,579		1,472			107			7		1,540			1,579		(39		)	(2	)
Card related interchange income	5,044		4,780			264			6		5,629			5,044		585			12
Swap fee income	528		217			311			143		421			528		(107		)	(20	)
Other income	1,754		2,244			(490		)	(22	)	1,865			1,754		111			6
Subtotal	17,572		17,791			(219		)	(1	)	18,646			17,572		1,074			6
Net securities gains	—		92			(92		)	(100	)	9			—		9			N/A
Gain on sale of mortgage loans	1,542		1,418			124			9		2,599			1,542		1,057			69
Gain on sale of other loans and assets	643		503			140			28		970			643		327			51
Derivatives mark to market	—		(14		)	14			(100	)	(45		)	—		(45		)	N/A
Total noninterest income	$	19,757	$	19,790		$	(33	)	—	%	$	22,179		$	19,757	$	2,422		12	%

~~Noninterest~~Total noninterest income ~~excluding net securities gains,~~for the three months ended September 30, 2019 increased $2.4 million in comparison to the three months ended September 30, 2018. The most significant changes include a $1.1 million increase in the gain on sale of mortgage loans ~~and other assets and the derivatives mark~~primarily due to ~~market, decreased $0.2 million for the third quarter of 2018 compared to 2017. Income from bank owned life insurance~~growth in our mortgage lending area. Additionally, card related interchange income increased $0.6 million. The Santander branches, which were acquired on September 6, 2019, contributed $0.1 million ~~due to death claims received~~in noninterest income during the third quarter of ~~2018. Offsetting this increase was a $0.3 million decrease in insurance and retail brokerage commissions as a result of $0.7 million in producer commission expense which is netted against~~2019.

6261

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

revenue in 2018 but was included as salary expense in 2017. This change is a result of Topic 606, the new revenue recognition standard which was adopted January 1, 2018. Total noninterest income for the third quarter of 2018 remained flat in comparison to the third quarter of 2017.

Noninterest Expense

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


	2018		2017			$ Change			% Change		2019		2018		$ Change			% Change
	(dollars in thousands)										(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	26,553	$	26,169		$	384		1	%	$	28,674	$	26,553	$	2,121		8	%
Net occupancy expense	4,341		3,715			626			17
Furniture and equipment expense	3,424		3,342			82			2
Data processing expense	2,853		2,229			624			28
Advertising and promotion expense	1,200		941			259			28
Pennsylvania shares tax expense	1,248		1,093			155			14
Net occupancy											4,521		4,341		180			4
Furniture and equipment											3,904		3,424		480			14
Data processing											2,825		2,853		(28		)	(1	)
Advertising and promotion											1,140		1,200		(60		)	(5	)
Pennsylvania shares tax											1,189		1,248		(59		)	(5	)
Intangible amortization	817		844			(27		)	(3	)	865		817		48			6
Collection and repossession expense	630		402			228			57
Collection and repossession											649		630		19			3
Other professional fees and services	962		1,300			(338		)	(26	)	969		962		7			1
FDIC insurance	217		696			(479		)	(69	)	35		217		(182		)	(84	)
Other operating expenses	6,645		5,934			711			12
Other operating											5,928		6,645		(717		)	(11	)
Subtotal	48,890		46,665			2,225			5		50,699		48,890		1,809			4
Loss on sale or write-down of assets	181		167			14			8		152		181		(29		)	(16	)
Merger and acquisition related	24		(69		)	93			(135	)	3,738		24		3,714			15,475
Litigation and operational losses	435		598			(163		)	(27	)	308		435		(127		)	(29	)
Total noninterest expense	$	49,530	$	47,361		$	2,169		5	%	$	54,897	$	49,530	$	5,367		11	%

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased ~~$2.2~~$1.8 million, or 5%4%, for the three months ended September 30, ~~2018~~2019 compared to the same period in ~~2017.~~2018. Merger and acquisition related expenses totaled $3.7 million in the third quarter of 2019. Contributing to the higher expenses in ~~2018~~2019 is a ~~$0.4~~$2.1 million increase in salaries and employee benefits ~~resulting from~~as a result of a higher number of full-time equivalent employees, ~~due to the Garfield acquisitions,~~ annual merit increases and ~~higher incentive compensation. The Garfield acquisition also accounted for the $0.6~~a $0.8 million increase in ~~net occupancy expense and the $0.1 million increase in furniture and equipment~~hospitalization expense. The ~~most significant item contributing to~~higher number of employees is a result of the Santander branch acquisition in September 2019 as well as continued expansion of our mortgage and commercial banking businesses. Partially offsetting the increase is a $0.7 million ~~increase~~decrease in other operating expense, which is primarily due to a $0.5 million decrease in unfunded commitment expense. Operating expenses related to the Santander branches, which were acquired on September 6, 2019, resulted in $0.8 million in noninterest expense during the third quarter of 2019.

