~~0000712537 us-gaap:ConsumerLoanMember us-gaap:DoubtfulMember fcf:OriginatedLoansMember 2019-09-30~~0000712537fcf:ReserveStudyMemberfcf:DiscountRatesMemberfcf:ImpairedLoansMembersrt:WeightedAverageMember2020-01-012020-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September~~June 30, ~~2019~~2020



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania

25-1428528

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

~~Pennsylvania~~

~~25-1428528~~

~~(State or other jurisdiction of~~

~~(I.R.S. Employer~~

~~incorporation or organization)~~

~~Identification No.)~~

601 Philadelphia Street

Indiana

15701

(Address of principal executive offices)

(Zip Code)

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

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically 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, 2019~~,August 6, 2020, was 98,132,697.

~~98,316,233~~.

Table of Contents

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~FORM 10-Q~~

~~INDEX~~



		~~PAGE~~

~~PART I.~~	~~Financial Information~~

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

	~~Included in Part I of this report:~~

	~~First Commonwealth Financial Corporation and Subsidiaries~~

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

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

~~ITEM 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	70

~~ITEM 4.~~	~~Controls and Procedures~~	70

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

~~ITEM 1.~~	~~Legal Proceedings~~	71

~~ITEM 1A.~~	~~Risk Factors~~	71

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

~~ITEM 3.~~	~~Defaults Upon Senior Securities~~	71

~~ITEM 4.~~	~~Mine Safety Disclosures~~	71

~~ITEM 5.~~	~~Other Information~~	71

~~ITEM 6.~~	~~Exhibits~~	72

	~~Signatures~~	73

~~Table of Contents~~

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION~~

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

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

~~Table of Contents~~

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX


		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	69

ITEM 4.	Controls and Procedures	69

PART II.	Other Information

ITEM 1.	Legal Proceedings	70

ITEM 1A.	Risk Factors	70

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

ITEM 3.	Defaults Upon Senior Securities	70

ITEM 4.	Mine Safety Disclosures	70

ITEM 5.	Other Information	70

ITEM 6.	Exhibits	71

	Signatures	72

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)


	June 30, 2020		December 31, 2019

	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	108,970	$	102,346
Interest-bearing bank deposits	348,763		19,510
Securities available for sale, at fair value	902,140		902,292
Securities held to maturity, at amortized cost (Fair value of $307,874 and $338,718 at June 30, 2020 and December 31,2019, respectively)	297,986		337,123
Other investments	12,272		16,761
Loans held for sale	30,409		15,989
Loans:
Portfolio loans	6,922,075		6,189,148
Allowance for credit losses	(81,441)		(51,637)
Net loans	6,840,634		6,137,511
Premises and equipment, net	134,780		137,268
Other real estate owned	1,634		2,228
Goodwill	303,328		303,328
Amortizing intangibles, net	14,744		16,366
Bank owned life insurance	223,114		220,723
Other assets	145,881		97,328
Total assets	$	9,364,655	$	8,308,773
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	2,288,299	$	1,690,247
Interest-bearing	5,493,902		4,987,368
Total deposits	7,782,201		6,677,615
Short-term borrowings	108,484		201,853
Subordinated debentures	170,531		170,450
Other long-term debt	56,590		56,917
Capital lease obligation	6,602		6,815
Total long-term debt	233,723		234,182
Other liabilities	164,542		139,458
Total liabilities	8,288,950		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 June 30, 2020 and December 31, 2019, and 98,132,697 and 98,311,840 shares outstanding at June 30, 2020 and December 31, 2019, respectively	113,915		113,915
Additional paid-in capital	494,682		493,737
Retained earnings	584,312		577,348
Accumulated other comprehensive income, net	21,522		5,579
Treasury stock (15,782,205 and 15,603,062 shares at June 30, 2020 and December 31, 2019, respectively)	(138,726)		(134,914)

Total shareholders’ equity	1,075,705		1,055,665
Total liabilities and shareholders’ equity	$	9,364,655	$	8,308,773

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For the Three Months Ended					For the Nine Months Ended						For the Three Months Ended						For the Six Months Ended
	September 30,					September 30,						June 30,						June 30,
	2019			2018		2019			2018			2020		2019		2020		2019
	(dollars in thousands, except share data)											(dollars in thousands, except share data)
Interest Income											Interest Income
Interest and fees on loans	$	74,714		$	66,105	$	218,524		$	188,529	Interest and fees on loans	$	68,076	$	73,389	$	139,816	$	143,810
Interest and dividends on investments:											Interest and dividends on investments:
Taxable interest	6,995			7,899		22,871			23,031		Taxable interest	6,493		7,712		13,466		15,876
Interest exempt from federal income taxes	398			410		1,231			1,231		Interest exempt from federal income taxes	267		415		582		833
Dividends	387			420		1,419			1,412		Dividends	113		495		377		1,032
Interest on bank deposits	81			39		181			109		Interest on bank deposits	32		46		69		100
Total interest income	82,575			74,873		244,226			214,312		Total interest income	74,981		82,057		154,310		161,651
Interest Expense											Interest Expense
Interest on deposits	9,846			6,006		27,298			14,639		Interest on deposits	5,686		9,277		14,135		17,452
Interest on short-term borrowings	1,620			2,603		8,075			7,387		Interest on short-term borrowings	47		3,017		635		6,455
Interest on subordinated debentures	2,232			2,302		6,930			4,664		Interest on subordinated debentures	2,142		2,343		4,288		4,697
Interest on other long-term debt	362			76		656			228		Interest on other long-term debt	354		224		709		295
Interest on lease obligations	70			73		210			221		Interest on lease obligations	66		70		133		140

Total interest expense	14,130			11,060		43,169			27,139		Total interest expense	8,295		14,931		19,900		29,039
Net Interest Income	68,445			63,813		201,057			187,173		Net Interest Income	66,686		67,126		134,410		132,612
Provision for credit losses	2,708			2,961		9,638			11,032		Provision for credit losses	6,859		2,835		37,826		6,930
Net Interest Income after Provision for Credit Losses	65,737			60,852		191,419			176,141		Net Interest Income after Provision for Credit Losses	59,827		64,291		96,584		125,682
Noninterest Income											Noninterest Income

Net securities gains	9			—		15			8,102		Net securities gains	8		6		27		6
Trust income	2,325			2,206		6,221			6,014		Trust income	2,109		1,970		4,220		3,896
Service charges on deposit accounts	4,954			4,589		13,792			13,418		Service charges on deposit accounts	3,286		4,593		8,031		8,838
Insurance and retail brokerage commissions	1,912			1,872		5,887			5,560		Insurance and retail brokerage commissions	1,831		2,014		3,826		3,975
Income from bank owned life insurance	1,540			1,579		4,408			5,241		Income from bank owned life insurance	1,800		1,442		3,416		2,868
Gain on sale of mortgage loans	2,599			1,542		6,101			4,267		Gain on sale of mortgage loans	4,243		2,074		6,789		3,502
Gain on sale of other loans and assets	970			643		3,831			3,548		Gain on sale of other loans and assets	581		1,777		1,280		2,861
Card-related interchange income	5,629			5,044		15,800			14,929		Card-related interchange income	5,886		5,441		11,148		10,171
Derivatives mark to market	(45		)	—		(88		)	789		Derivatives mark to market	(221)		(17)		(1,962)		(43)

