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FCF First Commonwealth Financial

Filed: 6 Nov 20, 5:20pm
0000712537us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel1Member2020-09-30

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
Or
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)
Pennsylvania25-1428528
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
601 Philadelphia Street
IndianaPA15701
(Address of principal executive offices)(Zip Code)
724-349-7220
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x    Accelerated filer  ¨    Smaller reporting company Emerging growth company  
Non-accelerated filer  ¨ (Do not check if a smaller reporting company) 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No x
The number of shares outstanding of issuer’s common stock, $1.00 par value, as of November 5, 2020, was 96,132,751.


FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
 

2


ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

September 30, 2020December 31, 2019
 (dollars in thousands, except share data)
Assets
Cash and due from banks$97,060 $102,346 
Interest-bearing bank deposits283,037 19,510 
Securities available for sale, at fair value908,236 902,292 
Securities held to maturity, at amortized cost (Fair value of $276,988 and $338,718 at September 30, 2020 and December 31,2019, respectively)268,638 337,123 
Other investments12,966 16,761 
Loans held for sale37,998 15,989 
Loans:
Portfolio loans6,949,716 6,189,148 
Allowance for credit losses(88,307)(51,637)
Net loans6,861,409 6,137,511 
Premises and equipment, net(1)
128,041 137,268 
Other real estate owned1,079 2,228 
Goodwill303,328 303,328 
Amortizing intangibles, net14,095 16,366 
Bank owned life insurance224,660 220,723 
Other assets148,819 97,328 
Total assets$9,289,366 $8,308,773 
Liabilities
Deposits (all domestic):
Noninterest-bearing$2,301,821 $1,690,247 
Interest-bearing5,402,086 4,987,368 
Total deposits7,703,907 6,677,615 
Short-term borrowings122,356 201,853 
Subordinated debentures170,572 170,450 
Other long-term debt56,424 56,917 
Capital lease obligation6,494 6,815 
Total long-term debt233,490 234,182 
Other liabilities156,782 139,458 
Total liabilities8,216,535 7,253,108 
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 shares issued at September 30, 2020 and December 31, 2019, and 96,924,781 and 98,311,840 shares outstanding at September 30, 2020 and December 31, 2019, respectively113,915 113,915 
Additional paid-in capital494,682 493,737 
Retained earnings592,704 577,348 
Accumulated other comprehensive income, net19,111 5,579 
Treasury stock (16,990,121 and 15,603,062 shares at September 30, 2020 and December 31, 2019, respectively)(147,581)(134,914)
Total shareholders’ equity1,072,831 1,055,665 
Total liabilities and shareholders’ equity$9,289,366 $8,308,773 
(1)September 30, 2020 balance includes $2.6 million in available for sale assets as a result of the branch consolidation initiative.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3

ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months EndedFor the Nine Months Ended
 September 30,September 30,
 2020201920202019
(dollars in thousands, except share data)
Interest Income
Interest and fees on loans$67,474 $74,714 $207,290 $218,524 
Interest and dividends on investments:
Taxable interest5,598 6,995 19,064 22,871 
Interest exempt from federal income taxes268 398 850 1,231 
Dividends159 387 536 1,419 
Interest on bank deposits94 81 163 181 
Total interest income73,593 82,575 227,903 244,226 
Interest Expense
Interest on deposits4,621 9,846 18,756 27,298 
Interest on short-term borrowings35 1,620 670 8,075 
Interest on subordinated debentures2,146 2,232 6,434 6,930 
Interest on other long-term debt356 362 1,065 656 
Interest on lease obligations66 70 199 210 
Total interest expense7,224 14,130 27,124 43,169 
Net Interest Income66,369 68,445 200,779 201,057 
Provision for credit losses11,212 2,708 49,038 9,638 
Net Interest Income after Provision for Credit Losses55,157 65,737 151,741 191,419 
Noninterest Income
Net securities gains20 47 15 
Trust income2,554 2,325 6,774 6,221 
Service charges on deposit accounts4,035 4,954 12,066 13,792 
Insurance and retail brokerage commissions2,156 1,912 5,982 5,887 
Income from bank owned life insurance1,547 1,540 4,963 4,408 
Gain on sale of mortgage loans6,437 2,599 13,226 6,101 
Gain on sale of other loans and assets1,871 970 3,151 3,831 
Card-related interchange income6,441 5,629 17,589 15,800 
Derivatives mark to market(160)(45)(2,122)(88)
Swap fee income41 421 864 1,634 
Other income1,827 1,865 5,314 5,356 
Total noninterest income26,769 22,179 67,854 62,957 
Noninterest Expense
Salaries and employee benefits28,823 28,674 87,573 83,205 
Net occupancy4,609 4,521 13,979 13,878 
Furniture and equipment4,033 3,904 11,468 11,396 
Data processing2,741 2,825 7,804 7,988 
Advertising and promotion1,115 1,140 3,800 3,611 
Pennsylvania shares tax1,254 1,189 3,246 3,365 
Intangible amortization939 865 2,792 2,364 
Other professional fees and services937 969 2,755 2,755 
FDIC insurance876 35 1,637 1,164 
Loss on sale or write-down of assets63 152 416 1,398 
Litigation and operational losses329 308 1,038 1,264 
Merger and acquisition related3,738 3,772 
COVID-19 related125 567 
Voluntary early retirement3,304 3,304 
Branch consolidation2,544 2,544 
Other operating6,555 6,577 18,351 20,696 
Total noninterest expense58,247 54,897 161,274 156,856 
Income Before Income Taxes23,679 33,019 58,321 97,520 
Income tax provision4,493 6,375 10,557 19,007 
Net Income$19,186 $26,644 $47,764 $78,513 
Average Shares Outstanding97,917,096 98,267,229 97,990,749 98,363,539 
Average Shares Outstanding Assuming Dilution98,160,143 98,547,898 98,224,506 98,615,787 
Per Share Data: Basic Earnings per Share
$0.20 $0.27 $0.49 $0.80 
 Diluted Earnings per Share$0.20 $0.27 $0.49 $0.80 
Cash Dividends Declared per Common Share$0.11 $0.10 $0.33 $0.30 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
4

ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
For the Three Months EndedFor the Nine Months Ended
 September 30,September 30,
 2020201920202019
 (dollars in thousands)
Net Income$19,186 $26,644 $47,764 $78,513 
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period(3,256)3,152 22,069 22,055 
Less: reclassification adjustment for gains on securities included in net income(20)(9)(47)(15)
Unrealized holding gains (losses) on derivatives arising during the period225 (124)(4,892)
Total other comprehensive (loss) income, before tax benefit (expense)(3,051)3,019 17,130 22,049 
Income tax benefit (expense) related to items of other comprehensive (loss) income640 (635)(3,598)(4,631)
Total other comprehensive (loss) income(2,411)2,384 13,532 17,418 
Comprehensive Income$16,775 $29,028 $61,296 $95,931 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5

ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Shares
Outstanding
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Treasury
Stock
Total
Shareholders’
Equity
 (dollars in thousands, except share and per share data)
Balance at December 31, 201998,311,840 $113,915 $493,737 $577,348 $5,579 $(134,914)$1,055,665 
Net income47,764 47,764 
Other comprehensive income13,532 13,532 
Cash dividends declared ($0.33 per share)(32,408)(32,408)
Treasury stock acquired(1,638,812)(14,373)(14,373)
Treasury stock reissued158,453 458 1,358 1,816 
Restricted stock93,300 487 348 835 
Balance at September 30, 202096,924,781 $113,915 $494,682 $592,704 $19,111 $(147,581)$1,072,831 

 Shares
Outstanding
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Treasury
Stock
Total
Shareholders’
Equity
 (dollars in thousands, except share and per share data)
Balance at December 31, 201898,518,668 $113,915 $492,273 $511,409 $(11,341)$(130,867)$975,389 
Net income78,513 78,513 
Other comprehensive income17,418 17,418 
Cash dividends declared ($0.30 per share)(29,562)(29,562)
Treasury stock acquired(482,608)(6,200)(6,200)
Treasury stock reissued205,021 1,014 1,729 2,743 
Restricted stock78,000 450 279 729 
Balance at September 30, 201998,319,081 $113,915 $493,737 $560,360 $6,077 $(135,059)$1,039,030 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
6

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, 202098,132,697 $113,915 $494,682 $584,312 $21,522 $(138,726)$1,075,705 
Net income19,186 19,186 
Other comprehensive loss(2,411)(2,411)
Cash dividends declared ($0.11 per share)(10,794)(10,794)
Treasury stock acquired(1,207,916)(9,153)(9,153)
Treasury stock reissued
Restricted stock298 298 
Common stock issued— — — — 
Balance at September 30, 202096,924,781 $113,915 $494,682 $592,704 $19,111 $(147,581)$1,072,831 

 Shares
Outstanding
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Treasury
Stock
Total
Shareholders’
Equity
 (dollars in thousands, except share and per share data)
Balance at June 30, 201998,499,937 $113,915 $493,737 $543,566 $3,693 $(133,080)$1,021,831 
Net income26,644 26,644 
Other comprehensive income2,384 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 stock261 261 
Common stock issuance— — — — — 
Balance at September 30, 201998,319,081 $113,915 $493,737 $560,360 $6,077 $(135,059)$1,039,030 


The accompanying notes are an integral part of these unaudited consolidated financial statements.
7

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,
 20202019
Operating Activities(dollars in thousands)
Net income$47,764 $78,513 
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses49,038 9,638 
Deferred tax (benefit) expense(5,059)2,613 
Depreciation and amortization8,676 7,777 
Net gains on securities and other assets(12,608)(8,545)
Net amortization of premiums and discounts on securities4,662 2,871 
Income from increase in cash surrender value of bank owned life insurance(4,699)(4,405)
Increase in interest receivable(13,105)(110)
Mortgage loans originated for sale(287,196)(178,911)
Proceeds from sale of mortgage loans281,424 173,961 
Increase in interest payable575 1,180 
Decrease in income taxes payable(536)(556)
Other-net1,888 (7,193)
Net cash provided by operating activities70,824 76,833 
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions76,841 35,163 
Purchases(9,621)(200)
Transactions with securities available for sale:
Proceeds from maturities and redemptions272,544 134,453 
Purchases(282,461)(17,401)
Purchases of FHLB stock(21,903)(29,538)
Proceeds from the redemption of FHLB stock25,698 50,103 
Proceeds from bank owned life insurance1,147 
Proceeds from sale of loans25,534 28,098 
Proceeds from sale of other assets4,875 5,390 
Acquisition, net of cash acquired332,465 
Net increase in loans(798,377)(256,168)
Purchases of premises and equipment and other assets(6,570)(14,060)
Net cash (used in) provided by investing activities(712,293)268,305 
Financing Activities
Net decrease in federal funds purchased(4,000)
Net decrease in other short-term borrowings(79,497)(634,088)
Net increase in deposits1,026,580 308,976 
Repayments of other long-term debt(493)(473)
Repayments of capital lease obligation(321)(300)
Proceeds from issuance of other long-term debt50,000 
Dividends paid(32,408)(29,562)
Proceeds from reissuance of treasury stock222 211 
Purchase of treasury stock(14,373)(6,200)
Net cash provided by (used in) financing activities899,710 (315,436)
Net increase in cash and cash equivalents258,241 29,702 
Cash and cash equivalents at January 1121,856 98,947 
Cash and cash equivalents at September 30$380,097 $128,649 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
8


ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or the “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of First Commonwealth’s financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity as of and for the periods presented. Certain information and Note disclosures normally included in Consolidated Financial Statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.
The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year of 2020. These interim financial statements should be read in conjunction with First Commonwealth’s 2019 Annual Report on Form 10-K.

Note 2 Acquisition
Santander Branch Acquisition
On September 6, 2019, the Company's banking subsidiary, First Commonwealth Bank, completed its acquisition of 14 full service branches from Santander Bank N.A. ("Santander") receiving $329.5 million in cash. This acquisition further expands the Company's market into State College, Lock Haven, Williamsport and Lewisburg, Pennsylvania and included the purchase of $101.2 million in loans and $471.4 million in deposits.
The table below summarizes the final purchase price allocation and the net assets acquired (at fair value) and consideration transferred in connection with the Santander acquisition (dollars in thousands):
Consideration received
Cash received$329,533 
Total consideration received$329,533 
Fair Value of Assets Acquired
   Cash and cash equivalents2,935 
   Loans99,956 
   Premises and other equipment3,637 
   Core deposit intangible5,615 
   Other assets770 
     Total assets acquired112,913 
Fair Value of Liabilities Assumed
   Deposits471,386 
   Other Liabilities186 
      Total liabilities assumed471,572 
Total Fair Value of Identifiable Net Assets(358,659)
Goodwill$29,126 
9

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company determined that this acquisition constitutes a business combination as defined in FASB ASC Topic 805, “Business Combinations.” Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” Acquired loans were recorded at fair value with no carryover of the related allowance for loan losses. At the date of acquisition, none of the loans were accounted for under the guidance of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The fair value of acquired loans and certificate of deposits is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments. The $100.0 million fair value of acquired loans is the result of $101.2 million in loans acquired from Santander and the recognition of a net combined yield and credit mark adjustment of $1.2 million. The $471.4 million fair value of acquired deposits is the result of $471.0 million in deposits acquired and the recognition of a yield mark adjustment of $0.4 million on the certificate of deposits. A $5.6 million core deposit intangible was recognized for core deposits acquired.
The goodwill of $29.1 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with the branches acquired from Santander. The goodwill for this transaction is expected to be deducted over a 15-year period for income tax purposes.
Costs related to the acquisition totaled $3.7 million. These amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the Consolidated Statements of Income.