FDIC insurance decreased $0.2 million in comparison to the prior period as a result of a $0.6 million assessment credit received in the third quarter of 2019. This credit is a ~~$0.3~~result of the FDIC deposit insurance fund reaching the required minimum reserve ratio. The company has $1.3 million ~~increase~~ in remaining credits that will offset FDIC expense ~~related to interest rate lock derivatives on mortgage loans held for sale~~ in ~~2018 as compared to 2017.~~future quarters.

Total noninterest expense increased ~~by $2.2~~$5.4 million ~~or 5%,~~ for the three months ended September 30, ~~2018~~2019 compared to the same period in ~~2017, primarily due to an~~2018. Include in this increase ~~of $0.1~~is a $3.7 million increase in merger and acquisition expense.

The acquisition of Santander was completed in September 2019 with no similar activity in the third quarter of 2018.

Income Tax

The provision for income taxes ~~decreased $3.6~~increased $0.4 million for the three months ended September 30, ~~2018,~~2019, compared to the corresponding period in ~~2017.~~2018. The ~~lower provision can be attributed~~effective tax rate increased 20 basis points from 19.1% to 19.3% due to the ~~impact of~~increase in income before income taxes as well as certain deduction limitations included in the Tax Cuts and Jobs Act passed in December ~~2017, which decreased the statutory Federal tax rate from 35% to 21%. Partially offsetting the change in the federal tax rate was a $0.3 million increase in the level of income before taxes.~~2017.

We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the three months ended September 30, ~~2018~~2019 and ~~2017.~~2018.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

the first nine months of ~~2018, $98.1 million in liquidity was provided from~~2019, the ~~net proceeds of a $100 million subordinated debt note issued by First Commonwealth Bank, the Company's banking subsidiary. Additionally, the sale,~~ maturity and redemption of investment securities provided ~~$118.7~~$169.6 million in liquidity. ~~This~~These funds contributed to the liquidity ~~was~~ used to pay down of short-term borrowings, ~~by $119.7 million and also provided funds to~~ originate loans, purchase investment securities and fund depositor withdrawals. Additionally, in September 2019, $243.3 million in short-term borrowings were paid off with proceeds from the Santander branch acquisition.

We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland (“FRB”) and access to certificates of deposit through brokers.

We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of September 30, ~~2018~~2019, our maximum borrowing capacity under this program was $1.2 billion and as of that date there was $~~6.9~~4.7 million outstanding with an average weighted rate of ~~0.92%~~1.46% and an average original term of ~~295~~336 days. These deposits are part of a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.

An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program, which enables us to pledge certain loans that are not being used as collateral at the FHLB as collateral for borrowings at the FRB. At September 30, ~~2018~~2019, the borrowing capacity under this program totaled $~~806.6~~840.5 million and there were no amounts outstanding.

As of September 30, ~~2018~~2019, our maximum borrowing capacity at the FHLB of Pittsburgh was $~~1.6~~1.5 billion and as of that date amounts used against this capacity included $~~0.4~~0.1 billion in outstanding borrowings and no outstanding letters of credit.

We also have available unused federal funds lines with ~~five~~six correspondent banks. These lines have an aggregate commitment of ~~$195.0~~$205.0 million with ~~a $6.5~~$7.0 million outstanding balance as of September 30, ~~2018~~2019. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of ~~$509.3~~$488.4 million with no outstanding balance as of September 30, ~~2018.~~2019.

First Commonwealth Financial Corporation has an unsecured ~~$15.0~~$20 million line of credit with another financial institution. As of September 30, ~~2018,~~2019, there are no amounts outstanding on this line.

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



	September 30, 2019		December 31, 2018
	(dollars in thousands)
Noninterest-bearing demand deposits^(a)	$	1,657,507	$	1,466,213
Interest-bearing demand deposits^(a)	263,312		180,209
Savings deposits^(a)	3,867,034		3,401,354
Time deposits	890,143		850,216
Total	$	6,677,996	$	5,897,992


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

The level of deposits during any period is influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. ~~The following table shows a breakdown of the components of First Commonwealth’s deposits:~~

September 30, 2018 December 31, 2017
(dollars in thousands)
Noninterest-bearing demand deposits^(a)
$ 1,451,284
$ 1,416,771
Interest-bearing demand deposits^(a)
181,504
187,281
Savings deposits^(a)
3,453,461
3,361,840
Time deposits 808,894
614,813
Total $ 5,895,143
$ 5,580,705