Swap fee income	421			528		1,634			1,115		Swap fee income	609		820		823		1,213
Other income	1,865			1,754		5,356			5,125		Other income	1,680		1,786		3,487		3,491
Total noninterest income	22,179			19,757		62,957			68,108		Total noninterest income	21,812		21,906		41,085		40,778
Noninterest Expense											Noninterest Expense
Salaries and employee benefits	28,674			26,553		83,205			77,580		Salaries and employee benefits	28,773		27,311		58,750		54,531
Net occupancy	4,521			4,341		13,878			12,932		Net occupancy	4,397		4,441		9,370		9,357
Furniture and equipment	3,904			3,424		11,396			10,611		Furniture and equipment	3,657		3,824		7,435		7,492
Data processing	2,825			2,853		7,988			7,764		Data processing	2,596		2,619		5,063		5,163
Advertising and promotion	1,140			1,200		3,611			3,185		Advertising and promotion	1,535		1,231		2,685		2,471
Pennsylvania shares tax	1,189			1,248		3,365			3,398		Pennsylvania shares tax	1,254		1,260		1,992		2,176
Intangible amortization	865			817		2,364			2,430		Intangible amortization	919		745		1,853		1,499
Collection and repossession	649			630		1,656			2,060		Collection and repossession	341		460		905		1,007
Other professional fees and services	969			962		2,755			3,000		Other professional fees and services	920		1,032		1,818		1,786
FDIC insurance	35			217		1,164			1,590		FDIC insurance	733		555		761		1,129
Loss on sale or write-down of assets	152			181		1,398			875		Loss on sale or write-down of assets	140		1,181		353		1,246

Litigation and operational losses	308			435		1,264			811		Litigation and operational losses	319		555		709		956
Merger and acquisition related	3,738			24		3,772			1,634
Unfunded commitment reserve											Unfunded commitment reserve	887		612		(1,652)		231

COVID-19 related											COVID-19 related	419		—		442		—
Other operating	5,928			6,645		19,040			17,662		Other operating	5,866		6,403		12,543		12,915
Total noninterest expense	54,897			49,530		156,856			145,532		Total noninterest expense	52,756		52,229		103,027		101,959
Income Before Income Taxes	33,019			31,079		97,520			98,717		Income Before Income Taxes	28,883		33,968		34,642		64,501
Income tax provision	6,375			5,930		19,007			18,217		Income tax provision	5,032		6,688		6,064		12,632
Net Income	$	26,644		$	25,149	$	78,513		$	80,500	Net Income	$	23,851	$	27,280	$	28,578	$	51,869
Average Shares Outstanding	98,267,229			100,226,647		98,363,539			98,998,497		Average Shares Outstanding	97,932,333		98,346,674		98,027,980		98,412,492
Average Shares Outstanding Assuming Dilution	98,547,898			100,490,812		98,615,787			99,197,568		Average Shares Outstanding Assuming Dilution	98,146,854		98,600,609		98,254,429		98,651,810
Per Share Data:											Per Share Data:
Basic Earnings per Share	$	0.27		$	0.25	$	0.80		$	0.81	Basic Earnings per Share	$	0.24	$	0.28	$	0.29	$	0.53
Diluted Earnings per Share	$	0.27		$	0.25	$	0.80		$	0.81	Diluted Earnings per Share	$	0.24	$	0.28	$	0.29	$	0.53
Cash Dividends Declared per Common Share	$	0.10		$	0.09	$	0.30		$	0.26	Cash Dividends Declared per Common Share	$	0.11	$	0.10	$	0.22	$	0.20

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(dollars in thousands)
Net Income	$	23,851	$	27,280	$	28,578	$	51,869
Other comprehensive income, before tax expense:
Unrealized holding gains on securities arising during the period	5,822		9,873		25,325		18,903

Less: reclassification adjustment for gains on securities included in net income	(8)		(6)		(27)		(6)
Unrealized holding (losses) gains on derivatives arising during the period	(536)		—		(5,117)		133

Total other comprehensive income, before tax expense	5,278		9,867		20,181		19,030
Income tax expense related to items of other comprehensive income	(1,108)		(2,072)		(4,238)		(3,996)
Total other comprehensive income	4,170		7,795		15,943		15,034
Comprehensive Income	$	28,021	$	35,075	$	44,521	$	66,903

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

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


	Shares Outstanding	Common Stock		Additional Paid-in- Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Treasury Stock		Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2019	98,311,840	$	113,915	$	493,737	$	577,348	$	5,579	$	(134,914)	$	1,055,665


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




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

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

Shares
Outstanding

Common
Stock

Additional
Paid-in-
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss),
net

Treasury
Stock

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


	Shares Outstanding	Common Stock		Additional Paid-in- Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Treasury Stock		Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2018	98,518,668	$	113,915	$	492,273	$	511,409	$	(11,341)	$	(130,867)	$	975,389


Net income						51,869						51,869
Other comprehensive income								15,034				15,034
Cash dividends declared ($0.20 per share)						(19,712)						(19,712)




Treasury stock acquired	(301,752)									(3,960)		(3,960)
Treasury stock reissued	205,021			1,014		—				1,729		2,743
Restricted stock	78,000	—		450		—				18		468

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

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

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



	Shares Outstanding	Common Stock		Additional Paid-in- Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Treasury Stock		Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at March 31, 2020	98,015,396	$	113,915	$	494,181	$	571,256	$	17,352	$	(138,780)	$	1,057,924


Net income						23,851						23,851
Other comprehensive income								4,170				4,170
Cash dividends declared ($0.11 per share)						(10,795)						(10,795)




Treasury stock acquired	—									—		—
Treasury stock reissued	24,001			14		—				208		222
Restricted stock	93,300	—		487		—				(154)		333
Common stock issued	—	—		—								—
Balance at June 30, 2020	98,132,697	$	113,915	$	494,682	$	584,312	$	21,522	$	(138,726)	$	1,075,705

Shares
Outstanding

Common
Stock

Additional
Paid-in-
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss),
net

Treasury
Stock

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




	Shares Outstanding	Common Stock		Additional Paid-in- Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Treasury Stock		Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at March 31, 2019	98,625,806	$	113,915	$	493,664	$	526,136	$	(4,102)	$	(131,594)	$	998,019