Note 3 Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the unaudited Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating" line in the unaudited Consolidated Statements of Income.
For the Nine Months Ended September 30,
20202019
Pretax AmountTax (Expense) BenefitNet of Tax AmountPretax AmountTax (Expense) BenefitNet of Tax Amount
(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period$22,069 $(4,635)$17,434 $22,055 $(4,632)$17,423 
Reclassification adjustment for gains on securities included in net income(47)10 (37)(15)(12)
Total unrealized gains on securities22,022 (4,625)17,397 22,040 (4,629)17,411 
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period(4,892)1,027 (3,865)(2)
Reclassification adjustment for losses on derivatives included in net income
Total unrealized (losses) gains on derivatives(4,892)1,027 (3,865)(2)
Total other comprehensive income$17,130 $(3,598)$13,532 $22,049 $(4,631)$17,418 

10

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Three Months Ended September 30,
20202019
Pretax AmountTax (Expense) BenefitNet of Tax AmountPretax AmountTax (Expense) BenefitNet of Tax Amount
(dollars in thousands)
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on securities arising during the period$(3,256)$684 $(2,572)$3,152 $(663)$2,489 
Reclassification adjustment for gains on securities included in net income(20)(16)(9)(7)
Total unrealized (losses) gains on securities(3,276)688 (2,588)3,143 (661)2,482 
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the period225 (48)177 (124)26 (98)
Reclassification adjustment for losses on derivatives included in net income
Total unrealized gains (losses) on derivatives225 (48)177 (124)26 (98)
Total other comprehensive (loss) income$(3,051)$640 $(2,411)$3,019 $(635)$2,384 

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

20202019
 Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss)Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss)
 (dollars in thousands)
Balance at December 31$4,580 $365 $634 $5,579 $(11,697)$461 $(105)$(11,341)
Other comprehensive income before reclassification adjustment17,434 (3,865)13,569 17,423 17,430 
Amounts reclassified from accumulated other comprehensive (loss) income(37)(37)(12)(12)
Net other comprehensive income during the period17,397 (3,865)13,532 17,411 17,418 
Balance at September 30$21,977 $365 $(3,231)$19,111 $5,714 $461 $(98)$6,077 

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

20202019
 Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss)Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss)
 (dollars in thousands)
Balance at June 30$24,565 $365 $(3,408)$21,522 $3,232 $461 $$3,693 
Other comprehensive (loss) income before reclassification adjustment(2,572)177 (2,395)2,489 (98)2,391 
Amounts reclassified from accumulated other comprehensive (loss) income(16)(16)(7)(7)
Net other comprehensive (loss) income during the period(2,588)177 (2,411)2,482 (98)2,384 
Balance at September 30$21,977 $365 $(3,231)$19,111 $5,714 $461 $(98)$6,077 

11

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4 Supplemental Cash Flow Disclosures
The following table presents information related to cash paid during the period for interest and income taxes, as well as detail on non-cash investing and financing activities for the nine months ended September 30:
20202019
(dollars in thousands)
Cash paid during the period for:
Interest$26,687 $42,195 
Income taxes16,207 16,994 
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets3,206 2,754 
Loans transferred from held to maturity to held for sale27,391 21,620 
Loans transferred from available for sale to held to maturity1,908 
Gross increase in market value adjustment to securities available for sale22,022 22,041 
Gross (decrease) increase in market value adjustment to derivatives(4,892)
Investments committed to purchase, not settled22,644 
Noncash treasury stock reissuance1,594 2,531 
Net (liabilities) assets acquired through acquisition(361,895)
Proceeds from death benefit on bank owned life insurance not received(384)486 

Note 5 Earnings per Share
The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computations:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2020201920202019
Weighted average common shares issued113,914,902 113,914,902 113,914,902 113,914,902 
Average treasury stock shares(15,821,469)(15,496,941)(15,761,114)(15,396,215)
Average deferred compensation shares(45,454)(37,411)(41,790)(37,411)
Average unearned nonvested shares(130,883)(113,321)(121,249)(117,737)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share97,917,096 98,267,229 97,990,749 98,363,539 
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share197,545 243,258 188,255 214,837 
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share45,502 37,411 45,502 37,411 
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share98,160,143 98,547,898 98,224,506 98,615,787 
Per Share Data: Basic Earnings per Share$0.20 $0.27 $0.49 $0.80 
 Diluted Earnings per Share$0.20 $0.27 $0.49 $0.80 
The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the nine months ended September 30 because to do so would have been antidilutive.
20202019
Price RangePrice Range
SharesFromToSharesFromTo
Restricted Stock110,068 $13.72 $15.44 95,054 $12.99 $15.44 
Restricted Stock Units102,844 $12.43 $15.37 24,782 $16.62 $16.62 
12

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 6 Commitments and Contingent Liabilities
Commitments and Letters of Credit
Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.
The following table identifies the notional amount of those instruments at:
September 30, 2020December 31, 2019
 (dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit$2,080,476 $1,981,275 
Financial standby letters of credit13,879 16,630 
Performance standby letters of credit17,914 23,293 
Commercial letters of credit470 783 
 
The notional amounts outstanding as of September 30, 2020 include amounts issued in 2020 of $245 thousand in performance standby letters of credit and $641 thousand in financial standby letters of credit. There were 0 commercial letters of credit issued in 2020. A liability of $0.1 million has been recorded as of both September 30, 2020 and December 31, 2019, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.
Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk related to these commitments resulted in the recording of a liability of $3.4 million and $4.5 million as of September 30, 2020 and December 31, 2019, respectively. This liability is reflected in "Other liabilities" in the unaudited Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.
Legal Proceedings
First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, 2020, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $1 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.
First Commonwealth Bank was named a defendant in an action that commenced on October 14, 2020 in the Court of Common Pleas of Allegheny County, Pennsylvania. The plaintiffs allege that the Bank violated the Pennsylvania Commercial Code by failing to provide accurate and complete notices of repossession and post-sale notices to certain Pennsylvania customers whose motor vehicles were repossessed and later sold at public sales. Plaintiffs seek to pursue the action as a statewide class action on behalf of themselves and other allegedly similarly situated defaulting borrowers who had their motor vehicles repossessed and seeks to recover statutory damages. The Bank intends to vigorously defend the plaintiffs’ claims and any request for class
13

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

certification. The plaintiffs have not made any formal or specific financial demand and due to the preliminary status of this case any possible loss cannot be reasonably estimated at this time and is not included in the range set forth in the preceding paragraph.
Note 7 Investment Securities
Securities Available for Sale
Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:
 September 30, 2020December 31, 2019
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
 (dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential$6,778 $763 $$7,541 $7,745 $596 $$8,341 
Mortgage-Backed Securities – Commercial209,175 9,377 218,552 186,316 2,983 (166)189,133 
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential527,570 15,977 (4)543,543 660,777 4,113 (2,943)661,947 
Other Government-Sponsored Enterprises100,993 (2)100,993 1,000 1,000 
Obligations of States and Political Subdivisions12,965 208 (6)13,167 17,738 171 17,909 
Corporate Securities22,935 1,505 24,440 22,919 1,043 23,962 
Total Securities Available for Sale$880,416 $27,832 $(12)$908,236 $896,495 $8,906 $(3,109)$902,292 

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

Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties. Other fixed income securities within the portfolio also contain prepayment risk.
14

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at September 30, 2020, by contractual maturity, are shown below.
Amortized
Cost
Estimated
Fair Value
 (dollars in thousands)
Due within 1 year$104,991 $105,041 
Due after 1 but within 5 years20,225 21,260 
Due after 5 but within 10 years7,127 7,749 
Due after 10 years4,550 4,550 
136,893 138,600 
Mortgage-Backed Securities (a)743,523 769,636 
Total Debt Securities$880,416 $908,236 
 
(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $216.0 million and a fair value of $226.1 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $527.6 million and a fair value of $543.5 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
 
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the nine months ended September 30:
20202019
 (dollars in thousands)
Proceeds from sales$$
Gross gains (losses) realized:
Sales transactions:
Gross gains$$
Gross losses
Maturities
Gross gains47 15 
Gross losses
47 15 
Net gains and impairment$47 $15 
Securities available for sale with an estimated fair value of $865.1 million and $584.8 million were pledged as of September 30, 2020 and December 31, 2019, respectively, to secure public deposits and for other purposes required or permitted by law.
15

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity
Below is an analysis of the amortized cost and fair values of debt securities held to maturity at:
 September 30, 2020December 31, 2019
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
 (dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential$2,937 $151 $$3,088 $3,392 $57 $$3,449 
Mortgage-Backed Securities- Commercial41,334 1,537 42,871 51,291 18 (184)51,125 
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential171,100 5,646 (19)176,727 229,667 1,377 (294)230,750 
Mortgage-Backed Securities – Commercial10,334 375 10,709 12,081 67 12,148 
Obligations of States and Political Subdivisions42,133 661 (1)42,793 40,092 554 40,646 
Debt Securities Issued by Foreign Governments800 800 600 600 
Total Securities Held to Maturity$268,638 $8,370 $(20)$276,988 $337,123 $2,073 $(478)$338,718 
The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
Amortized
Cost
Estimated
Fair Value
 (dollars in thousands)
Due within 1 year$4,949 $4,974 
Due after 1 but within 5 years11,195 11,310 
Due after 5 but within 10 years19,760 20,232 
Due after 10 years7,029 7,077 
42,933 43,593 
Mortgage-Backed Securities (a)225,705 233,395 
Total Debt Securities$268,638 $276,988 
(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $44.3 million and a fair value of $46.0 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $181.4 million and a fair value of $187.4 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
Securities held to maturity with an amortized cost of $257.6 million and $306.8 million were pledged as of September 30, 2020 and December 31, 2019, respectively, to secure public deposits and for other purposes required or permitted by law.
Other Investments
As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these
16

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of September 30, 2020 and December 31, 2019, our FHLB stock totaled $11.3 million and $15.1 million, respectively, and is included in “Other investments” on the unaudited Consolidated Statements of Financial Condition.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three and nine months ended September 30, 2020.
As of both September 30, 2020 and December 31, 2019, "Other investments" also includes $1.7 million in equity securities. These securities do not have a readily determinable fair value and are carried at cost. During the nine-months ended September 30, 2020 and 2019, there were 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.
Impairment of Investment Securities
As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the nine months ended September 30, 2020 and 2019, 0 other-than-temporary impairment charges were recognized.
First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by weakness in the U.S. economy or changes in real estate values.
The following table presents the gross unrealized losses and estimated fair values at September 30, 2020 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:
 
 Less Than 12 Months12 Months or MoreTotal
 Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
 (dollars in thousands)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential$10,777 $(23)$$$10,777 $(23)
Other Government-Sponsored Enterprises998 (2)998 (2)
Obligations of States and Political Subdivisions2,207 (7)— — 2,207 (7)
Total Securities$13,982 $(32)$$$13,982 $(32)
    
At September 30, 2020, fixed income securities issued by U.S. Government-sponsored enterprises comprised 78% of total unrealized losses due to changes in market interest rates. At September 30, 2020, there are 10 debt securities in an unrealized loss position.
17

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at December 31, 2019 by investment category and time frame for which securities have been in a continuous unrealized loss position:
 Less Than 12 Months12 Months or MoreTotal
 Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
 (dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Commercial$54,501 $(201)$16,365 $(149)$70,866 $(350)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential111,969 (436)219,015 (2,801)330,984 (3,237)
Total Securities$166,470 $(637)$235,380 $(2,950)$401,850 $(3,587)
As of September 30, 2020, our corporate securities had an amortized cost and an estimated fair value of $22.9 million and $24.4 million, respectively. As of December 31, 2019, our corporate securities had an amortized cost and estimated fair value of $22.9 million and $24.0 million, respectively. Corporate securities are comprised of debt issued by large regional banks. There were 0 corporate securities in an unrealized loss position as of both September 30, 2020 and December 31, 2019. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