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

During the first nine months of ~~2018,~~2019, total deposits increased ~~$314.4~~$780.0 million, with $470.8 million of ~~which $141.3~~that increase related to the acquisition of 14 branches from Santander. The acquisition provided for an additional $86.6 million ~~were obtained as part~~in noninterest-bearing deposits, $312.0 million in interest bearing demand and savings deposits and $72.2 million in time deposits. Exclusive of the ~~Garfield acquisition. Interest~~acquisition, interest bearing demand and savings deposits increased ~~$85.8~~$236.8 million, noninterest-bearing demand deposits increased ~~$34.5~~$104.7 million and time deposits ~~increased~~ ~~$194.1 million. The increase in time deposits is the result of an increase in core certificates of deposit of $202.1 million offset by a decline in CDARs deposits of $8.0~~decreased $32.3 million.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

Market Risk

The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The ratio of rate-sensitive assets to rate-sensitive liabilities repricing within a one-year period was ~~0.71~~0.80 and ~~0.73~~0.74 at September 30, ~~2018~~2019 and December 31, ~~2017~~2018, respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

The following is the gap analysis as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018:


	September 30, 2018																		September 30, 2019
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years			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)																		(dollars in thousands)
Loans	$	2,603,145		$	215,192		$	343,984		$	3,162,321		$	1,852,000		$	624,597		$	2,773,709		$	303,122		$	475,440		$	3,552,271		$	1,970,024		$	569,937
Investments	69,608			48,821			91,949			210,378			587,607			493,491			90,752			72,881			127,711			291,344			565,144			315,253
Other interest-earning assets	3,022			—			—			3,022			—			—			16,408			—			—			16,408			—			—
Total interest-sensitive assets (ISA)	2,675,775			264,013			435,933			3,375,721			2,439,607			1,118,088			2,880,869			376,003			603,151			3,860,023			2,535,168			885,190
Certificates of deposit	105,061			112,540			228,624			446,225			359,785			2,884			174,941			113,576			275,779			564,296			323,213			2,634
Other deposits	3,634,965			—			—			3,634,965			—			—			4,130,346			—			—			4,130,346			—			—
Borrowings	660,183			216			440			660,839			54,031			58,202			156,125			228			466			156,819			104,262			57,058
Total interest-sensitive liabilities (ISL)	4,400,209			112,756			229,064			4,742,029			413,816			61,086			4,461,412			113,804			276,245			4,851,461			427,475			59,692
Gap	$	(1,724,434	)	$	151,257		$	206,869		$	(1,366,308	)	$	2,025,791		$	1,057,002		$	(1,580,543	)	$	262,199		$	326,906		$	(991,438	)	$	2,107,693		$	825,498
ISA/ISL	0.61			2.34			1.90			0.71			5.90			18.30			0.65			3.30			2.18			0.80			5.93			14.83
Gap/Total assets	22.44		%	1.97		%	2.69		%	17.78		%	26.36		%	13.75		%	19.39		%	3.22		%	4.01		%	12.16		%	25.85		%	10.13		%


	December 31, 2017																		December 31, 2018
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years			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)																		(dollars in thousands)
Loans	$	2,662,906		$	214,139		$	359,790		$	3,236,835		$	1,633,236		$	521,478		$	2,659,890		$	291,134		$	439,098		$	3,390,122		$	1,802,605		$	569,659
Investments	79,484			45,983			84,001			209,468			525,391			434,919			81,971			60,654			99,288			241,913			612,407			468,916
Other interest-earning assets	8,668			—			—			8,668			—			—			3,013			—			—			3,013			—			—
Total interest-sensitive assets (ISA)	2,751,058			260,122			443,791			3,454,971			2,158,627			956,397			2,744,874			351,788			538,386			3,635,048			2,415,012			1,038,575
Certificates of deposit	139,920			71,178			165,083			376,181			235,037			3,595			116,469			116,664			276,101			509,234			338,148			2,834
Other deposits	3,549,121			—			—			3,549,121			—			—			3,581,563			—			—			3,581,563			—			—
Borrowings	779,875			244			495			780,614			4,468			10,302			794,206			218			443			794,867			54,080			57,932
Total interest-sensitive liabilities (ISL)	4,468,916			71,422			165,578			4,705,916			239,505			13,897			4,492,238			116,882			276,544			4,885,664			392,228			60,766
Gap	$	(1,717,858	)	$	188,700		$	278,213		$	(1,250,945	)	$	1,919,122		$	942,500		$	(1,747,364	)	$	234,906		$	261,842		$	(1,250,616	)	$	2,022,784		$	977,809
ISA/ISL	0.62			3.64			2.68			0.73			9.01			68.82			0.61			3.01			1.95			0.74			6.16			17.09
Gap/Total assets	23.50		%	2.58		%	3.81		%	17.12		%	26.26		%	12.90		%	22.32		%	3.00		%	3.34		%	15.98		%	25.84		%	12.49		%