Net income						27,280						27,280
Other comprehensive income								7,795				7,795
Cash dividends declared ($0.10 per share)						(9,850)						(9,850)




Treasury stock acquired	(142,190)			—						(1,886)		(1,886)
Treasury stock reissued	16,321			73		—				139		212
Restricted stock	—	—		—		—				261		261
Common stock issuance	—	—		—		—						—
Balance at June 30, 2019	98,499,937	$	113,915	$	493,737	$	543,566	$	3,693	$	(133,080)	$	1,021,831

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, 2018 100,364,567
$ 113,915
$ 492,262
$ 477,276
$ (16,561 ) $ (106,107 ) $ 960,785
Net income 25,149
25,149
Other comprehensive loss (4,096 ) (4,096 )
Cash dividends declared ($0.09 per share) (9,033 ) (9,033 )
Treasury stock acquired (3,133 ) —
(52 ) (52 )
Treasury stock reissued —
—
—
—
—
Restricted stock —
—
—
—
178
178
Balance at September 30, 2018 100,361,434
$ 113,915
$ 492,262
$ 493,392
$ (20,657 ) $ (105,981 ) $ 972,931

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For the Six Months Ended
	June 30,
	2020		2019
Operating Activities	(dollars in thousands)
Net income	$	28,578	$	51,869
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	37,826		6,930
Deferred tax (benefit) expense	(3,387)		1,112
Depreciation and amortization	5,549		5,087
Net gains on securities and other assets	(5,896)		(5,288)
Net amortization of premiums and discounts on securities	2,993		1,704

Income from increase in cash surrender value of bank owned life insurance	(3,149)		(2,868)
Increase in interest receivable	(10,218)		(1,963)
Mortgage loans originated for sale	(155,916)		(98,292)
Proceeds from sale of mortgage loans	150,821		95,549
(Decrease) increase in interest payable	(484)		270
Increase in income taxes payable	9,349		1,319

Other-net	(4,875)		(25,316)
Net cash provided by operating activities	51,191		30,113
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	42,175		19,977
Purchases	(200)		(200)
Transactions with securities available for sale:

Proceeds from maturities and redemptions	125,162		77,571
Purchases	(127,368)		(16,401)
Purchases of FHLB stock	(20,927)		(23,256)
Proceeds from the redemption of FHLB stock	25,416		25,814
Proceeds from bank owned life insurance	201		—
Proceeds from sale of loans	10,335		22,312
Proceeds from sale of other assets	3,173		3,539


Net increase in loans	(752,191)		(250,773)

Purchases of premises and equipment and other assets	(5,363)		(8,843)
Net cash used in investing activities	(699,587)		(150,260)
Financing Activities
Net decrease in federal funds purchased	—		(11,000)
Net decrease in other short-term borrowings	(93,369)		(155,743)
Net increase in deposits	1,104,794		258,198
Repayments of other long-term debt	(327)		(315)
Repayments of capital lease obligation	(213)		(199)
Proceeds from issuance of other long-term debt	—		50,000


Dividends paid	(21,614)		(19,712)
Proceeds from reissuance of treasury stock	222		211
Purchase of treasury stock	(5,220)		(3,960)

Net cash provided by financing activities	984,273		117,480
Net increase (decrease) in cash and cash equivalents	335,877		(2,667)
Cash and cash equivalents at January 1	121,856		98,947
Cash and cash equivalents at June 30	$	457,733	$	96,280

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

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the full year of ~~2019.~~2020. These interim financial statements should be read in conjunction with First Commonwealth’s ~~2018~~2019 Annual Report on Form 10-K.

~~Adoption of New Accounting Standards~~

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

Note 2 ~~Acquisition~~

~~Santander Branch Acquisition~~

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

Consideration received
Cash received $ 329,530

Total consideration received
$ 329,530

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

   Loans 100,025

   Premises and other equipment 3,637

   Core deposit intangible 5,277

   Other assets 736

     Total assets acquired 112,610

Fair Value of Liabilities Assumed
   Deposits 471,383

   Other Liabilities 187

      Total liabilities assumed 471,570

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

Goodwill $ 29,430

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

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

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

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

~~Garfield Acquisition Corporation~~

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

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

Consideration Paid
   Cash paid to shareholders $ 17,400

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

Total consideration paid $ 58,961

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

   FHLB Stock 3,261

   Loans 184,506

   Premises and other equipment 409

   Intangible assets 1,248

   Other assets 1,747

     Total assets acquired 209,276

Fair Value of Liabilities Assumed
   Deposits 141,281

   FHLB borrowings 22,988

   Other liabilities 5,068

      Total liabilities assumed 169,337

Total Fair Value of Identifiable Net Assets 39,939

Goodwill $ 19,022

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

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

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

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

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

~~Note 3~~ Supplemental Comprehensive Income Disclosures

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


	For the Six Months Ended June 30,
	2020										2019
	Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	25,325	$	(5,319)	$	20,006��	$	18,903	$	(3,969)	$	14,934

Reclassification adjustment for gains on securities included in net income	(27)		6		(21)		(6)		1		(5)
Total unrealized gains on securities	25,298		(5,313)		19,985		18,897		(3,968)		14,929
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period	(5,117)		1,075		(4,042)		133		(28)		105
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized (losses) gains on derivatives	(5,117)		1,075		(4,042)		133		(28)		105




Total other comprehensive income	$	20,181	$	(4,238)	$	15,943	$	19,030	$	(3,996)	$	15,034

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

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

129

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three Months Ended June 30,
	2020										2019
	Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount		Pretax Amount		Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	5,822	$	(1,223)	$	4,599	$	9,873	$	(2,073)	$	7,800

Reclassification adjustment for gains on securities included in net income	(8)		2		(6)		(6)		1		(5)
Total unrealized gains on securities	5,814		(1,221)		4,593		9,867		(2,072)		7,795
Unrealized losses on derivatives:
Unrealized holding losses on derivatives arising during the period	(536)		113		(423)		—		—		—
Reclassification adjustment for losses on derivatives included in net income	—		—		—		—		—		—
Total unrealized losses on derivatives	(536)		113		(423)		—		—		—




Total other comprehensive income	$	5,278	$	(1,108)	$	4,170	$	9,867	$	(2,072)	$	7,795

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

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


	2020														2019
	Securities Available for Sale		Post-Retirement Obligation		Derivatives		Accumulated Other Comprehensive Income (Loss)		Securities Available for Sale		Post-Retirement Obligation		Derivatives		Accumulated Other Comprehensive Income (Loss)
	(dollars in thousands)
Balance at December 31	$	4,580	$	365	$	634	$	5,579	$	(11,697)	$	461	$	(105)	$	(11,341)