Note 8 Loans and Allowance for Credit Losses
1The following table provides outstanding balances related to each of our loan types:
 
September 30, 2020December 31, 2019
OriginatedAcquiredTotalOriginatedAcquiredTotal
 (dollars in thousands)
Commercial, financial, agricultural and other$1,711,614 $25,122 $1,736,736 $1,212,026 $29,827 $1,241,853 
Real estate construction450,589 2,400 452,989 442,777 6,262 449,039 
Residential real estate1,534,949 209,071 1,744,020 1,415,808 265,554 1,681,362 
Commercial real estate2,088,217 127,094 2,215,311 1,958,346 159,173 2,117,519 
Loans to individuals790,471 10,189 800,660 685,416 13,959 699,375 
Total loans$6,575,840 $373,876 $6,949,716 $5,714,373 $474,775 $6,189,148 
In the table above, originated Commercial, financial, agricultural and other loans at September 30, 2020 includes $573.5 million in Paycheck Protection Program ("PPP") loans for small businesses who meet the necessary eligibility requirements. PPP loans are 100% guaranteed by the Small Business Administration ("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the PPP requirements. Because PPP loans are fully guaranteed by the SBA, there is no allowance for credit losses recognized for these loans. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program.
Credit Quality Information
As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:
Pass  Acceptable levels of risk exist in the relationship. Includes all loans not classified as OAEM, substandard or doubtful.
1
18

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

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

Doubtful  Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.
The following tables represent our credit risk profile by creditworthiness:
 September 30, 2020
 Commercial, financial, agricultural and otherReal estate constructionResidential real estateCommercial real estateLoans to individualsTotal
 (dollars in thousands)
Originated loans
Pass$1,649,458 $450,513 $1,527,225 $1,977,234 $790,222 $6,394,652 
Non-Pass
OAEM37,033 22 915 69,450 107,420 
Substandard25,123 54 6,809 41,533 249 73,768 
Doubtful
Total Non-Pass62,156 76 7,724 110,983 249 181,188 
Total$1,711,614 $450,589 $1,534,949 $2,088,217 $790,471 $6,575,840 
Acquired loans
Pass$23,405 $1,588 $207,233 $123,703 $10,178 $366,107 
Non-Pass
OAEM196 504 511 136 1,347 
Substandard1,521 308 1,327 3,255 11 6,422 
Doubtful
Total Non-Pass1,717 812 1,838 3,391 11 7,769 
Total$25,122 $2,400 $209,071 $127,094 $10,189 $373,876 
 
19

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 December 31, 2019
 Commercial, financial, agricultural and otherReal estate constructionResidential real estateCommercial real estateLoans to individualsTotal
 (dollars in thousands)
Originated loans
Pass$1,171,363 $442,751 $1,406,845 $1,918,690 $685,108 $5,624,757 
Non-Pass
OAEM29,359 26 475 13,533 43,393 
Substandard11,304 8,488 26,123 308 46,223 
Doubtful
Total Non-Pass40,663 26 8,963 39,656 308 89,616 
Total$1,212,026 $442,777 $1,415,808 $1,958,346 $685,416 $5,714,373 
Acquired loans
Pass$27,696 $5,697 $262,630 $153,814 $13,947 $463,784 
Non-Pass
OAEM2,009 565 537 2,072 5,183 
Substandard122 2,387 3,287 12 5,808 
Doubtful
Total Non-Pass2,131 565 2,924 5,359 12 10,991 
Total$29,827 $6,262 $265,554 $159,173 $13,959 $474,775 
Portfolio Risks
The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital and liquidity. First Commonwealth devotes substantial resources to managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting loans. Credit administration is independent of lending departments and oversight is provided by the Credit Committee of the First Commonwealth Board of Directors.
Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of September 30, 2020. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.
20

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Age Analysis of Past Due Loans by Segment
The following tables delineate the aging analysis of the recorded investments in past due loans as of September 30, 2020 and December 31, 2019. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.
 September 30, 2020
 30 - 59
days
past due
60 - 89
days
past
due
90 days
or
greater
and still
accruing
NonaccrualTotal past
due and
nonaccrual
CurrentTotal
 (dollars in thousands)
Originated loans
Commercial, financial, agricultural and other$1,978 $67 $17 $4,389 $6,451 $1,705,163 $1,711,614 
Real estate construction54 54 450,535 450,589 
Residential real estate2,022 1,554 458 5,960 9,994 1,524,955 1,534,949 
Commercial real estate517 122 30,112 30,751 2,057,466 2,088,217 
Loans to individuals1,986 902 725 247 3,860 786,611 790,471 
Total$6,503 $2,645 $1,200 $40,762 $51,110 $6,524,730 $6,575,840 
Acquired loans
Commercial, financial, agricultural and other$38 $$$74 $112 $25,010 $25,122 
Real estate construction308 308 2,092 2,400 
Residential real estate397 459 1,262 2,118 206,953 209,071 
Commercial real estate136 233 369 126,725 127,094 
Loans to individuals34 47 49 11 141 10,048 10,189 
Total$469 $642 $49 $1,888 $3,048 $370,828 $373,876 
 
21

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 December 31, 2019
 30 - 59
days
past due
60 - 89
days
past
due
90 days
or
greater
and still
accruing
NonaccrualTotal past
due and
nonaccrual
CurrentTotal
 (dollars in thousands)
Originated loans
Commercial, financial, agricultural and other$391 $57 $140 $8,780 $9,368 $1,202,658 $1,212,026 
Real estate construction198 207 442,570 442,777 
Residential real estate3,757 749 736 6,646 11,888 1,403,920 1,415,808 
Commercial real estate227 114 6,609 6,950 1,951,396 1,958,346 
Loans to individuals4,070 1,020 931 307 6,328 679,088 685,416 
Total$8,643 $1,940 $1,816 $22,342 $34,741 $5,679,632 $5,714,373 
Acquired loans
Commercial, financial, agricultural and other$$$$74 $76 $29,751 $29,827 
Real estate construction6,262 6,262 
Residential real estate304 207 221 1,949 2,681 262,873 265,554 
Commercial real estate107 298 405 158,768 159,173 
Loans to individuals87 89 35 12 223 13,736 13,959 
Total$392 $403 $257 $2,333 $3,385 $471,390 $474,775 
Nonaccrual Loans
The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans, which are placed on nonaccrual status at 150 days past due.
When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal becomes current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer in doubt.
Impaired Loans
Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are also considered to be impaired loans.

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

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The CARES Act, along with a joint agency statement issued by banking regulators, provides that short-term modifications, meeting certain
22

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

criteria and in response to COVID-19, do not need to be accounted for as a troubled debt restructured loans. Additionally, short-term loan modifications that are not accounted for as a troubled debt restructured loan, in accordance with the CARES Act, would remain classified as current during the deferral period and therefore are not reflected in the past due loan tables provided on the prior page. During the first and second quarters of 2020, the Company granted approximately 6,500 short-term loan modifications to its customers with aggregate principal balances of $1.4 billion. Most of these deferrals were for a 90-day period, which expired during the second and third quarters. Additional 90-day payment deferrals were granted to 136 customers with aggregate principal balances of $244.1 million during the second and third quarters. As of September 30, 2020, the balance of loans in deferral status had fallen to $65.4 million. It is likely that some customers that are no longer in the deferral period will be granted an additional 90 day deferral in order to provide support for the continued impact of COVID-19. The decision to grant an additional forbearance will be credit driven and will be based on a complete evaluation of the customer's financial circumstances.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.
At September 30, 2020 and December 31, 2019, there were 0 impaired loans held for sale. During the nine months ended September 30, 2020, there were 0 gains recognized on the sale of impaired loans. During the nine months ended September 30, 2019, there were $0.4 million in gains recognized on the sale of impaired loans.
The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of September 30, 2020 and December 31, 2019. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on their period-end allowance position.
 September 30, 2020December 31, 2019
 Recorded
investment
Unpaid
principal
balance
Related
allowance
Recorded
investment
Unpaid
principal
balance
Related
allowance
 (dollars in thousands)
Originated loans:
With no related allowance recorded:
Commercial, financial, agricultural and other$795 $987 $1,848 $6,997 
Real estate construction54 53 
Residential real estate9,962 11,965 10,372 12,437 
Commercial real estate14,228 14,523 3,015 3,210 
Loans to individuals495 808 406 640 
Subtotal25,534 28,336 15,641 23,284 
With an allowance recorded:
Commercial, financial, agricultural and other4,750 12,778 $1,497 8,290 10,032 $1,580 
Real estate construction
Residential real estate474 498 
Commercial real estate17,389 17,442 5,921 5,293 5,308 851 
Loans to individuals
Subtotal22,139 30,220 7,418 14,057 15,838 2,432 
Total$47,673 $58,556 $7,418 $29,698 $39,122 $2,432 

23

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 September 30, 2020December 31, 2019
 Recorded
investment
Unpaid
principal
balance
Related
allowance
Recorded
investment
Unpaid
principal
balance
Related
allowance
 (dollars in thousands)
Acquired loans
With no related allowance recorded:
Commercial, financial, agricultural and other$74 $74 $73 $73 
Real estate construction308 308 
Residential real estate1,429 1,794 2,136 2,585 
Commercial real estate233 257 298 320 
Loans to individuals11 14 12 15 
Subtotal2,055 2,447 2,519 2,993 
With an allowance recorded:
Commercial, financial, agricultural and other$$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total$2,055 $2,447 $$2,519 $2,993 $

 For the Nine Months Ended September 30,
 20202019
Originated LoansAcquired LoansOriginated LoansAcquired Loans
 Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
 (dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other$4,062 $15 $74 $$2,129 $10 $2,255 $
Real estate construction137 
Residential real estate10,380 235 1,772 18 10,751 280 1,966 
Commercial real estate13,994 90 1,453 76 3,854 129 636 18 
Loans to individuals469 11 356 11 14 
Subtotal28,911 349 3,447 94 17,090 430 4,871 24 
With an allowance recorded:
Commercial, financial, agricultural and other4,569 45 4,064 36 
Real estate construction
Residential real estate347 
Commercial real estate13,830 5,357 160 
Loans to individuals
Subtotal18,399 54 9,768 44 160 
Total$47,310 $403 $3,447 $94 $26,858 $474 $5,031 $24 

24

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Three Months Ended September 30,
20202019
Originated LoansAcquired LoansOriginated LoansAcquired Loans
Average
recorded
investment
Interest
Income
Recognized
Average
recorded
investment
Interest
Income
Recognized
Average
recorded
investment
Interest
Income
Recognized
Average
recorded
investment
Interest
Income
Recognized
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other$1,918 $10 $74 $$1,902 $$4,697 $
Real estate construction18 308 
Residential real estate10,198 72 1,473 10,254 86 1,950 
Commercial real estate14,312 23 1,440 76 3,582 28 666 
Loans to individuals494 11 389 13 
Subtotal26,940 108 3,306 77 16,127 121 7,326 
With an allowance recorded:
Commercial, financial, agricultural and other6,423 16 4,677 
Real estate construction
Residential real estate740 
Commercial real estate17,407 6,443 155 
Loans to individuals
Subtotal23,830 19 11,860 10 155 
Total$50,770 $127 $3,306 $77 $27,987 $131 $7,481 $
Unfunded commitments related to nonperforming loans were $0.1 million at September 30, 2020 and $1.7 million at December 31, 2019. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $23 thousand and $12 thousand was established for these off balance sheet exposures at September 30, 2020 and December 31, 2019, respectively.
The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:
September 30, 2020December 31, 2019
 (dollars in thousands)
Troubled debt restructured loans
Accrual status$7,078 $7,542 
Nonaccrual status4,511 6,037 
Total$11,589 $13,579 
Commitments
Letters of credit$60 $60 
Unused lines of credit21 163 
Total$81 $223 
25

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings:
 For the Nine Months Ended September 30, 2020
  Type of Modification   
 Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other$$629 $$629 $625 $489 
Residential real estate16 $$33 $844 $877 $729 $
Commercial real estate12 12 
Loans to individuals14 114 149 263 245 
Total33 $$776 $1,005 $1,781 $1,607 $489 

 For the Nine Months Ended September 30, 2019
  Type of Modification   
 Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other$$$156 $156 $157 $
Residential real estate14 17 149 842 1,008 933 
Commercial real estate6,119 6,119 5,740 397 
Loans to individuals98 98 87 
Total26 $17 $149 $7,215 $7,381 $6,917 $398 
The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a re-amortization of the principal and an extension of the maturity. For the nine months ended September 30, 2020 and 2019, $766 thousand and $149 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 2020 and 2019 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

 For the Three Months Ended September 30, 2020
  Type of Modification   
 Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other$$629 $$629 $625 $489 
Residential real estate12 $$33 $580 $613 $477 $
Loans to individuals43 24 67 63 
Total17 $$705 $604 $1,309 $1,165 $489 