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Net interest income change (12 months) for basis point movements of:
-200 -100 +100 +200
(dollars in thousands)
September 30, 2018 ($) $ (18,232 ) $ (7,161 ) $ 4,686
$ 9,509
September 30, 2018 (%) (6.78 )% (2.66 )% 1.74 % 3.54 %

December 31, 2017 ($) $ (15,810 ) $ (6,181 ) $ 5,856
$ 11,315
December 31, 2017 (%) (6.51 )% (2.55 )% 2.41 % 4.66 %



	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
September 30, 2019 ($)	$	(19,404	)	$	(8,065	)	$	3,996		$	6,551
September 30, 2019 (%)	(7.05		)%	(2.93		)%	1.45		%	2.38		%

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

The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates versus if rates remained unchanged and there are no changes in balance sheet categories.

Net interest income change (12 months) for basis point movements of:
-200 -100 +100 +200
(dollars in thousands)
September 30, 2018 ($) $ (39,065 ) $ (14,008 ) $ 9,373
$ 18,237
September 30, 2018 (%) (14.54 )% (5.21 )% 3.49 % 6.79 %

December 31, 2017 ($) $ (33,734 ) $ (16,356 ) $ 14,427
$ 27,815
December 31, 2017 (%) (13.90 )% (6.74 )% 5.94 % 11.46 %



	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
September 30, 2019 ($)	$	(42,480	)	$	(15,993	)	$	6,333		$	10,170
September 30, 2019 (%)	(15.42		)%	(5.81		)%	2.30		%	3.69		%

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

The analysis and model used to quantify the sensitivity of our net interest income becomes less meaningful in a decreasing 200 basis point scenario given the current interest rate environment. Results of the 100 and 200 basis point interest rate decline scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1%, with an assumed floor of zero in the model. In the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~2018, the cost of our interest-bearing liabilities averaged ~~0.71%~~1.08% and ~~0.42%~~0.71%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged ~~4.25%~~4.55% and ~~3.87%~~4.25%, respectively.

In 2015, the Company entered into a cash flow interest rate swap in which we extended the duration of $65.0 million of the $1.3 billion LIBOR based loans in our loan portfolio at that time into fixed interest rates for a period of four years. Please refer to Note 12 "Derivatives," for additional information on interest rate swaps.

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

Credit Risk

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

First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual impaired loans with a balance greater than $0.1 million, loss experience trends and other relevant factors.

First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled ~~$5.2~~$4.8 million at September 30, ~~2018~~2019 and is classified in "Other liabilities" on the ~~Condensed~~ Consolidated Statements of Financial Condition.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower, who could not obtain comparable terms from alternative financing sources. In the first nine months of ~~2018, 42~~2019, 26 loans totaling ~~$10.6~~$7.4 million were identified as troubled debt restructurings.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The balance of troubled debt restructured loans decreased ~~$0.9~~$1.4 million from December 31, ~~2017.~~2018. Changes during the first nine months of ~~2018 included~~2019 are largely the ~~addition~~result of ~~an $8.3 million loan and~~ the ~~sale~~pay-off of a ~~$5.4~~$6.0 million ~~loan in the~~ commercial, financial, agricultural and other ~~category. Additionally, one commercial real estate loan for $0.9 million paid off.~~relationship. Please refer to Note 9 “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.

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

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

Nonperforming loans, including loans held for sale, ~~decreased $2.4~~increased $3.3 million to ~~$39.8~~$35.3 million at September 30, ~~2018~~2019 compared to ~~$42.2~~$32.0 million at December 31, ~~2017.~~2018. During the nine months ended September 30, ~~2018, $29.2~~2019, $17.1 million of loans were moved to nonaccrual. Offsetting these additions ~~is the aforementioned sale of a $5.4 million loan, the sale of a $3.8 million nonaccrual loan,~~was the payoff of a ~~$5.2~~$6.0 million ~~nonaccrual loan, a $4.3~~commercial, financial, agricultural and other relationship, payoffs of $5.0 million ~~paydown of a nonaccrual loan,~~related to two commercial real estate loans, the ~~payoff of a $1.7 million accruing troubled debt restructured loan and the payoff~~charge-off of a $0.5 million ~~nonaccrual troubled debt restructured~~commercial, financial, agricultural and other loan and the $0.3 million charge-off of a commercial real estate loan.