Other comprehensive income before reclassification adjustment	20,006		—		(4,042)		15,964		14,934		—		105		15,039
Amounts reclassified from accumulated other comprehensive (loss) income	(21)		—		—		(21)		(5)		—		—		(5)
Net other comprehensive income during the period	19,985		—		(4,042)		15,943		14,929		—		105		15,034
Balance at June 30	$	24,565	$	365	$	(3,408)	$	21,522	$	3,232	$	461	$	—	$	3,693

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

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




	2020														2019
	Securities Available for Sale		Post-Retirement Obligation		Derivatives		Accumulated Other Comprehensive Income (Loss)		Securities Available for Sale		Post-Retirement Obligation		Derivatives		Accumulated Other Comprehensive Income (Loss)
	(dollars in thousands)
Balance at March 31	$	19,972	$	365	$	(2,985)	$	17,352	$	(4,563)	$	461	$	—	$	(4,102)


Other comprehensive income before reclassification adjustment	4,599		—		(423)		4,176		7,800		—		—		7,800
Amounts reclassified from accumulated other comprehensive (loss) income	(6)		—		—		(6)		(5)		—		—		(5)
Net other comprehensive income during the period	4,593		—		(423)		4,170		7,795		—		—		7,795
Balance at June 30	$	24,565	$	365	$	(3,408)	$	21,522	$	3,232	$	461	$	—	$	3,693

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 43 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~~six months ended ~~September~~ June 30:


	2020		2019
	(dollars in thousands)
Cash paid during the period for:
Interest	$	20,493	$	28,895
Income taxes	130		10,241
Non-cash investing and financing activities:

Loans transferred to other real estate owned and repossessed assets	2,368		1,776
Loans transferred from held to maturity to held for sale	13,442		16,823

Loans transferred from available for sale to held to maturity	1,908		—
Gross increase in market value adjustment to securities available for sale	25,298		18,897
Gross (decrease) increase in market value adjustment to derivatives	(5,117)		133
Investments committed to purchase, not settled	21,853		—
Noncash treasury stock reissuance	1,594		2,531


Proceeds from death benefit on bank owned life insurance not received	557		—

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

Note 54 Earnings per Share

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

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Weighted average common shares issued	113,914,902		113,914,902		113,914,902		113,914,902
Average treasury stock shares	(15,788,359)		(15,398,192)		(15,730,604)		(15,345,018)
Average deferred compensation shares	(41,426)		(37,411)		(39,939)		(37,411)
Average unearned nonvested shares	(152,784)		(132,625)		(116,379)		(119,981)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	97,932,333		98,346,674		98,027,980		98,412,492
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	173,095		216,524		185,023		201,907
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share	41,426		37,411		41,426		37,411

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	98,146,854		98,600,609		98,254,429		98,651,810
Basic Earnings per Share	$	0.24	$	0.28	$	0.29	$	0.53
Diluted Earnings per Share	$	0.24	$	0.28	$	0.29	$	0.53

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


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

Restricted Stock	122,066	$	13.72	$	15.44	106,631	$	10.02	$	14.49
Restricted Stock Units	91,240	$	12.43	$	15.37	21,888	$	16.62	$	16.62

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 65 Commitments and Contingent Liabilities

Commitments and Letters of Credit

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

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

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


	June 30, 2020		December 31, 2019
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	2,095,055	$	1,981,275
Financial standby letters of credit	16,596		16,630
Performance standby letters of credit	19,975		23,293
Commercial letters of credit	782		783

The notional amounts outstanding as of ~~September~~June 30, ~~2019~~2020 include amounts issued in ~~2019~~2020 of ~~$6.9 million~~$81 thousand in performance standby letters of credit and ~~$0.8 million~~$52 thousand in financial standby letters of credit. There were 0 commercial letters of credit issued

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

in ~~2019.~~2020. A liability of ~~$0.2~~$0.1 million has been recorded as of both ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~,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 ~~$4.8~~$2.9 million and ~~$5.0~~$4.5 million as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~,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~~June 30, ~~2019,~~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.

~~Note 7 Investment Securities~~

~~Securities Available for Sale~~

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

September 30, 2019 December 31, 2018
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential $ 8,112
$ 655
$ —
$ 8,767
$ 9,011
$ 479
$ (84 ) $ 9,406
Mortgage-Backed Securities – Commercial 168,006
3,585
—
171,591
169,633
214
(2,103 ) 167,744
Obligations of U.S. Government-Sponsored Enterprises:

Mortgage-Backed Securities – Residential 583,158
4,260
(2,594 ) 584,824
686,906
1,846
(15,391 ) 673,361
Other Government-Sponsored Enterprises 1,000
—
(2 ) 998
10,000
12
—
10,012
Obligations of States and Political Subdivisions 21,959
209
—
22,168
27,592
126
(6 ) 27,712
Corporate Securities 22,914
1,121
—
24,035
20,912
321
(221 ) 21,012
Total Securities Available for Sale $ 805,149
$ 9,830
$ (2,596 ) $ 812,383
$ 924,054
$ 2,998
$ (17,805 ) $ 909,247

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 Investment Securities

Securities Available for Sale

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


	June 30, 2020														December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	7,199	$	730	$	—	$	7,929	$	7,745	$	596	$	—	$	8,341
Mortgage-Backed Securities – Commercial	225,662		9,932		—		235,594		186,316		2,983		(166)		189,133
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	605,469		18,704		(18)		624,155		660,777		4,113		(2,943)		661,947

Other Government-Sponsored Enterprises	1,000		1		—		1,001		1,000		—		—		1,000
Obligations of States and Political Subdivisions	8,785		199		—		8,984		17,738		171		—		17,909
Corporate Securities	22,930		1,547		—		24,477		22,919		1,043		—		23,962



Total Securities Available for Sale	$	871,045	$	31,113	$	(18)	$	902,140	$	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.

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

Amortized
Cost Estimated
Fair Value
(dollars in thousands)
Due within 1 year $ 1,527
$ 1,531
Due after 1 but within 5 years 36,106
36,779
Due after 5 but within 10 years 8,240
8,891
Due after 10 years —
—
45,873
47,201
Mortgage-Backed Securities (a) 759,276
765,182
Total Debt Securities $ 805,149
$ 812,383
13

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

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

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

Gross gains from maturities recognized in 2019 were the result of calls on five municipal securities. Gross gains from sales transactions of $4.7 million recognized in 2018 were the result of the sale of the remaining pool trust preferred security portfolio. Gross gains from maturities of $3.4 million recognized in 2018 were the result of successful auction calls on PreSTL XIV and PreSTL IX, two of our pooled trust preferred securities.

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at June 30, 2020, by contractual maturity, are shown below.