26

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 For the Three Months Ended September 30, 2019
  Type of Modification   
 Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other$$$95 $95 $96 $
Residential real estate$$32 $53 $85 $85 $
Loans to individuals37 37 34 
Total$$32 $185 $217 $215 $
The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a re-amortization of the principal and an extension of the maturity. For the three months ended September 30, 2020 and 2019, $694 thousand and $32 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 2020 and 2019, the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.
A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to loans that were restructured within the past twelve months and that were considered to be in default during the nine months ended September 30:
 20202019
 Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
 (dollars in thousands)
Residential real estate$50 $70 
Commercial real estate112 
Loans to individuals78 
Total$240 $70 
The following table provides information related to loans that were restructured within the past twelve months and that were considered to be in default during the three months ended September 30:
 20202019
 Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
 (dollars in thousands)
Residential real estate$$49 
Commercial real estate112 
Loans to individuals78 
Total$190 $49 

27

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables provide detail related to the allowance for credit losses:
 For the Nine Months Ended September 30, 2020
 Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
 (dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance$20,221 $2,558 $4,091 $19,731 $4,984 $51,585 
Charge-offs(5,166)(720)(2,415)(4,958)(13,259)
Recoveries161 26 274 154 702 1,317 
Provision (credit)9,936 924 4,607 23,132 8,087 46,686 
Ending balance25,152 3,508 8,252 40,602 8,815 86,329 
Acquired loans:
Beginning balance13 37 52 
Charge-offs— (213)(2)(287)(502)
Recoveries28 38 10 76 
Provision (credit)295 173 1,607 277 2,352 
Ending balance336 1,642 1,978 
Total ending balance$25,488 $3,508 $8,252 $42,244 $8,815 $88,307 
Ending balance: individually evaluated for impairment$1,497 $$$5,921 $$7,418 
Ending balance: collectively evaluated for impairment23,991 3,508 8,252 36,323 8,815 80,889 
Loans:
Ending balance1,736,736 452,989 1,744,020 2,215,311 800,660 6,949,716 
Ending balance: individually evaluated for impairment5,048 308 1,226 30,387 36,969 
Ending balance: collectively evaluated for impairment1,731,688 452,681 1,742,794 2,184,924 800,660 6,912,747 

28

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 For the Nine Months Ended September 30, 2019
 Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
 (dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance$19,235 $2,002 $3,934 $18,382 $4,033 $47,586 
Charge-offs(1,584)(617)(305)(4,049)(6,555)
Recoveries180 158 190 160 419 1,107 
Provision (credit)2,109 250 409 790 4,310 7,868 
Ending balance19,940 2,410 3,916 19,027 4,713 50,006 
Acquired loans:
Beginning balance139 35 178 
Charge-offs(601)(46)(1,376)(9)(2,032)
Recoveries53 46 14 113 
Provision (credit)416 (34)1,393 (5)1,770 
Ending balance21 29 
Total ending balance$19,947 $2,410 $3,917 $19,048 $4,713 $50,035 
Ending balance: individually evaluated for impairment$1,054 $$$488 $$1,546 
Ending balance: collectively evaluated for impairment18,893 2,410 3,913 18,560 4,713 48,489 
Loans:
Ending balance1,210,936 420,281 1,666,220 2,124,240 677,884 6,099,561 
Ending balance: individually evaluated for impairment10,417 4,102 10,825 25,344 
Ending balance: collectively evaluated for impairment1,200,519 420,281 1,662,118 2,113,415 677,884 6,074,217 
29

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 For the Three Months Ended September 30, 2020
 Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
 (dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance$24,812 $3,067 $9,239 $33,130 $9,334 $79,582 
Charge-offs(3,395)(161)(1,149)(4,705)
Recoveries44 153 110 226 533 
Provision (credit)3,691 441 (979)7,362 404 10,919 
Ending balance25,152 3,508 8,252 40,602 8,815 86,329 
Acquired loans:
Beginning balance332 171 1,356 1,859 
Charge-offs(122)(80)(202)
Recoveries13 13 28 
Provision (credit)(9)(171)109 286 78 293 
Ending balance336 1,642 1,978 
Total ending balance$25,488 $3,508 $8,252 $42,244 $8,815 $88,307 


 For the Three Months Ended September 30, 2019
 Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
 (dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance$20,678 $2,491 $4,133 $19,287 $4,407 $50,996 
Charge-offs(742)(383)(6)(1,571)(2,702)
Recoveries41 74 81 162 364 
Provision (credit)(37)(155)160 (335)1,715 1,348 
Ending balance19,940 2,410 3,916 19,027 4,713 50,006 
Acquired loans:
Beginning balance15 25 25 65 
Charge-offs(49)(1,376)(3)(1,428)
Recoveries21 11 32 
Provision (credit)20 (35)1,372 1,360 
Ending balance21 29 
Total ending balance$19,947 $2,410 $3,917 $19,048 $4,713 $50,035 


Note 9 Leases
On January 1, 2019, the Company adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842 using the transition option provided in ASU 2018-11, which provides for the modified retrospective approach. Under this approach, comparative periods were not restated and no cumulative effect adjustment to the opening balance of retained earnings was required.
30

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

First Commonwealth has elected to apply certain practical expedients provided under the standard including (i) to not apply the requirements in the new standard to short-term leases (ii) to not reassess the lease classification for any expired or existing lease (iii) to account for lease and non-lease components separately (iv) to not reassess initial direct costs for any existing leases. The impact of this standard primarily relates to operating leases of certain real estate properties, primarily certain branch and ATM locations and office space. First Commonwealth has no material leasing arrangements for which it is the lessor of property or equipment.
Adoption of this standard resulted in the Company recognizing right of-use ("ROU") assets of $38.5 million and a lease liability of $41.8 million on January 1, 2019.
The following table represents the unaudited Consolidated Statements of Condition classification of the Company’s ROU assets and lease liabilities, lease costs and other lease information.
September 30, 2020December 31, 2019
Balance sheet:
Operating lease asset classified as premises and equipment$43,180 $48,642 
Operating lease liability classified as other liabilities47,791 52,894 
For the Three Months EndedFor the Nine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Income statement:
    Operating lease cost classified as occupancy and equipment expense$1,545 $1,275 $4,281 $3,959 
Weighted average lease term, in years15.1015.44
Weighted average discount rate3.42 %3.42 %
Operating cash flows$2,007 $3,351 
The ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. First Commonwealth's lease agreements often include one or more options to renew at the Company's discretion. If we consider the renewal option to be reasonably certain, we include the extended term in the calculation of the ROU asset and lease liability.
First Commonwealth uses incremental borrowing rates when calculating the lease liability because the rate implicit in the lease is not readily determinable. The incremental borrowing rate used by First Commonwealth is an amortizing loan rate obtained from the Federal Home Loan Bank ("FHLB") of Pittsburgh. This rate is consistent with a collateralized borrowing rate and is available for terms similar to the lease payment schedules.
In July 2020, the Company announced the consolidation of 29 branch locations, including 12 leased locations, into nearby offices prior to December 31, 2020. As a result, during the third quarter, the Company paid $0.7 million in lease termination fees and decreased the ROU asset and lease liability by $3.8 million and $3.6 million, respectively.
Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2020 were as follows (dollars in thousands):
For the twelve months ended:
September 30, 2021$4,823 
September 30, 20224,600 
September 30, 20234,490 
September 30, 20244,427 
September 30, 20254,312 
Thereafter39,752 
Total future minimum lease payments62,404 
Less remaining imputed interest14,613 
Operating lease liability$47,791 
31

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 10 Income Taxes
In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” at September 30, 2020 and December 31, 2019, First Commonwealth had 0 material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense.
First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service (“IRS”) as well as all states in which we conduct business. Generally, tax years prior to the year ended December 31, 2017 are no longer open to examination by federal and state taxing authorities.
Note 11 Fair Values of Assets and Liabilities
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the unaudited Consolidated Statements of Financial Condition or in the “Other assets” category of the unaudited Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.
FASB ASC Topic 825, “Financial Instruments,” permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.
 
In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for observable inputs for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, loans held for sale, interest rate derivatives (including interest rate caps, interest rate collars, interest rate swaps and risk participation agreements), certain other real estate owned and certain impaired loans.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
Management validates the market values provided by the third party service by having another source price 100% of the securities on a monthly basis, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.
Other investments recorded in the unaudited Consolidated Statements of Financial Condition are primarily comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 7, “Investment Securities.”
32

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans held for sale include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair value for these loans was determined on the basis of rates obtained in the respective secondary market. Loans held for sale also include the Small Business Administration guaranteed portion of small business loans. The estimated fair value of these loans is based on the contract with the third party investor.
During the third quarter of 2020, the company announced the consolidation of 29 branch locations into nearby offices prior to December 31, 2020. As a result, 17 owned locations were moved to held for sale and are being carried at the lower of cost or fair value. Four of these locations are carried at fair value, determined by an independent market-based appraisal less estimated costs to sell, and are classified as Level 2.
Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' and/or loan customers' credit risk since origination of the interest rate swap as well as interest rate caps, interest rate collars and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 12, “Derivatives.”
For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any estimated fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.
We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2020, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.
Interest rate derivatives also include interest rate forwards entered into to hedge residential mortgage loans held for sale and the related interest-rate lock commitments. This includes forward commitments to sell mortgage loans. The fair value of these derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.
In addition, the Company hedges foreign currency risk through the use of foreign exchange forward contracts. The fair value of foreign exchange forward contracts is based on the differential between the contract price and the market-based forward rate.
The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.
The estimated fair value of other investments included in Level 3 is based on carrying value as these securities do not have a readily determinable fair value.
The estimated fair value of limited partnership investments included in Level 3 is based on par value.
For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).
33

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with ASU No. 2011-4, the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.
Fair Value (dollars
in thousands)
Valuation
Technique
Unobservable InputsRange /
(weighted average)
September 30, 2020
Other Investments$1,670 CarryingValueN/AN/A
Impaired Loans758  (a)Gas Reserve StudyDiscount rate10.00%
Gas per MMBTU$1.46 - $1.48 (b)
Oil per BBL/d$36.00 - $36.00 (b)
Limited Partnership Investments6,546 Par ValueN/AN/A
December 31, 2019
Other Investments$1,670 CarryingValueN/AN/A
Impaired Loans884  (a)Gas Reserve StudyDiscount rate10.00%
Gas per MMBTU$2.61 - $3.49 (b)
Oil per BBL/d$47.09 - $53.14 (b)
2,239 Discounted Cash FlowDiscount Rate$3.84 - $9.50
Limited Partnership Investments5,795 Par ValueN/AN/A
 
(a)The remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those loans are based on bankruptcy agreement documentation.
(b)Unobservable inputs are defined as follows: MMBTU - million British thermal units; BBL/d - barrels per day.
The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in a higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil and natural gas prices. Increases in these prices would result in an increase in the estimated fair value of the loans, while a decrease in these prices would result in a lower fair value measurement.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:
 September 30, 2020
 Level 1Level 2Level 3Total
 (dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential$$7,541 $$7,541 
Mortgage-Backed Securities - Commercial218,552 218,552 
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential543,543 543,543 
Other Government-Sponsored Enterprises100,993 100,993 
Obligations of States and Political Subdivisions13,167 13,167 
Corporate Securities24,440 24,440 
Total Securities Available for Sale908,236 908,236 
Other Investments11,296 1,670 12,966 
Loans Held for Sale37,998 37,998 
Premises and Equipment, net442 442 
Other Assets(a)
60,563 6,546 67,109 
Total Assets$$1,018,535 $8,216 $1,026,751 
Other Liabilities(a)
$$67,241 $$67,241 
Total Liabilities$$67,241 $$67,241 
(a)Hedging and non-hedging interest rate derivatives and limited partnership investments

34

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 December 31, 2019
 Level 1Level 2Level 3Total
 (dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential$$8,341 $$8,341 
Mortgage-Backed Securities - Commercial189,133 189,133 
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential661,947 661,947 
Other Government-Sponsored Enterprises1,000 1,000 
Obligations of States and Political Subdivisions17,909 17,909 
Corporate Securities23,962 23,962 
Total Securities Available for Sale902,292 902,292 
Other Investments15,091 1,670 16,761 
Loans Held for Sale15,989 15,989 
Other Assets(a)
21,894 5,795 27,689 
Total Assets$$955,266 $7,465 $962,731 
Other Liabilities(a)
$$21,469 $$21,469 
Total Liabilities$$21,469 $$21,469 
(a)Hedging and non-hedging interest rate derivatives and limited partnership investments

For the nine months ended September 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 2020
 Other InvestmentsOther
Assets
Total
 (dollars in thousands)
Balance, beginning of period$1,670 $5,795 $7,465 
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales and settlements
Purchases751 751 
Issuances
Sales
Settlements
Transfers from Level 3
Transfers into Level 3
Balance, end of period$1,670 $6,546 $8,216 
 