The allowance for credit losses as a percentage of nonperforming loans was ~~127.35%~~141.64% as of September 30, ~~2018~~2019, compared to ~~114.34%~~149.14% at December 31, ~~2017~~2018, and ~~124.16%~~127.35% at September 30, ~~2017~~2018. The amount of specific reserves included in the allowance for nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific reserves of ~~$5.4~~$1.5 million and general reserves of ~~$45.4~~$48.5 million as of September 30, ~~2018~~2019. Specific reserves ~~increased $1.6~~decreased $0.1 million from December 31, ~~2017~~2018, and ~~$3.2~~decreased $3.8 million from September 30, ~~2017~~2018. The decrease from September 30, 2018 is primarily due to the ~~addition~~payoff of two commercial relationships totaling $14.3 million and the ~~two nonaccrual~~sale of a $3.7 million dollar commercial relationship. These three relationships ~~noted above.~~had total specific reserves of $9.0 million. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at September 30, ~~2018~~2019.

Criticized loans totaled ~~$141.6~~$128.7 million at September 30, ~~2018~~2019 and represented ~~2.5%~~2.1% of the loan portfolio. The level of criticized loans increased as of September 30, ~~2018~~2019 when compared to December 31, ~~2017,~~2018, by ~~$17.2~~$1.5 million, or ~~13.8%~~1.1%. ~~This increase can be attributed to the downgrade of two commercial real estate loans totaling $22.3 million.~~ Classified loans totaled ~~$50.1~~$50.7 million at September 30, ~~2018~~2019 compared to ~~$73.0~~$40.2 million at December 31, ~~2017, a decrease~~2018, an increase of ~~$22.9~~$10.5 million, or ~~31.4%~~26.0%. ~~This decrease~~The increase in criticized loans is primarily the result of the aforementioned changes in nonperforming loans. Delinquency on accruing loans for the same period ~~decreased~~increased$~~0.9~~4.1 million, or ~~6.8%~~39.6%, the majority of which are commercial, financial, agricultural and other loans and ~~residential~~commercial real estate loans.

The allowance for credit losses was $~~50.7~~50.0 million at September 30, ~~2018~~2019, or ~~0.90%~~0.82% of total loans outstanding, compared to ~~0.89%~~0.83% reported at December 31, ~~2017~~2018, and 0.90% at September 30, ~~2017~~2018. General reserves, or the portion of the allowance related to loans that were not specifically evaluated for impairment, as a percentage of non-impaired loans were 0.80% at September 30, 2019 compared to 0.80% at December 31, 2018 and 0.81% at September 30, 2018 ~~compared to 0.83% at~~ ~~December 31, 2017~~ ~~and 0.86% at~~ ~~September 30, 2017~~. General reserves as a percentage of non-impaired originated loans were 0.87% at September 30, 2019 compared to 0.88% at December 31, 2018 and 0.89% at September 30, ~~2018 compared to 0.90% at December 31, 2017 and 0.94% at September 30, 2017.~~2018.

6766

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	September 30,								December 31, 2017				September 30,								December 31, 2018
	2018				2017				December 31, 2017				2019				2018				December 31, 2018
	(dollars in thousands)												(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	17,921			$	14,943			$	19,455			$	16,227			$	17,921			$	11,509
Loans held for sale on a nonaccrual basis	—				—				—				—				—				—
Troubled debt restructured loans on nonaccrual basis	13,876				11,408				11,222				11,074				13,876				11,761
Troubled debt restructured loans on accrual basis	8,052				12,451				11,563				8,024				8,052				8,757
Total nonperforming loans	$	39,849			$	38,802			$	42,240			$	35,325			$	39,849			$	32,027
Loans past due 30 to 90 days and still accruing	$	10,702			$	8,580			$	11,401			$	12,387			$	10,702			$	8,760
Loans past due in excess of 90 days and still accruing	$	1,647			$	1,332			$	1,854			$	2,054			$	1,647			$	1,582
Other real estate owned	$	3,874			$	5,701			$	2,765			$	1,622			$	3,874			$	3,935
Loans held for sale at end of period	$	8,287			$	17,100			$	14,850			$	20,288			$	8,287			$	11,881
Portfolio loans outstanding at end of period	$	5,662,782			$	5,375,847			$	5,407,376			$	6,099,561			$	5,662,782			$	5,774,139
Average loans outstanding	$	5,541,600		(a)	$	5,226,320		(a)	$	5,278,511		(b)	$	5,935,427		(a)	$	5,541,600		(a)	$	5,582,651		(b)
Nonperforming loans as a percentage of total loans	0.70		%		0.72		%		0.78		%		0.58		%		0.70		%		0.55		%
Provision for credit losses	$	11,032		(a)	$	2,834		(a)	$	5,087		(b)	$	9,638		(a)	$	11,032		(a)	$	12,531		(b)
Allowance for credit losses	$	50,746			$	48,176			$	48,298			$	50,035			$	50,746			$	47,764
Net charge-offs	$	8,584		(a)	$	4,843		(a)	$	6,974		(b)	$	7,367		(a)	$	8,584		(a)	$	13,065		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.21		%		0.12		%		0.13		%		0.17		%		0.21		%		0.23		%
Provision for credit losses as a percentage of net charge-offs	128.52		%	(a)	58.52		%	(a)	72.94		%	(b)	130.83		%	(a)	128.52		%	(a)	95.91		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	0.90		%		0.90		%		0.89		%		0.82		%		0.90		%		0.83		%
Allowance for credit losses as a percentage of end-of-period originated loans outstanding	0.99		%		0.97		%		0.96		%		0.90		%		0.99		%		0.91		%
Allowance for credit losses as a percentage of nonperforming loans (d)	127.35		%		124.16		%		114.34		%		141.64		%		127.35		%		149.14		%