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	4,998	$	5,070
Due after 1 but within 5 years	23,978		25,071
Due after 5 but within 10 years	3,739		4,321
Due after 10 years	—		—
	32,715		34,462
Mortgage-Backed Securities (a)	838,330		867,678
Total Debt Securities	$	871,045	$	902,140

(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 $232.9 million and a fair value of $243.5 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $605.4 million and a fair value of $624.2 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 six months ended June 30:


	2020		2019
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities
Gross gains	27		6
Gross losses	—		—

	27		6
Net gains and impairment	$	27	$	6

Securities available for sale with an estimated fair value of $814.7 million and $584.8 million were pledged as of June 30, 2020 and December 31, 2019, respectively, to secure public deposits and for other purposes required or permitted by law.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity

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

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


	June 30, 2020														December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	3,008	$	191	$	—	$	3,199	$	3,392	$	57	$	—	$	3,449
Mortgage-Backed Securities- Commercial	46,803		1,646		—		48,449		51,291		18		(184)		51,125
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	197,342		6,974		—		204,316		229,667		1,377		(294)		230,750
Mortgage-Backed Securities – Commercial	10,894		395		—		11,289		12,081		67		—		12,148

Obligations of States and Political Subdivisions	39,139		682		—		39,821		40,092		554		—		40,646
Debt Securities Issued by Foreign Governments	800		—		—		800		600		—		—		600




Total Securities Held to Maturity	$	297,986	$	9,888	$	—	$	307,874	$	337,123	$	2,073	$	(478)	$	338,718

The amortized cost and estimated fair value of debt securities held to maturity at ~~September~~June 30, ~~2019,~~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	$	1,012	$	1,018
Due after 1 but within 5 years	14,227		14,404
Due after 5 but within 10 years	24,700		25,199
Due after 10 years	—		—
	39,939		40,621
Mortgage-Backed Securities (a)	258,047		267,253
Total Debt Securities	$	297,986	$	307,874

Amortized
Cost Estimated
Fair Value
(dollars in thousands)
Due within 1 year $ 512
$ 512
Due after 1 but within 5 years 8,084
8,144
Due after 5 but within 10 years 33,902
34,464
Due after 10 years —
—
42,498
43,120
Mortgage-Backed Securities (a) 315,392
317,104
Total Debt Securities $ 357,890
$ 360,224
(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $49.8 million and a fair value of $51.6 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $208.2 million and a fair value of $215.6 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

~~(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 $57.8 million and a fair value of $57.9 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $257.6 million and a fair value of $259.2 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Securities held to maturity with an amortized cost of ~~$324.9~~$286.9 million and ~~$250.3~~$306.8 million were pledged as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, to secure public deposits and for other purposes required or permitted by law.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 87 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~, 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~~June 30, ~~2019~~2020 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:

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


	Less Than 12 Months						12 Months or More						Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)



Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	11,333	$	(18)	$	—	$	—	$	11,333	$	(18)








Total Securities	$	11,333	$	(18)	$	—	$	—	$	11,333	$	(18)

At ~~September~~June 30, ~~2019,~~2020, fixed income securities issued by U.S. Government-sponsored enterprises ~~and U.S. Government agencies~~ comprised ~~96% and 4%, respectively,~~100% of total unrealized losses due to changes in market interest rates. At ~~September~~June 30, ~~2019~~,2020, there are 402 debt securities in an unrealized loss position.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

The following table presents the gross unrealized losses and estimated fair values at December 31, ~~2018~~2019 by investment category and time frame for which securities have been in a continuous unrealized loss position:

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


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

Mortgage-Backed Securities - Commercial	$	54,501	$	(201)	$	16,365	$	(149)	$	70,866	$	(350)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	111,969		(436)		219,015		(2,801)		330,984		(3,237)





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

As of ~~September~~June 30, ~~2019~~,2020, our corporate securities had an amortized cost and an estimated fair value of $22.9 million and ~~$24.0~~$24.5 million, respectively. As of December 31, ~~2018,~~2019, our corporate securities had an amortized cost and estimated fair value of ~~$20.9~~$22.9 million and ~~$21.0~~$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 ~~September~~both June 30, ~~2019~~2020 and ~~4 corporate securities in an unrealized loss position as of~~ December 31, ~~2018~~.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.

ITEM 1. Financial Statements and Supplementary Data

During 2018, all of our pooled trust preferred collateralized debt obligations were liquidated either through a successful auction call or sale. Other-than-temporary impairment charges were recognized on the pooled trust preferred securities in 2008, 2009 and 2010. The following table provides a cumulative roll forward of credit losses recognized in earnings for the trust preferred securities:FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


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


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

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of ~~September~~June 30, ~~2019~~2020 and

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

December 31, ~~2018,~~2019, our FHLB stock totaled ~~$9.9~~$10.6 million and ~~$30.5~~$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~~six months ended ~~September~~June 30, ~~2019.~~2020.

As of both ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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~~six-months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~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.

Note 98 Loans and Allowance for Credit Losses

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

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


	June 30, 2020										December 31, 2019
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,746,495	$	26,604	$	1,773,099	$	1,212,026	$	29,827	$	1,241,853
Real estate construction	413,405		2,924		416,329		442,777		6,262		449,039
Residential real estate	1,494,925		228,363		1,723,288		1,415,808		265,554		1,681,362
Commercial real estate	2,089,658		135,052		2,224,710		1,958,346		159,173		2,117,519
Loans to individuals	773,467		11,182		784,649		685,416		13,959		699,375
Total loans	$	6,517,950	$	404,125	$	6,922,075	$	5,714,373	$	474,775	$	6,189,148

Credit Quality Information

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



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



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



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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

The following tables represent our credit risk profile by creditworthiness:


	September 30, 2019													June 30, 2020
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total			Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)													(dollars in thousands)
Originated loans													Originated loans
Pass	$	1,115,341	$	413,535	$	1,371,231	$	1,902,969	$	662,535	$	5,465,611	Pass	$	1,686,601	$	413,382	$	1,487,535	$	2,043,050	$	773,234	$	6,403,802
Non-Pass													Non-Pass
OAEM	49,258		27		487		22,709		—		72,481		OAEM	30,959		23		459		14,406		—		45,847
Substandard	8,471		—		8,768		21,855		303		39,397		Substandard	28,935		—		6,931		32,202		233		68,301
Doubtful	—		—		—		—		—		—		Doubtful	—		—		—		—		—		—
Total Non-Pass	57,729		27		9,255		44,564		303		111,878		Total Non-Pass	59,894		23		7,390		46,608		233		114,148
Total	$	1,173,070	$	413,562	$	1,380,486	$	1,947,533	$	662,838	$	5,577,489	Total	$	1,746,495	$	413,405	$	1,494,925	$	2,089,658	$	773,467	$	6,517,950