35

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 2019
 Other InvestmentsOther
Assets
Total
 (dollars in thousands)
Balance, beginning of period$1,670 $2,696 $4,366 
Total gains or losses
Included in earnings198 198 
Included in other comprehensive income
Purchases, issuances, sales and settlements
Purchases1,237 1,237 
Issuances
Sales
Settlements
Transfers from Level 3
Transfers into Level 3
Balance, end of period$1,670 $4,131 $5,801 
During the nine months ended September 30, 2020 and 2019, there were 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, 2020 and 2019.
For the three months ended September 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 2020
 Other InvestmentsOther
Assets
Total
 (dollars in thousands)
Balance, beginning of period$1,670 $6,406 $8,076 
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales and settlements
Purchases140 140 
Issuances
Sales
Settlements
Transfers from Level 3
Transfers into Level 3
Balance, end of period$1,670 $6,546 $8,216 
 
36

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 2019
 Other InvestmentsOther
Assets
Total
 (dollars in thousands)
Balance, beginning of period$1,670 $3,312 $4,982 
Total gains or losses
Included in earnings245 245 
Included in other comprehensive income
Purchases, issuances, sales and settlements
Purchases574 574 
Issuances
Sales
Settlements
Transfers from Level 3
Transfers into Level 3
Balance, end of period$1,670 $4,131 $5,801 
During the three months ended September 30, 2020 and 2019, there were no transfers between fair value Levels 1, 2 or 3. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at September 30, 2020 and 2019.
The tables below present the balances of assets measured at fair value on a nonrecurring basis at:
 September 30, 2020
 Level 1Level 2Level 3Total
 (dollars in thousands)
Impaired loans$$28,793 $13,517 $42,310 
Other real estate owned1,183 1,183 
Total Assets$$29,976 $13,517 $43,493 

 December 31, 2019
 Level 1Level 2Level 3Total
 (dollars in thousands)
Impaired loans$$12,267 $17,518 $29,785 
Other real estate owned2,608 2,608 
Total Assets$$14,875 $17,518 $32,393 
The following losses were realized on the assets measured on a nonrecurring basis:
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2020201920202019
 (dollars in thousands)
Impaired loans2$(3,695)$(954)$(9,940)$(2,606)
Other real estate owned(4)(42)(4)(51)
Total losses$(3,699)$(996)$(9,944)$(2,657)
Impaired loans over $250 thousand are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. The fair value for impaired loans that are collateral-based is determined by reviewing real property appraisals, equipment valuations, accounts receivable listings and other financial information. A discounted cash flow analysis is performed to determine fair value for impaired loans when an observable market price or a current appraisal is not available. For real estate secured loans, First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve months on all impaired loans with balances of $250 thousand and over. For real estate secured loans with balances under $250
2
37

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.
The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned, determined using an internal valuation, is classified as Level 3. Other real estate owned has a current carrying value of $1.1 million as of September 30, 2020 and consists primarily of residential and commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.
Certain other assets and liabilities, including goodwill, core deposit intangibles and customer list intangibles are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 13, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2020.
FASB ASC 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities available for sale and held to maturity are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of other investments, which includes FHLB stock and other equity investments, is considered a reasonable estimate of fair value.
Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans.
Loans held for sale: The estimated fair value of loans held for sale is based on market bids obtained from potential buyers.
Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and estimated fair value for standby letters of credit was $0.1 million at both September 30, 2020 and December 31, 2019. See Note 6, “Commitments and Contingent Liabilities,” for additional information.
Deposit liabilities: The estimated fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The carrying value of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities.
Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental borrowing rate for similar type borrowings. The carrying amounts of other short-term borrowings, such as federal funds purchased and securities sold under agreement to repurchase, were used to approximate fair value due to the short-term nature of the borrowings.
Subordinated debt and long-term debt: The fair value is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements.
38

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:
 September 30, 2020
  Fair Value Measurements Using:
 Carrying
Amount
TotalLevel 1Level 2Level 3
 (dollars in thousands)
Financial assets
Cash and due from banks$97,060 $97,060 $97,060 $$
Interest-bearing deposits283,037 283,037 283,037 
Securities available for sale908,236 908,236 908,236 
Securities held to maturity268,638 276,988 276,988 
Other investments12,966 12,966 11,296 1,670 
Loans held for sale37,998 37,998 37,998 
Loans6,949,716 7,391,037 28,793 7,362,244 
Financial liabilities
Deposits7,703,907 7,707,618 7,707,618 
Short-term borrowings122,356 121,828 121,828 
Subordinated debt170,572 164,565 164,565 
Long-term debt56,424 58,372 58,372 
Capital lease obligation6,494 6,494 6,494 

 December 31, 2019
  Fair Value Measurements Using:
 Carrying
Amount
TotalLevel 1Level 2Level 3
 (dollars in thousands)
Financial assets
Cash and due from banks$102,346 $102,346 $102,346 $$
Interest-bearing deposits19,510 19,510 19,510 
Securities available for sale902,292 902,292 902,292 
Securities held to maturity337,123 338,718 338,718 
Other investments16,761 16,761 15,091 1,670 
Loans held for sale15,989 15,989 15,989 
Loans6,189,148 6,393,872 12,267 6,381,605 
Financial liabilities
Deposits6,677,615 6,677,595 6,677,595 
Short-term borrowings201,853 201,151 201,151 
Subordinated debt170,450 171,772 171,772 
Long-term debt56,917 58,051 58,051 
Capital lease obligation6,815 6,815 6,815 

39

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12 Derivatives
Derivatives Not Designated as Hedging Instruments
First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount.
The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
We have 38 risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. We have 14 risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.
First Commonwealth is also party to interest rate caps and collars that are not designated as hedging instruments. The interest rate caps relate to contracts that First Commonwealth enters into with loan customers that provide a maximum interest rate on their variable rate loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap contracts are identical. The interest rate collars relate to contracts that First Commonwealth enters into with loan customers that provides both a maximum and minimum interest rate on their variable rate loan. At the same time the interest rate collar is entered into with the customer, First Commonwealth enters into an offsetting interest rate collar with another financial institution. The notional amount and the maximum and minimum interest rates on both interest collar contracts are identical.
The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.
Derivatives Designated as Hedging Instruments
In August 2019, the Company entered into two interest rate swap contracts that are designated as cash flow hedges. These contracts mature on August 15, 2024 and August 15, 2026 and have notional amounts of $30.0 million and $40.0 million, respectively. The Company's risk management objective for these hedges is to reduce its exposure to variability in expected future cash flows related to interest payments made on subordinated debentures benchmarked to the 3-month LIBOR rate. Therefore, the interest rate swaps convert the interest rate benchmark on the first $70.0 million of 3-month LIBOR based subordinated debentures to a fixed rate.
The periodic net settlement of these interest rate swaps are recorded as an adjustment to "Interest on subordinated debentures" in the unaudited Consolidated Statements of Income. For the three and nine months ended September 30, 2020 there was a negative impact of $208 thousand and $219 thousand, respectively, on net interest income as a result of these interest rate swaps. Changes in the fair value of the cash flow hedges are reported on the balance sheet and in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in "Interest on subordinated debentures," the same line item in the unaudited Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at September 30, 2020, and changes in the fair value attributed to hedge ineffectiveness were not material.
The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Noninterest income" in the unaudited Consolidated Statements of Income. The impact to noninterest income for the three and nine months ended September 30, 2020 was an increase of $0.3 and $1.5 million, respectively.
40

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At September 30, 2020, the underlying funded mortgage loan commitments had a carrying value of $21.2 million and a fair value of $24.5 million, while the underlying unfunded mortgage loan commitments had a notional amount of $49.1 million. At December 31, 2019, the underlying funded mortgage loan commitments had a carrying value of $9.8 million and a fair value of $10.7 million, while the underlying unfunded mortgage loan commitments had a notional amount of $25.5 million. The interest rate lock commitments decreased noninterest income by $0.1 million and increased other noninterest income by $0.1 million for the three and nine months ended September 30, 2020, respectively.
In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other operating expense" in the unaudited Consolidated Statements of Income. The increase in other noninterest expense for the three and nine months ended September 30, 2020 totaled $3 thousand and $15 thousand, respectively. At September 30, 2020 and December 31, 2019, the underlying loans had a carrying value of $2.4 million and $4.8 million, respectively, and a fair value of $2.4 million and $4.8 million, respectively.

The following table depicts the credit value and fair value adjustments recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:
September 30, 2020December 31, 2019
 (dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment$(2,394)$(272)
Notional amount:
Interest rate derivatives610,994 587,275 
Interest rate caps75,685 87,188 
Interest rate collars35,354 35,354 
Risk participation agreements228,853 164,632 
Sold credit protection on risk participation agreements(78,656)(69,011)
Interest rate options49,105 25,460 
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment(4,091)801 
Notional amount70,000 70,000 
Interest rate forwards:
Fair value adjustment(195)(63)
Notional amount42,000 30,000 
Foreign exchange forwards:
Fair value adjustment(41)
Notional amount2,362 4,789 
 
41

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The table below presents the change in the fair value of derivative assets and derivative liabilities attributable to credit risk or fair value changes included in "Other income," 'Other expense," "Interest on subordinated debentures" or "Interest and fees on loans" in the unaudited Consolidated Statements of Income:
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2020201920202019
 (dollars in thousands)
Non-hedging interest rate derivatives
Increase (decrease) in other income$142 $(33)$(611)$420 
Increase in other expense
Hedging interest rate derivatives
Decrease in interest and fees on loans(118)
Increase (decrease) in interest from subordinated debentures208 (70)219 (70)
Increase in other expense
Hedging interest rate forwards
(Decrease) increase in other income(102)201 132 122 
Increase in other expense
Hedging foreign exchange forwards
Increase in other expense15 
The fair value of our derivatives is included in a table in Note 11, “Fair Values of Assets and Liabilities,” in the line items
“Other assets” and “Other liabilities.”
Note 13 Goodwill
FASB ASC Topic 350-20, “Intangibles – Goodwill and Other” requires an annual valuation of the fair value of a reporting unit that has goodwill and a comparison of the fair value to the book value of equity to determine whether the goodwill has been impaired. Goodwill is also required to be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. When circumstances indicate that it is more likely than not that fair value is less than carrying value, a triggering event has occurred and a quantitative impairment test would be performed.
We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as both of September 30, 2020 and December 31, 2019 was $303.3 million. NaN impairment charges on goodwill or other intangible assets were incurred in 2020 or 2019.
We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur during a quarter that may affect goodwill.
As a result of the COVID-19 pandemic and its impact on the Company's stock price as well as the potential impact on future earnings, Management evaluated whether a triggering event had occurred as of September 30, 2020. The evaluation concluded that it was more likely than not that First Commonwealth's fair value exceeded its book value and therefore there was no triggering event. However, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

42

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14 Subordinated Debentures
Subordinated debentures outstanding are as follows:
  September 30, 2020December 31, 2019
 DueAmountRateAmountRate
  (dollars in thousands)
Owed to:
First Commonwealth Bank2028$49,291 4.875% until June 1, 2023, then LIBOR + 1.845%$49,222 4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank203349,114 5.50% until June 1, 2028, then LIBOR + 2.37%49,061 5.50% until June 1, 2028, then LIBOR + 2.37%
First Commonwealth Capital Trust II203430,929 LIBOR + 2.85%30,929 LIBOR + 2.85%
First Commonwealth Capital Trust III203441,238 LIBOR + 2.85%41,238 LIBOR + 2.85%
Total$170,572 $170,450 
On May 21, 2018, First Commonwealth issued ten-year subordinated notes with an aggregate principal amount of $50.0 million and a fixed-to-floating rate of 4.875%. The rate remains fixed until June 1, 2023, then adjusts on a quarterly basis to LIBOR + 1.845%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2023, in whole or in part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to the date of redemption. Deferred issuance costs of $0.9 million are being amortized on a straight-line basis over the term of the notes.
On May 21, 2018, First Commonwealth issued fifteen-year subordinated notes with an aggregate principal amount of $50.0 million and a fixed-to-floating rate of 5.50%. The rate remains fixed until June 1, 2028, then adjusts on a quarterly basis to LIBOR + 2.37%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2028, in whole or in part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to the date of redemption. Deferred issuance costs of $1.1 million are being amortized on a straight-line basis over the term of the notes.
First Commonwealth currently has two trusts, First Commonwealth Capital Trust II and First Commonwealth Capital Trust III, of which 100% of the common equity is owned by First Commonwealth. The trusts were formed for the purpose of issuing company obligated mandatorily redeemable capital securities to third-party investors and investing the proceeds from the sale of the capital securities solely in junior subordinated debt securities (“subordinated debentures”) of First Commonwealth. The subordinated debentures held by each trust are the sole assets of the trust.
Interest on the debentures issued to First Commonwealth Capital Trust III is paid quarterly at a floating rate of LIBOR + 2.85% which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at its option on any interest payment date at a redemption price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $0.6 million are being amortized on a straight-line basis over the term of the securities.
Interest on the debentures issued to First Commonwealth Capital Trust II is paid quarterly at a floating rate of LIBOR + 2.85%, which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at its option at a redemption price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $0.5 million are being amortized on a straight-line basis over the term of the securities.
Note 15 Revenue Recognition

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

43

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

The Company also evaluated whether it has any significant contract balances. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration resulting in a contract receivable or before payment is due resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the Company has already received payment from the customer. First Commonwealth’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as trust income which is based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2020 and December 31, 2019, the Company did not have any significant contract balances.