(a)	For the nine-month period ended.


(b)	For the twelve-month period ended.


(c)	Does not include loans held for sale.


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

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


	September 30, 2018				December 31, 2017				September 30, 2019				December 31, 2018
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)								(dollars in thousands)
Commercial, financial, agricultural and other	$	1,116,204	20	%	$	1,163,383	22	%	$	1,210,936	20	%	$	1,138,473	20	%
Real estate construction	298,395		5		248,868		5		420,281		7		358,978		6
Residential real estate	1,533,338		27		1,426,370		26		1,666,220		27		1,562,405		27
Commercial real estate	2,136,431		38		2,019,096		37		2,124,240		35		2,123,544		37
Loans to individuals	578,414		10		549,659		10		677,884		11		590,739		10
Total loans and leases net of unearned income	$	5,662,782	100	%	$	5,407,376	100	%	$	6,099,561	100	%	$	5,774,139	100	%

During the nine months endedSeptember 30, ~~2018~~,2019, loans increased ~~$255.4~~$325.4 million,, or ~~4.7%~~5.6%, compared to balances outstanding at December 31, ~~2017. Loans~~2018, of which $100.0 million was acquired ~~as part~~at the time of the ~~Garfield acquisition totaled $184.5 million.~~Santander branch acquisition. All loan categories reflect growth for the nine months ended September 30, ~~2018, except for~~2019, with residential real estate, loans to individuals and commercial, financial, agricultural providing a majority of the ~~commercial,~~growth. Commercial, financial, agricultural and other ~~category where new volumes were offset by several large payoffs.~~loans increased $72.5 million, or 6.4%, largely due to growth in direct lending in Pennsylvania and Ohio. Loans acquired from

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Santander accounted for $7.0 million of the growth in this category. Real estate construction loans increased $61.3 million, or 17.1%, with $55.2 million resulting from growth in commercial construction projects primarily in Pennsylvania and Ohio and $27.7 million due to growth in consumer construction. Residential real estate grew $103.8 million, primarily due to $71.8 million acquired as part of the Santander branch acquisition and continued growth in residential mortgages. Loans to individuals increased $87.1 million as a result of growth in the indirect portfolio and $11.8 million in loans acquired from Santander.

As indicated in the table below, commercial, financial, agricultural and other, residential real estate and commercial real estate loans represented a significant portion of the nonperforming loans as of September 30, ~~2018.~~2019. See discussions related to the provision for credit losses and loans for more information.


	For the Nine Months Ended September 30, 2018							As of September 30, 2018						For the Nine Months Ended September 30, 2019							As of September 30, 2019
	Net Charge- offs			% of Total Net Charge-offs		Net Charge- offs as a % of Average Loans (annualized)		Nonperforming Loans		% of Total Nonperforming Loans		Nonperforming Loans as a % of Total Loans		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)													(dollars in thousands)
Commercial, financial, agricultural and other	$	2,834		33.01	%	0.07	%	$	13,248	33.24	%	0.23	%	$	1,952		26.50	%	0.05	%	$	10,975	31.07	%	0.18	%
Real estate construction	(99		)	(1.15	)	—		—		—		—		(158		)	(2.14	)	—		—		—		—
Residential real estate	709			8.27		0.02		13,334		33.46		0.23		427			5.79		0.01		12,651		35.81		0.21
Commercial real estate	2,288			26.65		0.05		12,965		32.54		0.23		1,521			20.64		0.03		11,294		31.97		0.18
Loans to individuals	2,852			33.22		0.07		302		0.76		0.01		3,625			49.21		0.08		405		1.15		0.01
Total loans, net of unearned income	$	8,584		100.00	%	0.21	%	$	39,849	100.00	%	0.70	%	$	7,367		100.00	%	0.17	%	$	35,325	100.00	%	0.58	%