Acquired loans													Acquired loans
Pass	$	30,986	$	6,134	$	283,171	$	169,935	$	15,033	$	505,259	Pass	$	24,743	$	2,092	$	226,353	$	128,482	$	11,171	$	392,841
Non-Pass													Non-Pass
OAEM	2,143		585		637		2,126		—		5,491		OAEM	204		524		520		1,420		—		2,668
Substandard	4,737		—		1,926		4,646		13		11,322		Substandard	1,657		308		1,490		5,150		11		8,616
Doubtful	—		—		—		—		—		—		Doubtful	—		—		—		—		—		—
Total Non-Pass	6,880		585		2,563		6,772		13		16,813		Total Non-Pass	1,861		832		2,010		6,570		11		11,284
Total	$	37,866	$	6,719	$	285,734	$	176,707	$	15,046	$	522,072	Total	$	26,604	$	2,924	$	228,363	$	135,052	$	11,182	$	404,125

2118

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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


	December 31, 2019
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,171,363	$	442,751	$	1,406,845	$	1,918,690	$	685,108	$	5,624,757
Non-Pass
OAEM	29,359		26		475		13,533		—		43,393
Substandard	11,304		—		8,488		26,123		308		46,223
Doubtful	—		—		—		—		—		—
Total Non-Pass	40,663		26		8,963		39,656		308		89,616
Total	$	1,212,026	$	442,777	$	1,415,808	$	1,958,346	$	685,416	$	5,714,373

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

Portfolio Risks

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

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of ~~September~~June 30, ~~2019~~.2020. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~.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, 2019															June 30, 2020
	30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total			30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)															(dollars in thousands)
Originated loans															Originated loans
Commercial, financial, agricultural and other	$	165	$	345	$	26	$	4,808	$	5,344	$	1,167,726	$	1,173,070	Commercial, financial, agricultural and other	$	155	$	48	$	15	$	8,423	$	8,641	$	1,737,854	$	1,746,495
Real estate construction	—		—		—		—		—		413,562		413,562		Real estate construction	—		—		—		—		—		413,405		413,405
Residential real estate	4,756		1,438		935		6,465		13,594		1,366,892		1,380,486		Residential real estate	2,028		695		562		6,046		9,331		1,485,594		1,494,925
Commercial real estate	671		406		103		7,590		8,770		1,938,763		1,947,533		Commercial real estate	220		69		—		30,097		30,386		2,059,272		2,089,658
Loans to individuals	3,090		775		845		302		5,012		657,826		662,838		Loans to individuals	1,371		492		632		232		2,727		770,740		773,467
Total	$	8,682	$	2,964	$	1,909	$	19,165	$	32,720	$	5,544,769	$	5,577,489	Total	$	3,774	$	1,304	$	1,209	$	44,798	$	51,085	$	6,466,865	$	6,517,950

Acquired loans															Acquired loans
Commercial, financial, agricultural and other	$	10	$	—	$	4	$	4,693	$	4,707	$	33,159	$	37,866	Commercial, financial, agricultural and other	$	264	$	—	$	—	$	74	$	338	$	26,266	$	26,604
Real estate construction	—		—		—		—		—		6,719		6,719		Real estate construction	—		—		—		308		308		2,616		2,924
Residential real estate	394		101		119		1,818		2,432		283,302		285,734		Residential real estate	580		76		174		1,313		2,143		226,220		228,363
Commercial real estate	—		—		—		1,612		1,612		175,095		176,707		Commercial real estate	—		—		—		2,064		2,064		132,988		135,052
Loans to individuals	220		16		22		13		271		14,775		15,046		Loans to individuals	55		24		38		11		128		11,054		11,182
Total	$	624	$	117	$	145	$	8,136	$	9,022	$	513,050	$	522,072	Total	$	899	$	100	$	212	$	3,770	$	4,981	$	399,144	$	404,125

2320

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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


	December 31, 2019
	30 - 59 days past due		60 - 89 days past due		90 days or greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	391	$	57	$	140	$	8,780	$	9,368	$	1,202,658	$	1,212,026
Real estate construction	198		—		9		—		207		442,570		442,777
Residential real estate	3,757		749		736		6,646		11,888		1,403,920		1,415,808
Commercial real estate	227		114		—		6,609		6,950		1,951,396		1,958,346
Loans to individuals	4,070		1,020		931		307		6,328		679,088		685,416
Total	$	8,643	$	1,940	$	1,816	$	22,342	$	34,741	$	5,679,632	$	5,714,373

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

Nonaccrual Loans

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

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

Impaired Loans

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

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

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 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), along with a joint agency statement issued by banking regulators,

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

provides that short-term modifications of up to 180 days made 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 second quarter, the Company granted approximately 6,500 short-term loan modifications to its customers with aggregate principal balances of $1.4 billion. Since most of these deferrals were for a 90-day period, as of June 30, 2020, the balance of loans in deferral status had fallen to $611.1 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 90 day forbearance will be more credit driven than the first deferral and will be based on a complete evaluation of the customers 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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were 0 impaired loans held for sale. During the ~~nine~~six months ended, ~~September~~June 30, 2020 and 2019, there were 0 gains ~~of $0.4 million were~~ recognized on the sale of an impaired ~~commercial real estate loan. There~~loans. During the six months ended June 30,2019, there were $0.4 million in gains ~~of $1.2 million~~ recognized on the sale of an impaired ~~commercial, financial, agricultural and other relationship during the nine months ended September 30, 2018.~~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~~June 30, ~~2019~~2020 and December 31, ~~2018~~.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.


	June 30, 2020										December 31, 2019
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Originated loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	7,620	$	10,557			$	1,848	$	6,997
Real estate construction	—		—				—		—
Residential real estate	9,778		11,770				10,372		12,437
Commercial real estate	14,786		15,053				3,015		3,210
Loans to individuals	475		845				406		640
Subtotal	32,659		38,225				15,641		23,284
With an allowance recorded:
Commercial, financial, agricultural and other	2,019		7,071		$	958	8,290		10,032		$	1,580
Real estate construction	—		—		—		—		—		—
Residential real estate	254		358		—		474		498		1
Commercial real estate	17,136		17,154		5,590		5,293		5,308		851
Loans to individuals	—		—		—		—		—		—
Subtotal	19,409		24,583		6,548		14,057		15,838		2,432
Total	$	52,068	$	62,808	$	6,548	$	29,698	$	39,122	$	2,432

September 30, 2019 December 31, 2018
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 $ 1,638
$ 7,014

$ 8,735
$ 16,442

Real estate construction —
—

—
—

Residential real estate 9,760
11,516

10,726
12,571

Commercial real estate 3,274
3,502

3,599
3,812

Loans to individuals 392
593

281
408

Subtotal 15,064
22,625

23,341
33,233

With an allowance recorded:
Commercial, financial, agricultural and other 4,644
6,386
$ 1,054
3,042
3,181
$ 797
Real estate construction —
—
—
—
—
—
Residential real estate 920
976
4
486
495
107
Commercial real estate 6,408
6,543
469
1,866
1,878
596
Loans to individuals —
—
—
—
—
—
Subtotal 11,972
13,905
1,527
5,394
5,554
1,500
Total $ 27,036
$ 36,530
$ 1,527
$ 28,735
$ 38,787
$ 1,500