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

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

Trust Income

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

Service Charges on Deposit Accounts

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

44

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Insurance and Retail Brokerage Commissions

Insurance income primarily consists of commissions received from execution of personal, business and health insurance policies when acting as an agent on behalf of insurance carriers. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Because the Company’s contracts with the insurance carriers are generally cancellable by either party, with minimal notice, insurance commissions are recognized during the policy period as received. Also, the majority of insurance commissions are received on a monthly basis during the policy period; however, some carriers pay the full annual commission to First Commonwealth at the time of policy issuance or renewal. In these cases, First Commonwealth would be required to refund any commissions it would not be entitled to as a result of cancelled or terminated policies. The Company has established a refund liability for the remaining term of the policies expected to be cancelled. The Company also receives incentive-based contingency fees from the insurance carriers. Contingency fee revenue, which totals approximately $0.3 million per year, is recognized as received due to the immaterial amount.
Retail brokerage income primarily consists of commissions received on annuity and investment product sales through a third-party service provider. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy or the execution of an investment transaction. The Company does not earn a significant amount of trailer fees on annuity sales. However, after considering the factors impacting these trailer fees, such as the uncertainty of investor behavior and changes in the market value of assets, First Commonwealth determined that it would recognize trailing fees as received because it could not reasonably estimate an amount of future trailing commissions for which collection is probable. Commissions from the third-party service provider are received on a monthly basis based upon customer activity for the month. The fees are recognized monthly with a receivable until commissions are received from the third-party service provider the following month. Because the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does not control the services rendered to the customers, retail brokerage fees are presented net of related costs, including $2.2 million and $2.3 million in commission expense as of September 30, 2020 and 2019, respectively.

Card-Related Interchange Income

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

Other Income

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

Gains(losses) on sales of OREO

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

45

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606:
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2020201920202019
 (dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income$2,554 $2,325 $6,774 $6,221 
Service charges on deposit accounts4,035 4,954 12,066 13,792 
Insurance and retail brokerage commissions2,156 1,912 5,982 5,887 
Card-related interchange income6,441 5,629 17,589 15,800 
Gain on sale of other loans and assets520 181 853 861 
Other income945 937 2,713 2,789 
Noninterest Income (in-scope of Topic 606)16,651 15,938 45,977 45,350 
Noninterest Income (out-of-scope of Topic 606)10,118 6,241 21,877 17,607 
Total Noninterest Income$26,769 $22,179 $67,854 $62,957 
46

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and nine months ended September 30, 2020 and 2019, and should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Forward-Looking Statements
Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute “forward-looking statements” as well. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including uncertainties regarding the impact of the COVID-19 pandemic, and could be affected by many factors, including, but not limited to: (1) the length and extent of the economic contraction as a result of the COVID-19 pandemic and the impact of such contraction on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth or its customers must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth’s goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth’s borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth’s ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth’s markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (19) the reliability of First Commonwealth’s vendors, internal control systems or information systems; (20) the costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals; and (21) other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Explanation of Use of Non-GAAP Financial Measure
In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe these non-GAAP financial measures provide information that is useful to investors in understanding our underlying operational performance and our business and performance trends as
47

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


they facilitate comparison with the performance of others in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 51 and page 58 for the nine and three months ended September 30, 2020 and 2019, respectively.
48

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Selected Financial Data
The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the unaudited Consolidated Financial Statements and related notes. 
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2020201920202019
(dollars in thousands, except per share data)
Net Income$19,186 $26,644 $47,764 $78,513 
Per Share Data:
Per Share Data: Basic Earnings per Share$0.20 $0.27 $0.49 $0.80 
 Diluted Earnings per Share0.20 0.27 0.49 0.80 
Cash Dividends Declared per Common Share0.11 0.10 0.33 0.30 
Average Balance:
Total assets$9,389,965 $8,050,052 $8,925,315 $7,972,438 
Total equity1,088,101 1,033,903 1,077,030 1,010,227 
End of Period Balance:
Net loans (1)
$6,899,407 $6,069,814 
Total assets9,289,366 8,152,027 
Total deposits7,703,907 6,677,996 
Total equity1,072,831 1,039,030 
Key Ratios:
Return on average assets0.81 %1.31 %0.71 %1.32 %
Return on average equity7.01 %10.22 %5.92 %10.39 %
Dividends payout ratio55.00 %37.04 %67.35 %37.50 %
Average equity to average assets ratio11.59 %12.84 %12.07 %12.67 %
Net interest margin3.11 %3.76 %3.34 %3.75 %
Net loans to deposits ratio89.56 %90.89 %
(1) Includes loans held for sale.

Results of Operations
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Net Income
For the nine months ended September 30, 2020, First Commonwealth had net income of $47.8 million, or $0.49 diluted earnings per share, compared to net income of $78.5 million, or $0.80 diluted earnings per share, in the nine months ended September 30, 2019. The decline in net income was primarily the result of $49.0 million provision for credit losses recognized in order to provide for estimated probable losses related to the COVID-19 pandemic. This was partially offset by a $8.5 million decrease in the income tax provision due to lower income before income taxes.
For the nine months ended September 30, 2020, the Company’s return on average equity was 5.92% and its return on average assets was 0.71%, compared to 10.39% and 1.32%, respectively, for the nine months ended September 30, 2019.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $201.9 million in the first nine months of 2020, compared to $202.4 million for the same period in 2019. Despite growth in average interest-earning assets of $869.4 million, net interest income declined because of a lower interest rate environment in 2020, which resulted in a 41 basis point decrease in the net interest margin, on a fully taxable equivalent basis. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 74.7% and 76.2% for the nine months ended September 30, 2020 and 2019, respectively.
49

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


The net interest margin on a fully taxable equivalent basis, was 3.34% and 3.75% for the nine months ended September 30, 2020 and September 30, 2019, respectively. The decline in the net interest margin is primarily attributable to the lower level of interest rates largely offset by the amount and composition of interest-earning assets and interest-bearing liabilities.
 
The taxable equivalent yield on interest-earning assets was 3.79% for the nine months ended September 30, 2020, a decrease of 76 basis points compared to the 4.55% yield for the same period in 2019. This decrease is primarily due to loan portfolio yield, which decreased by 78 basis points when compared to the nine months ended September 30, 2019. Contributing to this decrease was the yield on our adjustable and variable rate commercial loan portfolio, which declined 97 basis points as a result of the Federal Reserve decreasing short-term interest rates. During the first quarter of 2020, the Federal Reserve decreased the Federal Funds target rate by 150 basis points in addition to the 75 basis point rate decreases made during 2019. Although the impact of the 2020 rate decreases are not fully reflected in the comparison of the periods presented, such decreases in rates have the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing liabilities, and any additional rate decreases would be expected to have a similar effect.

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

The investment portfolio yield decreased 49 basis points in comparison to the prior year primarily due the decrease in the Federal Reserve short-term rates. Investment portfolio purchases during the nine months ended September 30, 2020 have been primarily in obligations of U.S. government agencies, obligations of other government-sponsored enterprises and obligations of states and political subdivisions with durations of approximately 4 to 11 years. Additionally, as a result of excess liquidity caused by significant growth in deposits during 2020, the average balance of interest bearing deposits with banks has increased from $5.6 million in 2019 to $173.1 million in 2020. The impact of the level and rate paid on interest bearing deposits with banks decreases the yield on earning assets by 8 basis points for the nine months ended September 30, 2020.
The cost of interest-bearing liabilities decreased to 0.64% for the nine months ended September 30, 2020, from 1.08% for the same period in 2019, primarily due to a decrease in the cost of short-term borrowings and the cost of interest-bearing deposits as well as the cost of long-term debt. Deposit growth due to the retention of PPP loan proceeds and the deposit of Federal stimulus checks, as well as deposits acquired in our third quarter 2019 acquisition of Santander branches, combined to contribute to a decline in average short-term borrowings of $343.3 million for the nine months ended September 30, 2020 compared to the same period in 2019. Decreases in the Federal Funds target rate impacted the cost of long-term debt, decreasing the cost by 56 basis points. Lower market interest rates and management's efforts to reduce deposit costs resulted in the cost of interest-bearing deposits decreasing 43 basis points and short-term borrowings decreasing 160 basis points in comparison to the same period last year.
For the nine months ended September 30, 2020, changes in interest rates negatively impacted net interest income by $35.3 million when compared with the same period in 2019. The lower yield on interest-earning assets negatively impacted net interest income by $48.5 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $13.2 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $34.8 million for the nine months ended September 30, 2020, as compared to the same period in 2019. Higher levels of interest-earning assets resulted in an increase of $31.9 million in interest income, and changes in the volume and mix of interest-bearing liabilities decreased interest expense by $2.9 million, primarily due to a decrease in short-term borrowings. Average earning assets for the nine months ended September 30, 2020 increased $869.4 million, or 12.1%, compared to the same period in 2019. Average loans for the comparable period increased $735.4 million, or 12.4%.
Net interest income also benefited from a $551.6 million increase in average net free funds at September 30, 2020 as compared to September 30, 2019. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $522.5 million, or 34.7%, in noninterest-bearing demand deposit average balances, primarily due to deposit growth related to PPP loan proceeds as well as $86.6 million in deposits attributed to the Santander branch acquisition completed in the third quarter of 2019. Average time deposits for the nine months ended September 30, 2020 decreased by
50

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


$100.6 million compared to the comparable period in 2019, while the average rate paid on time deposits decreased 19 basis points compared to the same period in 2019.
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the nine months ended September 30:
 
20202019
 (dollars in thousands)
Interest income per Consolidated Statements of Income$227,903 $244,226 
Adjustment to fully taxable equivalent basis1,129 1,341 
Interest income adjusted to fully taxable equivalent basis (non-GAAP)229,032 245,567 
Interest expense27,124 43,169 
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)$201,908 $202,398 


51

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:
 
 20202019
 Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
 (dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks$173,058 $163 0.13 %$5,591 $181 4.33 %
Tax-free investment securities47,197 1,075 3.04 67,158 1,557 3.10 
Taxable investment securities1,187,354 19,600 2.20 1,200,845 24,290 2.70 
Loans, net of unearned income (b)(c)(e)6,670,819 208,194 4.17 5,935,427 219,539 4.95 
Total interest-earning assets8,078,428 229,032 3.79 7,209,021 245,567 4.55 
Noninterest-earning assets:
Cash98,345 91,954 
Allowance for credit losses(72,256)(51,192)
Other assets820,798 722,655 
Total noninterest-earning assets846,887 763,417 
Total Assets$8,925,315 $7,972,438 
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)$1,534,147 $1,702 0.15 %$1,272,065 $5,511 0.58 %
Savings deposits (d)3,000,925 8,494 0.38 2,524,703 10,906 0.58 
Time deposits766,106 8,560 1.49 866,746 10,881 1.68 
Short-term borrowings146,270 670 0.61 489,562 8,075 2.21 
Long-term debt233,818 7,698 4.40 210,353 7,796 4.96 
Total interest-bearing liabilities5,681,266 27,124 0.64 5,363,429 43,169 1.08 
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)2,030,364 1,507,826 
Other liabilities136,655 90,956 
Shareholders’ equity1,077,030 1,010,227 
Total Noninterest-Bearing Funding Sources3,244,049 2,609,009 
Total Liabilities and Shareholders’ Equity$8,925,315 $7,972,438 
Net Interest Income and Net Yield on Interest-Earning Assets$201,908 3.34 %$202,398 3.75 %
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the nine months ended September 30, 2020 and 2019.
(b)Loan balances include held for sale and nonaccrual loans. Income on nonaccrual loans is accounted for on the cash basis.
(c)Loan income includes loan fees earned.
(d)Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.
(e)Includes held for sale loans.