Net charge-offs for the nine months ended September 30, ~~2018~~2019 totaled ~~$8.6~~$7.4 million, compared to ~~$4.8~~$8.6 million for the nine months ended September 30, ~~2017.~~2018. The most significant charge-offs during the nine months ended September 30, ~~2018~~2019 included a ~~$4.3~~$1.3 million charge-off, a $0.5 million charge-off and a ~~$4.2~~$0.3 million charge-off for ~~two~~three commercial customers and ~~$2.9~~$3.6 million in net charge-offs related to loans to individuals, primarily indirect auto loans and personal credit lines. ~~During~~See discussions related to the ~~nine months ended~~ ~~September 30, 2017, the most significant charge-offs included partial charge-offs on~~provision for credit losses and loans for ~~two commercial borrowers of $1.9 million and $1.5 million. Offsetting those charge-offs were recoveries of $3.5 million on two commercial and industrial loans.~~more information.

Capital Resources

At September 30, ~~2018~~,2019, shareholders’ equity was ~~$972.9~~$1.0 billion, an increase of $63.6 million~~, an~~ ~~increase~~ of ~~$84.8 million~~ from December 31, ~~2017~~.2018. The increase was primarily the result ~~$80.5~~of $78.5 million in net income, ~~and $44.4~~$3.5 million in treasury stock sales and an increase of ~~which $41.6 million related to shares issued in relation to the Garfield acquisition. These increases were partially offset by~~ ~~$25.9 million~~ ~~of dividends paid to shareholders, a decrease of $13.1~~$17.4 million in the fair value of available for sale ~~investments~~investments. These increases were partially offset by $29.6 million of dividends paid to shareholders and ~~$1.1~~$6.2 million of common stock repurchases. Cash dividends declared per common share were ~~$0.26~~$0.30 and ~~$0.24~~$0.26 for the nine months endedSeptember 30, ~~2018~~2019 and ~~2017~~,2018, respectively.

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

First Commonwealth maintains capital to absorb unexpected losses. In order to provide assurance that our capital levels are adequate for our risk exposure, we test our capital position under several stress scenarios on an annual basis. This analysis is reviewed by our Board of Directors. Our most recent capital stress test was completed in September 2017.

Effective January 1, 2015, the Company became subject to the new regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. The most significant changes ~~include~~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 ~~new~~ rules ~~improve~~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% on a fully phased-in basis.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

As of September 30, ~~2018~~,2019, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which they are subject and was considered well-capitalized under the regulatory rules, all on a fully phased-in basis. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital, Tier I leverage ratio and Common equity tier I risk-based capital as set forth in the table below:


	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized				Actual				Minimum Capital Required				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	(dollars in thousands)																(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	927,584	15.08	%	$	607,498	9.875	%	$	645,947	10.50	%	$	615,188	10.00	%	$	935,130	14.11	%	$	695,859	10.50	%	$	662,723	10.00	%
First Commonwealth Bank	897,626		14.62		606,254		9.875		644,624		10.50		613,928		10.00		897,035		13.56		694,517		10.50		661,445		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	773,533	12.57	%	$	484,460	7.875	%	$	522,910	8.50	%	$	492,150	8.00	%	$	782,068	11.80	%	$	563,315	8.50	%	$	530,178	8.00	%
First Commonwealth Bank	743,575		12.11		483,468		7.875		521,839		8.50		491,142		8.00		743,973		11.25		562,228		8.50		529,156		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	773,533	10.46	%	$	295,748	4.000	%	$	295,748	4.00	%	$	369,685	5.00	%	$	782,068	10.13	%	$	308,930	4.00	%	$	386,163	5.00	%
First Commonwealth Bank	743,575		10.08		295,208		4.000		295,208		4.00		369,010		5.00		743,973		9.65		308,358		4.00		385,447		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	703,533	11.44	%	$	392,182	6.375	%	$	430,631	7.00	%	$	399,872	6.50	%	$	712,068	10.74	%	$	463,906	7.00	%	$	430,770	6.50	%
First Commonwealth Bank	743,575		12.11		391,379		6.375		429,750		7.00		399,053		6.50		743,973		11.25		463,012		7.00		429,939		6.50

On October ~~23, 2018,~~29, 2019, First Commonwealth Financial Corporation declared a quarterly dividend of ~~$0.09~~$0.10 per share payable on November ~~16, 2018~~22, 2019 to shareholders of record as of November ~~2, 2018.~~8, 2019. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.