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	June 30, 2020										December 31, 2019
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Acquired loans
With no related allowance recorded:
Commercial, financial, agricultural and other	$	74	$	74			$	73	$	73
Real estate construction	—		—				—		—
Residential real estate	1,499		1,875				2,136		2,585
Commercial real estate	245		260				298		320
Loans to individuals	11		14				12		15
Subtotal	1,829		2,223				2,519		2,993
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—		$	—
Real estate construction	308		308		171		—		—		—
Residential real estate	—		—		—		—		—		—
Commercial real estate	1,818		1,854		176		—		—		—
Loans to individuals	—		—		—		—		—		—
Subtotal	2,126		2,162		347		—		—		—
Total	$	3,955	$	4,385	$	347	$	2,519	$	2,993	$	—

September 30, 2019 December 31, 2018
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 $ 4,693
$ 4,717
$ 73
$ 73

Real estate construction —
—
—
—

Residential real estate 1,971
2,413
2,031
2,604

Commercial real estate 1,459
2,843
1,042
2,052

Loans to individuals 13
15
15
17

Subtotal 8,136
9,988
3,161
4,746

With an allowance recorded:
Commercial, financial, agricultural and other —
—
$ —
131
131
$ 131
Real estate construction —
—
—
—
—
—
Residential real estate —
—
—
—
—
—
Commercial real estate 153
165
19
—
—
—
Loans to individuals —
—
—
—
—
—
Subtotal 153
165
19
131
131
131
Total $ 8,289
$ 10,153
$ 19
$ 3,292
$ 4,877
$ 131


	For the Six Months Ended June 30,
	2020														2019
	Originated Loans						Acquired Loans						Originated Loans				Acquired Loans
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	6,894	$	34	$	74	$	—	$	2,216	$	7	$	1,035	$	—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	10,182		159		1,922		17		10,577		186		1,975		5
Commercial real estate	14,367		67		238		—		3,256		101		620		18
Loans to individuals	457		6		11		—		340		7		14		—
Subtotal	31,900		266		2,245		17		16,389		301		3,644		23
With an allowance recorded:
Commercial, financial, agricultural and other	1,881		1		—		—		3,784		30		—		—
Real estate construction	—		—		51		—		—		—		—		—
Residential real estate	290		—		—		—		571		12		—		—
Commercial real estate	11,509		4		1,222		—		5,550		2		162		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	13,680		5		1,273		—		9,905		44		162		—
Total	$	45,580	$	271	$	3,518	$	17	$	26,294	$	345	$	3,806	$	23

For the Nine Months Ended September 30,
2019 2018
Originated Loans Acquired Loans Originated Loans Acquired Loans
Average
recorded
investment Interest
income
recognized Average
recorded
investment Interest
income
recognized Average
recorded
investment Interest
income
recognized Average
recorded
investment Interest
income
recognized
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other $ 2,129
$ 10
$ 2,255
$ —
$ 17,838
$ 576
$ 261
$ 10
Real estate construction —
—
—
—
—
—
—
—
Residential real estate 10,751
280
1,966
6
10,639
191
1,779
3
Commercial real estate 3,854
129
636
18
7,632
146
1,558
—
Loans to individuals 356
11
14
—
322
6
16
—
Subtotal 17,090
430
4,871
24
36,431
919
3,614
13
With an allowance recorded:
Commercial, financial, agricultural and other 4,064
36
—
—
5,979
16
—
—
Real estate construction —
—
—
—
—
—
—
—
Residential real estate 347
6
—
—
532
11
—

Commercial real estate 5,357
2
160
—
1,787
3
—
—
Loans to individuals —
—
—
—
—
—
—
—
Subtotal 9,768
44
160
—
8,298
30
—
—
Total $ 26,858
$ 474
$ 5,031
$ 24
$ 44,729
$ 949
$ 3,614
$ 13

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	For the Three Months Ended June 30,
	2020														2019
	Originated Loans						Acquired Loans						Originated Loans				Acquired Loans
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	6,758	$	12	$	74	$	—	$	2,268	$	5	$	1,630	$	—
Real estate construction	—		—		—		—		—		—		—		—
Residential real estate	9,836		80		1,753		15		10,242		115		1,969		4
Commercial real estate	17,411		48		246		—		3,034		65		423		17
Loans to individuals	468		4		11		—		357		5		14		—
Subtotal	34,473		144		2,084		15		15,901		190		4,036		21
With an allowance recorded:
Commercial, financial, agricultural and other	2,028		—		—		—		3,957		16		—		—
Real estate construction	—		—		103		—		—		—		—		—
Residential real estate	254		—		—		—		653		7		—		—
Commercial real estate	17,142		—		1,828		—		7,304		1		161		—
Loans to individuals	—		—		—		—		—		—		—		—
Subtotal	19,424		—		1,931		—		11,914		24		161		—
Total	$	53,897	$	144	$	4,015	$	15	$	27,815	$	214	$	4,197	$	21

For the Three Months Ended September 30,
2019 2018
Originated Loans Acquired Loans Originated Loans Acquired Loans
Average
recorded
investment Interest
Income
Recognized Average
recorded
investment Interest
Income
Recognized Average
recorded
investment Interest
Income
Recognized Average
recorded
investment Interest
Income
Recognized
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other $ 1,902
$ 3
$ 4,697
$ —
$ 5,697
$ 8
$ 73
$ 10
Real estate construction —
—
—
—
—
—
—
—
Residential real estate 10,254
86
1,950
1
10,627
59
2,541
2
Commercial real estate 3,582
28
666
—
6,810
59
1,955
—
Loans to individuals 389
4
13
—
320
2
16
—
Subtotal 16,127
121
7,326
1
23,454
128
4,585
12
With an allowance recorded:
Commercial, financial, agricultural and other 4,677
8
—
—
10,298
4
—
—
Real estate construction —
—
—
—
—
—
—
—
Residential real estate 740
1
—
—
565
2
—
—
Commercial real estate 6,443
1
155
—
4,342
1
—
—
Loans to individuals —
—
—
—
—
—
—
—
Subtotal 11,860
10
155
—
15,205
7
—
—
Total $ 27,987
$ 131
$ 7,481
$ 1
$ 38,659
$ 135
$ 4,585
$ 12

Unfunded commitments related to nonperforming loans were ~~$0.2~~$1.1 million at ~~September~~June 30, ~~2019~~2020 and ~~$1.6~~$1.7 million at December 31, ~~2018~~.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 ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018~~.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, 2019 December 31, 2018
(dollars in thousands)
Troubled debt restructured loans
Accrual status $ 8,024
$ 8,757
Nonaccrual status 11,074
11,761
Total $ 19,098
$ 20,518
Commitments
Letters of credit $ 60
$ 60
Unused lines of credit 131
1,027
Total $ 191
$ 1,087