 
52

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


The following table shows the effect of changes in volumes and rates on interest income and interest expense for the nine months ended September 30, 2020 compared with September 30, 2019:
 
 Analysis of Year-to-Year Changes in Net Interest Income
 Total
Change
Change Due To
Volume
Change Due To
Rate (a)
 (dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks$(18)$5,424 $(5,442)
Tax-free investment securities(482)(463)(19)
Taxable investment securities(4,690)(272)(4,418)
Loans(11,345)27,227 (38,572)
Total interest income (b)(16,535)31,916 (48,451)
Interest-bearing liabilities:
Interest-bearing demand deposits(3,809)1,137 (4,946)
Savings deposits(2,412)2,066 (4,478)
Time deposits(2,321)(1,265)(1,056)
Short-term borrowings(7,405)(5,674)(1,731)
Long-term debt(98)871 (969)
Total interest expense(16,045)(2,865)(13,180)
Net interest income$(490)$34,781 $(35,271)
 
(a)Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b)Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.

Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed for probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.
 
The table below provides a breakout of the provision for credit losses by loan category for the nine months ended September 30: 
 20202019
 DollarsPercentageDollarsPercentage
 (dollars in thousands)
Commercial, financial, agricultural and other$10,231 21 %$2,525 26 %
Real estate construction924 250 
Residential real estate4,780 10 375 
Commercial real estate24,739 50 2,183 23 
Loans to individuals8,364 17 4,305 45 
Total$49,038 100 %$9,638 100 %
The provision for credit losses for the nine months ended September 30, 2020 increased in comparison to the nine months ended September 30, 2019 by $39.4 million. The level of provision expense in the first nine months of 2020 is primarily to build the allowance for loan loss in order to provide for estimated credit risks related to the COVID-19 pandemic. Contributing to the higher provision in nine months ended September 30, 2020 was $5.7 million in specific reserves related to loans for four commercial real estate borrowers that were placed on nonaccrual status during the first nine months of 2020. Additionally, $27.9 million of the provision expense is attributable to higher qualitative reserves due to the uncertain economic environment, additional risks related to accrued interest on loan forbearances and the large volume of consumer forbearances, and consideration of the estimated probable losses incurred in certain loan categories that may be affected by COVID-19, such as hospitality and retail. Additional qualitative reserves resulted in provision expense of $4.6 million for commercial, financial, agricultural loans, $4.1 million for residential real estate loans, $15.2 million for commercial real estate loans and $3.0 million for loans to individuals. Net charge-offs during the first nine months of 2020 totaled $12.4 million.
53

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


The level of provision expense in the first nine months of 2019 was primarily a result of $7.4 million in net charge-offs, growth in the loan portfolio and an increase in qualitative reserves as a result of a higher probability of slightly less favorable economic conditions.
The allowance for credit losses was $88.3 million, or 1.27%, of total loans outstanding and 1.34% of total originated loans outstanding at September 30, 2020, compared to $51.6 million, or 0.83%, and 0.90%, respectively, at December 31, 2019 and $50.0 million, or 0.82%, and 0.90%, respectively, at September 30, 2019. Nonperforming loans as a percentage of total loans increased to 0.71% at September 30, 2020 from 0.52% at December 31, 2019 and 0.58% as of September 30, 2019. The allowance to nonperforming loan ratio was 177.58%, 160.28% and 141.64% as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively.
 
Below is an analysis of the consolidated allowance for credit losses for the nine months ended September 30, 2020 and 2019 and the year-ended December 31, 2019:
 
September 30, 2020September 30, 2019December 31, 2019
 (dollars in thousands)
Balance, beginning of period$51,637 $47,764 $47,764 
Loans charged off:
Commercial, financial, agricultural and other5,166 2,185 3,393 
Real estate construction— — — 
Residential real estate933 663 1,042 
Commercial real estate2,417 1,681 2,008 
Loans to individuals5,245 4,058 5,831 
Total loans charged off13,761 8,587 12,274 
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other189 233 326 
Real estate construction26 158 158 
Residential real estate312 236 315 
Commercial real estate154 160 189 
Loans to individuals712 433 626 
Total recoveries1,393 1,220 1,614 
Net credit losses12,368 7,367 10,660 
Provision charged to expense49,038 9,638 14,533 
Balance, end of period$88,307 $50,035 $51,637 

54

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


Noninterest Income
The following table presents the components of noninterest income for the nine months ended September 30: 
20202019$ Change% Change
 (dollars in thousands)
Noninterest Income:
Trust income$6,774 $6,221 $553 %
Service charges on deposit accounts12,066 13,792 (1,726)(13)
Insurance and retail brokerage commissions5,982 5,887 95 
Income from bank owned life insurance4,963 4,408 555 13 
Card-related interchange income17,589 15,800 1,789 11 
Swap fee income864 1,634 (770)(47)
Other income5,314 5,356 (42)(1)
Subtotal53,552 53,098 454 
Net securities gains47 15 32 213 
Gain on sale of mortgage loans13,226 6,101 7,125 117 
Gain on sale of other loans and assets3,151 3,831 (680)(18)
Derivatives mark to market(2,122)(88)(2,034)2,311 
Total noninterest income$67,854 $62,957 $4,897 %
 
Total noninterest income, excluding net securities gains, gain on sale of mortgage loans, gain on sale of other loans and assets and derivatives mark to market for the nine months ended September 30, 2020 increased $0.5 million, or 1%, compared to the nine months ended September 30, 2019. Card-related interchange income increased $1.8 million due to growth in customer accounts and transactions, including $1.4 million attributable to accounts acquired in the Santander branch acquisition in the third quarter of 2019. Service charges on deposit accounts decreased $1.7 million, despite a $0.7 million increase attributable to the Santander branch acquisition. The lower level of service charge on deposit accounts is a result of customers maintaining higher deposit balances due to CARES Act stimulus and lower consumer spending during the second and third quarters of 2020.
Total noninterest income increased $4.9 million, or 8%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include a $7.1 million increase in gain on sale of mortgage loans as a result of growth in our mortgage lending area. The mark to market adjustment on interest rate swaps entered into for our commercial customers resulted in a decrease of $2.0 million in noninterest income compared to the prior year period. This adjustment does not reflect a realized loss on the swaps, but rather relates to change in fair value due to movements in corporate bond spreads and swap rates. The gain on sale of other loans and assets decreased $0.7 million due to a lower volume of loans being sold in the first nine months of 2020 compared to the same period in 2019.
55

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


Noninterest Expense
The following table presents the components of noninterest expense for the nine months ended September 30: 
20202019$ Change% Change
 (dollars in thousands)
Noninterest Expense:
Salaries and employee benefits$87,573 $83,205 $4,368 %
Net occupancy13,979 13,878 101 
Furniture and equipment11,468 11,396 72 
Data processing7,804 7,988 (184)(2)
Advertising and promotion3,800 3,611 189 
Pennsylvania shares tax3,246 3,365 (119)(4)
Intangible amortization2,792 2,364 428 18 
Other professional fees and services2,755 2,755 — — 
FDIC insurance1,637 1,164 473 41 
Other operating18,351 20,696 (2,345)(11)
Subtotal153,405 150,422 2,983 
Loss on sale or write-down of assets416 1,398 (982)(70)
Merger and acquisition related— 3,772 (3,772)(100)
COVID-19 related567 — 567 — 
Voluntary early retirement3,304 — 3,304 — 
Branch consolidation2,544 — 2,544 — 
Litigation and operational losses1,038 1,264 (226)(18)
Total noninterest expense$161,274 $156,856 $4,418 %

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

Also increasing noninterest expense for the nine months ended September, 30, 2020 is $3.3 million related to the voluntary early retirement program and $2.5 million related to the branch consolidation initiative, both of which were announced during the third quarter of 2020. The early retirement program was offered to all eligible employees who will reach age 60 or above as of December 31, 2020. Approximately 72 employees elected to participate in the early retirement program resulting in the recognition of $2.9 million in severance and $0.4 million in hospitalization expense. The branch consolidation initiative includes combining 29 of the Company's retail locations into nearby offices by December 31, 2020 and the related expenses include writedowns of $1.4 million on owned properties and leasehold improvements and $0.7 million in lease termination expense. Offsetting these is a $3.8 million decrease in merger and acquisition expenses with the completion of the Santander acquisition in the third quarter of 2019 with no similar activity in 2020.
56

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


Income Tax
The provision for income taxes decreased $8.5 million, or 44.5%, for the nine months ended September 30, 2020, compared to the corresponding period in 2019.  The effective tax rate decreased 140 basis points, or 7.2%, primarily due to a $39.2 million decrease in income before income taxes offset by a $0.6 million increase in tax-free income from bank owned life insurance.
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the nine months ended September 30, 2020 and 2019.
We generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest, income from bank owned life insurance and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income. These provided for an annual effective tax rate of 18.1% and 19.5% for the nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020, our deferred tax assets totaled $18.3 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not recorded. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earning levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.
Results of Operations
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Net Income
For the three months ended September 30, 2020, First Commonwealth recognized net income of $19.2 million, or $0.20 diluted earnings per share, compared to net income of $26.6 million, or $0.27 diluted earnings per share, in the three months ended September 30, 2019. The decrease in net income was primarily the result of a $8.5 million increase in the provision for credit losses, and a $2.1 million decrease net interest income.
For the three months ended September 30, 2020, the Company’s return on average equity was 7.01% and its return on average assets was 0.81%, compared to 10.22% and 1.31%, respectively, for the three months ended September 30, 2019.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $66.7 million in the third quarter of 2020, compared to $68.9 million for the same period in 2019. This decrease resulted despite the positive impact of $1.3 billion growth in average interest-earning assets, which was more than offset by the impact of lower interest rates that contributed to a 65 basis points decrease in the net interest margin. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 71.3% and 75.5% for the three months ended September 30, 2020 and 2019, respectively.
The net interest margin, on a fully taxable equivalent basis, was 3.11% and 3.76% for the three months ended September 30, 2020 and September 30, 2019, respectively. The decrease in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
 
The taxable equivalent yield on interest-earning assets was 3.45% for the three months ended September 30, 2020, a decrease of 108 basis points compared to the 4.53% yield for the same period in 2019. This is largely due to a decrease in the loan portfolio yield, which declined by 106 basis points when compared to the three months ended September 30, 2019. Contributing to this was a decrease in the Federal Funds target rate of 181 basis points in comparison to September 30, 2019.  While not fully reflected in the comparison of the periods presented, such decreases in rates have the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing liabilities, and any additional rate decreases would be expected to have a similar effect. Also impacting the yield on loans was PPP loans originated under the CARES Act which have a stated rate of 1% and a yield of 2.7%. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $2.4 million. These loans increased the average balance of loans by $572.4 million for the third quarter of 2020 causing an 11 basis point decrease in the yield on loans and a 3 basis point decrease in the net interest margin. The yield on the investment portfolio decreased 57 basis points in comparison to the prior year.
The cost of interest-bearing liabilities decreased to 0.49% for the three months ended September 30, 2020, from 1.05% for the same period in 2019, primarily due to a decrease in the cost of short-term borrowings and the cost of interest-bearing deposits.
57

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


Deposits acquired from the 3rd quarter 2019 acquisition of Santander branches as well as the portion of PPP loan proceeds still remaining in customers' deposit accounts contributed to a decline in average short-term borrowings of $198.4 million for the three months ended September 30, 2020 compared to the same period in 2019. Lower market interest rates resulted in the cost of interest-bearing deposits decreasing 55 basis points and short-term borrowings decreasing 188 basis points in comparison to the same period last year. Lower interest rates also impacted the cost of long-term debt, decreasing the cost by 14 basis points.
For the three months ended September 30, 2020, changes in interest rates negatively impacted net interest income by $17.0 million when compared with the same period in 2019. The lower yield on interest-earning assets negatively impacted net interest income by $23.6 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $6.5 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $14.9 million in the three months ended September 30, 2020, as compared to the same period in 2019. Higher levels of interest-earning assets resulted in an increase of $14.5 million in interest income while changes in the volume and mix of interest-bearing liabilities decreased interest expense by $0.4 million. Average interest-earning assets for the three months ended September 30, 2020 increased $1,259.6 million, or 17.3%, compared to the same period in 2019. Average loans for the comparable period increased $932.6 million, or 15.4%. Loans acquired with of the Santander branch acquisition contributed $26.1 million to the increase in average loans during the third quarter 2019.
Net interest income also benefited from a $740.8 million increase in average net free funds at September 30, 2020 as compared to September 30, 2019. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $720.7 million, or 46.2%, in noninterest-bearing demand deposit average balances. Average time deposits for the three months ended September 30, 2020 decreased by $167.5 million at lower costs compared to the comparable period in 2019, decreasing interest expense by $0.8 million.
The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended September 30:
 
20202019
 (dollars in thousands)
Interest income per Consolidated Statements of Income$73,593 $82,575 
Adjustment to fully taxable equivalent basis373 430 
Interest income adjusted to fully taxable equivalent basis (non-GAAP)73,966 83,005 
Interest expense7,224 14,130 
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)$66,742 $68,875 


58

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:
 
 20202019
 Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
 (dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks$343,689 $94 0.11 %$9,033 $81 3.56 %
Tax-free investment securities45,706 338 2.94 65,463 504 3.05 
Taxable investment securities1,163,857 5,757 1.97 1,151,774 7,382 2.54 
Loans, net of unearned income (b)(c)(e)6,975,402 67,777 3.87 6,042,822 75,038 4.93 
Total interest-earning assets8,528,654 73,966 3.45 7,269,092 83,005 4.53 
Noninterest-earning assets:
Cash100,751 93,740 
Allowance for credit losses(83,237)(52,593)
Other assets843,797 739,813 
Total noninterest-earning assets861,311 780,960 
Total Assets$9,389,965 $8,050,052 
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)$1,669,157 $234 0.06 %$1,357,281 $2,092 0.61 %
Savings deposits (d)3,149,419 2,139 0.27 2,575,810 3,950 0.61 
Time deposits696,227 2,248 1.28 863,714 3,804 1.75 
Short-term borrowings124,670 35 0.11 323,041 1,620 1.99 
Long-term debt233,588 2,568 4.37 234,497 2,664 4.51 
Total interest-bearing liabilities5,873,061 7,224 0.49 5,354,343 14,130 1.05 
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)2,281,200 1,560,478 
Other liabilities147,603 101,328 
Shareholders’ equity1,088,101 1,033,903 
Total noninterest-bearing funding sources3,516,904 2,695,709 
Total Liabilities and Shareholders’ Equity$9,389,965 $8,050,052 
Net Interest Income and Net Yield on Interest-Earning Assets$66,742 3.11 %$68,875 3.76 %
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the three months ended September 30, 2020 and 2019.
(b)Loan balances include held for sale and nonaccrual loans. Income on nonaccrual loans is accounted for on the cash basis.
(c)Loan income includes loan fees earned.
(d)Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.