On ~~October 23, 2018,~~March 4, 2019 a share repurchase program was authorized by the Board of Directors for up to an additional $25.0 million in shares of the Company's common stock. ~~Depending on market conditions and other factors, repurchases may be made~~As of September 30, 2019, 177,723 common shares were repurchased at ~~any time or from time to time, without prior notice.~~an average price of $12.37 per share. First Commonwealth may suspend or discontinue the program at any time.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

ITEM 4. Controls and Procedures

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

In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the current fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. As part of this evaluation, a change was identified in connection with the preparation of the allowance for credit losses estimate. In the third quarter of 2018, the Company transitioned from a spreadsheet based calculation of the allowance for credit losses to a calculation completed utilizing a third party software. As part of this transition, internal controls related to data import, access controls, change management and documentation were added or updated to reflect the new environment.

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


ITEM 1.	LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1, Note 6, "Commitments and Contingent Liabilities," which is incorporated herein by reference in response to this item.


ITEM 1A.	RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018.


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

~~None~~On March 4, 2019, a share repurchase program was authorized for up to $25.0 million in shares of the Company's common stock. The following table details the amount of shares repurchased under this program during the third quarter of 2019:



Month Ending:	Total Number of Shares Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs*
July 30, 2019	—	$	—	—	1,611,490
August 31, 2019	177,723	12.37		—	1,616,178
September 30, 2019	—	—		—	1,505,431
Total	177,723	$	12.37	—

* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $13.77 at July 30, 2019, $12.37 at August 31, 2019 and $13.28 at September 30, 2019.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable


ITEM 5.	OTHER INFORMATION

None

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS



Exhibit Number	Description	Incorporated by Reference to

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 ~~Condensed~~ Consolidated Balance Sheets, (ii) the ~~Condensed~~ Consolidated Statements of Income and Comprehensive Income, (iii) the ~~Condensed~~ Consolidated Statements of Changes in Stockholders’ Equity, (iv) the ~~Condensed~~ Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited ~~Condensed~~ Consolidated Financial Statements. Note that XBRL tags are embedded within the document.	Filed herewith

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SIGNATURES

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

FIRST COMMONWEALTH FINANCIAL CORPORATION

(Registrant)



DATED: November ~~8, 2018~~7, 2019		/s/ T. Michael Price
		T. Michael Price President and Chief Executive Officer

DATED: November ~~8, 2018~~7, 2019		/s/ James R. Reske
		James R. Reske Executive Vice President, Chief Financial Officer and Treasurer

7473



	September 30, 2018			December 31, 2017
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	93,162		$	98,624
Interest-bearing bank deposits	3,022			8,668
Securities available for sale, at fair value	889,056			731,358
Securities held to maturity, at amortized cost (Fair value of $373,933 and $418,249 at September 30, 2018 and December 31, 2017, respectively)	389,621			422,096
Other investments	25,029			29,837
Loans held for sale	8,287			14,850
Loans:
Portfolio loans	5,662,782			5,407,376
Allowance for credit losses	(50,746		)	(48,298		)
Net loans	5,612,036			5,359,078
Premises and equipment, net	80,426			81,339
Other real estate owned	3,874			2,765
Goodwill	274,202			255,353
Amortizing intangibles, net	13,826			15,007
Bank owned life insurance	214,322			212,099
Other assets	79,482			77,465
Total assets	$	7,686,345		$	7,308,539
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,451,284		$	1,416,771
Interest-bearing	4,443,859			4,163,934
Total deposits	5,895,143			5,580,705
Short-term borrowings	587,806			707,466
Subordinated debentures	170,249			72,167
Other long-term debt	7,706			8,161
Capital lease obligation	7,311			7,590
Total long-term debt	185,266			87,918
Other liabilities	45,199			44,323
Total liabilities	6,713,414			6,420,412
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 shares issued at September 30, 2018 and December 31, 2017, and 100,361,434 and 97,456,478 shares outstanding at September 30, 2018 and December 31, 2017, respectively	113,915			113,915
Additional paid-in capital	492,262			470,123
Retained earnings	493,392			437,416
Accumulated other comprehensive loss, net	(20,657		)	(6,173		)
Treasury stock (13,553,468 and 16,458,424 shares at September 30, 2018 and December 31, 2017, respectively)	(105,981		)	(127,154		)
Total shareholders’ equity	972,931			888,127
Total liabilities and shareholders’ equity	$	7,686,345		$	7,308,539