 
59

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three months ended September 30, 2020 compared with September 30, 2019:
 
 Analysis of Year-to-Year Changes in Net Interest Income
 Total
Change
Change Due To
Volume
Change Due To
Rate (a)
 (dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks$13 $3,003 $(2,990)
Tax-free investment securities(166)(152)(14)
Taxable investment securities(1,625)77 (1,702)
Loans(7,261)11,589 (18,850)
Total interest income (b)(9,039)14,517 (23,556)
Interest-bearing liabilities:
Interest-bearing demand deposits(1,858)480 (2,338)
Savings deposits(1,811)882 (2,693)
Time deposits(1,556)(739)(817)
Short-term borrowings(1,585)(995)(590)
Long-term debt(96)(10)(86)
Total interest expense(6,906)(382)(6,524)
Net interest income$(2,133)$14,899 $(17,032)
 
(a)Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b)Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.
Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed for probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.
 
The table below provides a breakout of the provision for credit losses by loan category for the three months ended September 30: 
 20202019
 DollarsPercentageDollarsPercentage
 (dollars in thousands)
Commercial, financial, agricultural and other$3,682 33 %$(17)(1)%
Real estate construction270 (155)(6)
Residential real estate(870)(8)125 
Commercial real estate7,648 68 1,037 38 
Loans to individuals482 1,718 64 
Total$11,212 100 %$2,708 100 %

The provision for credit losses for the three months ended September 30, 2020 increased in comparison to the three months ended September 30, 2019 by $8.5 million. The level of provision expense in the third quarter of 2020 is primarily a result of a $5.6 million increase in qualitative reserves due to the uncertain economic environment and consideration of the estimated probable losses incurred in certain loan categories that may be affected by COVID-19, such as hospitality and retail. In addition, a $1.1 million increase in specific reserves was recognized on four commercial loan relationships. Net charge-offs for the three months ended September 30, 2020 were $4.3 million.
The level of provision expense in the third quarter of 2019 was primarily due to $3.7 million in net charge-offs.

60

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


Below is an analysis of the consolidated allowance for credit losses for the three months ended September 30, 2020 and 2019 and the year-ended December 31, 2019:
 
9/30/20209/30/201912/31/2019
 (dollars in thousands)
Balance, beginning of period$81,441 $51,061 $47,764 
Loans charged off:
Commercial, financial, agricultural and other3,395 791 3,393 
Real estate construction— — — 
Residential real estate283 383 1,042 
Commercial real estate— 1,382 2,008 
Loans to individuals1,229 1,574 5,831 
Total loans charged off4,907 4,130 12,274 
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other57 62 326 
Real estate construction— 74 158 
Residential real estate166 17 315 
Commercial real estate110 81 189 
Loans to individuals228 162 626 
Total recoveries561 396 1,614 
Net credit losses4,346 3,734 10,660 
Provision charged to expense11,212 2,708 14,533 
Balance, end of period$88,307 $50,035 $51,637 

Noninterest Income
The following table presents the components of noninterest income for the three months ended September 30: 
20202019$ Change% Change
 (dollars in thousands)
Noninterest Income:
Trust income$2,554 $2,325 $229 10 %
Service charges on deposit accounts4,035 4,954 (919)(19)
Insurance and retail brokerage commissions2,156 1,912 244 13 
Income from bank owned life insurance1,547 1,540 — 
Card-related interchange income6,441 5,629 812 14 
Swap fee income41 421 (380)(90)
Other income1,827 1,865 (38)(2)
Subtotal18,601 18,646 (45)— 
Net securities gains20 11 122 
Gain on sale of mortgage loans6,437 2,599 3,838 148 
Gain on sale of other loans and assets1,871 970 901 93 
Derivatives mark to market(160)(45)(115)256 
Total noninterest income$26,769 $22,179 $4,590 21 %

Total noninterest income for the three months ended September 30, 2020 increased $4.6 million in comparison to the three months ended September 30, 2019. The most significant changes include a $3.8 million increase in the gain on sale of mortgage loans primarily due to growth in our mortgage lending area and a $0.9 million increase in gain on sale of other loans and assets due to an increase in the volume of SBA loans sold during the quarter. Additionally, card-related interchange income increased $0.8 million, of which $0.5 million is attributable to the Santander branches acquired in September 2019. Service charges on
61

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


deposits decreased $0.9 million for the three months ended due to customers maintaining higher deposit balances as a result of the CARES Act stimulus in 2020.
Noninterest Expense
The following table presents the components of noninterest expense for the three months ended September 30: 
20202019$ Change% Change
 (dollars in thousands)
Noninterest Expense:
Salaries and employee benefits$28,823 $28,674 $149 %
Net occupancy4,609 4,521 88 
Furniture and equipment4,033 3,904 129 
Data processing2,741 2,825 (84)(3)
Advertising and promotion1,115 1,140 (25)(2)
Pennsylvania shares tax1,254 1,189 65 
Intangible amortization939 865 74 
Other professional fees and services937 969 (32)(3)
FDIC insurance876 35 841 2,403 
Other operating6,555 6,577 (22)— 
Subtotal51,882 50,699 1,183 
Loss on sale or write-down of assets63 152 (89)(59)
Merger and acquisition related— 3,738 (3,738)(100)
COVID-19 related125 — 125 — 
Voluntary early retirement3,304 — 3,304 — 
Branch consolidation2,544 — 2,544 — 
Litigation and operational losses329 308 21 
Total noninterest expense$58,247 $54,897 $3,350 %

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

Additionally, noninterest expense was impacted by $3.3 million and $2.5 million recognized for the voluntary early retirement and branch consolidation initiatives, respectively. Branch consolidation expenses include $1.4 million related to writedowns on owned properties and leasehold improvements and $0.7 million in lease termination expense. Offsetting these increases is a decrease of $3.7 million in merger and acquisition expenses related to the Santander acquisition. There were no similar expenses in the current quarter.
Income Tax
The provision for income taxes decreased $1.9 million for the three months ended September 30, 2020, compared to the corresponding period in 2019.  The effective tax rate decreased 30 basis points from 19.3% to 19.0% due to a $9.3 million decrease in income before income taxes.
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, 2020 and 2019.
Liquidity
Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through the core deposit base of First Commonwealth Bank and the maturity or repayment of loans and other interest-earning assets, including investments. During the first nine months of 2020, the maturity and redemption of investment securities provided $349.4 million in liquidity. These
62

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


funds contributed to the liquidity used to pay down short-term borrowings, originate loans, purchase investment securities and fund depositor withdrawals.
We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland (“FRB”) and access to certificates of deposit through brokers.
We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of September 30, 2020, our maximum borrowing capacity under this program was $1.4 billion and as of that date there was $4.5 million outstanding with an average weighted rate of 0.85% and an average original term of 334 days. These deposits are part of a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.
An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program, which enables us to pledge certain loans that are not being used as collateral at the FHLB as collateral for borrowings at the FRB. At September 30, 2020, the borrowing capacity under this program totaled $831.5 million and there was no balance outstanding. As of September 30, 2020, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.5 billion and as of that date amounts used against this capacity included $56.4 million in outstanding borrowings and no outstanding letters of credit.
We also have available unused federal funds lines with five correspondent banks. These lines have an aggregate commitment of $180.0 million with no outstanding balance as of September 30, 2020. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $456.0 million with no outstanding balance as of September 30, 2020.
First Commonwealth Financial Corporation has an unsecured $20.0 million line of credit with another financial institution. As of September 30, 2020, there are no amounts outstanding on this line.
First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The following table shows a breakdown of the components of First Commonwealth’s deposits: 
September 30, 2020December 31, 2019
 (dollars in thousands)
Noninterest-bearing demand deposits(a)
$2,301,821 $1,690,247 
Interest-bearing demand deposits(a)
315,806 254,981 
Savings deposits(a)
4,425,119 3,896,536 
Time deposits661,161 835,851 
Total$7,703,907 $6,677,615 
(a)Balances include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.
The level of deposits during any period is influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds.
During the first nine months of 2020, total deposits increased $1.0 billion. Interest-bearing demand and savings deposits increased $589.4 million, noninterest-bearing demand deposits increased $611.6 million and time deposits decreased $174.7 million. The deposit increase is a result of elevated customer deposit balances from PPP loan proceeds and the deposit of Federal stimulus checks into our customers' deposit accounts.
Market Risk
The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The ratio of rate-sensitive assets to rate-sensitive liabilities repricing within a one-year period was 0.52 and 0.80 at September 30, 2020 and December 31, 2019, respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.
 
Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could
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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


indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below the gap analysis.

The following is the gap analysis as of September 30, 2020 and December 31, 2019: 
 September 30, 2020
 0-90 Days91-180
Days
181-365
Days
Cumulative
0-365 Days
Over 1 Year
Through 5
Years
Over 5
Years
 (dollars in thousands)
Loans$600,799 $549,600 $951,753 $2,102,152 $3,700,971 $1,095,176 
Investments217,878 95,452 166,510 479,840 531,602 128,234 
Other interest-earning assets283,037 — — 283,037 — — 
Total interest-sensitive assets (ISA)1,101,714 645,052 1,118,263 2,865,029 4,232,573 1,223,410 
Certificates of deposit204,060 141,316 172,511 517,887 140,922 2,086 
Other deposits4,740,926 — — 4,740,926 — — 
Borrowings194,627 104 50,208 244,939 1,665 104,344 
Total interest-sensitive liabilities (ISL)5,139,613 141,420 222,719 5,503,752 142,587 106,430 
Gap$(4,037,899)$503,632 $895,544 $(2,638,723)$4,089,986 $1,116,980 
ISA/ISL0.21 4.56 5.02 0.52 29.68 11.49 
Gap/Total assets43.47 %5.42 %9.64 %28.41 %44.03 %12.02 %

 
 December 31, 2019
 0-90 Days91-180
Days
181-365
Days
Cumulative
0-365 Days
Over 1 Year
Through 5
Years
Over 5
Years
 (dollars in thousands)
Loans$2,818,183 $313,651 $494,467 $3,626,301 $2,052,952 $475,962 
Investments103,225 79,866 162,225 345,316 633,178 235,437 
Other interest-earning assets19,510 — — 19,510 — — 
Total interest-sensitive assets (ISA)2,940,918 393,517 656,692 3,991,127 2,686,130 711,399 
Certificates of deposit121,302 161,488 303,245 586,035 246,512 2,822 
Other deposits4,151,518 — — 4,151,518 — — 
Borrowings274,213 193 385 274,791 103,082 53,064 
Total interest-sensitive liabilities (ISL)4,547,033 161,681 303,630 5,012,344 349,594 55,886 
Gap$(1,606,115)$231,836 $353,062 $(1,021,217)$2,336,536 $655,513 
ISA/ISL0.65 2.43 2.16 0.80 7.68 12.73 
Gap/Total assets19.33 %2.79 %4.25 %12.29 %28.12 %7.89 %

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


 Net interest income change (12 months) for basis point movements of:
 -200-100+100