	June 30, 2020		December 31, 2019
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	7,455	$	7,542
Nonaccrual status	3,600		6,037
Total	$	11,055	$	13,579
Commitments
Letters of credit	$	60	$	60
Unused lines of credit	984		163
Total	$	1,044	$	223

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Six Months Ended June 30, 2020
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)


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

For the Nine Months Ended September 30, 2019
Type of Modification
Number
of
Contracts Extend
Maturity Modify
Rate Modify
Payments Total
Pre-Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other 2
$ —
$ —
$ 156
$ 156
$ 157
$ —
Residential real estate 14
17
149
842
1,008
933
1
Commercial real estate 3
—
—
6,119
6,119
5,740
397
Loans to individuals 7
—
—
98
98
87
—
Total 26
$ 17
$ 149
$ 7,215
$ 7,381
$ 6,917
$ 398

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


	For the Six Months Ended June 30, 2019
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	1	$	—	$	—	$	61	$	61	$	62	$	—

Residential real estate	11	17		117		788		922		897		37
Commercial real estate	3	—		—		6,119		6,119		5,854		969
Loans to individuals	5	—		—		62		62		56		—
Total	20	$	17	$	117	$	7,030	$	7,164	$	6,869	$	1,006

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a re-amortization of the principal and an extension of the maturity. For ~~both~~ the ~~nine~~six months ended ~~September~~ June 30, 2020 and 2019, $71 thousand and ~~2018, $0.1 million and $0.2 million,~~$117 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 ~~2019~~2020 and ~~2018~~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 June 30, 2020
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)


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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

For the Three Months Ended September 30, 2019
Type of Modification
Number
of
Contracts Extend
Maturity Modify
Rate Modify
Payments Total
Pre-Modification
Outstanding
Recorded
Investment Post-
Modification
Outstanding
Recorded
Investment Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other 1
$ —
$ —
$ 95
$ 95
$ 96
$ —
Residential real estate 3
—
32
53
85
85
—
Loans to individuals 2
—
—
37
37
34
—
Total 6
$ —
$ 32
$ 185
$ 217
$ 215
$ —


															For the Three Months Ended June 30, 2019
	For the Three Months Ended, September 30, 2018															Type of Modification
		Type of Modification													Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve			(dollars in thousands)
	(dollars in thousands)
Commercial, financial, agricultural and other	1	$	74	$	—	$	—	$	74	$	74	$	—

Residential real estate	7	65		70		230		365		338		—		Residential real estate	5	$	—	$	68	$	273	$	341	$	337	$	969
Commercial real estate														Commercial real estate	2	—		—		5,878		5,878		5,613		—
Loans to individuals	6	—		26		17		43		40		—		Loans to individuals	3	—		—		14		14		14		—
Total	14	$	139	$	96	$	247	$	482	$	452	$	—	Total	10	$	—	$	68	$	6,165	$	6,233	$	5,964	$	969

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~~June 30, 2020 and 2019, ~~and 2018, $32~~$53 thousand and ~~$96~~$68 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 ~~2019~~2020 and ~~2018~~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~~six months ended ~~September~~June 30:

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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



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


Residential real estate	1	$	50	1	$	22

Loans to individuals	—	—		1	10
Total	1	$	50	2	$	32

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~~June 30:



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


Residential real estate	1	$	50	1	$	22


Total	1	$	50	1	$	22

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

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

For the Nine Months Ended September 30, 2019
Commercial,
financial,
agricultural
and other Real estate
construction Residential
real estate Commercial
real estate Loans to
individuals Total
(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance $ 19,235
$ 2,002
$ 3,934
$ 18,382
$ 4,033
$ 47,586
Charge-offs (1,584 ) —
(617 ) (305 ) (4,049 ) (6,555 )
Recoveries 180
158
190
160
419
1,107
Provision (credit) 2,109
250
409
790
4,310
7,868
Ending balance 19,940
2,410
3,916
19,027
4,713
50,006
Acquired loans:
Beginning balance 139
—
35
4
—
178
Charge-offs (601 ) —
(46 ) (1,376 ) (9 ) (2,032 )
Recoveries 53
—
46
—
14
113
Provision (credit) 416
—
(34 ) 1,393
(5 ) 1,770
Ending balance 7
—
1
21
—
29
Total ending balance $ 19,947
$ 2,410
$ 3,917
$ 19,048
$ 4,713
$ 50,035
Ending balance: individually evaluated for impairment $ 1,054
$ —
$ 4
$ 488
$ —
$ 1,546
Ending balance: collectively evaluated for impairment 18,893
2,410
3,913
18,560
4,713
48,489
Loans:
Ending balance 1,210,936
420,281
1,666,220
2,124,240
677,884
6,099,561
Ending balance: individually evaluated for impairment 10,417
—
4,102
10,825
—
25,344
Ending balance: collectively evaluated for impairment 1,200,519
420,281
1,662,118
2,113,415
677,884
6,074,217

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Six Months Ended June 30, 2020
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	20,221	$	2,558	$	4,091	$	19,731	$	4,984	$	51,585
Charge-offs	(1,771)		—		(559)		(2,415)		(3,809)		(8,554)
Recoveries	117		26		121		44		476		784
Provision (credit)	6,245		483		5,586		15,770		7,683		35,767
Ending balance	24,812		3,067		9,239		33,130		9,334		79,582
Acquired loans:
Beginning balance	13		—		2		37		—		52
Charge-offs	—		—		(91)		(2)		(207)		(300)
Recoveries	15		—		25		—		8		48
Provision (credit)	304		171		64		1,321		199		2,059
Ending balance	332		171		—		1,356		—		1,859
Total ending balance	$	25,144	$	3,238	$	9,239	$	34,486	$	9,334	$	81,441
Ending balance: individually evaluated for impairment	$	958	$	171	$	—	$	5,766	$	—	$	6,895
Ending balance: collectively evaluated for impairment	24,186		3,067		9,239		28,720		9,334		74,546
Loans:
Ending balance	1,773,099		416,329		1,723,288		2,224,710		784,649		6,922,075
Ending balance: individually evaluated for impairment	3,336		308		1,498		32,537		—		37,679
Ending balance: collectively evaluated for impairment	1,769,763		416,021		1,721,790		2,192,173		784,649		6,884,396

For the Nine Months Ended September 30, 2018
Commercial,
financial,
agricultural
and other Real estate
construction Residential
real estate Commercial
real estate Loans to
individuals Total
(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance $ 23,418
$ 1,349
$ 2,753
$ 17,328
$ 3,404
$ 48,252
Charge-offs (3,443 ) —
(949 ) (2,411 ) (3,321 ) (10,124 )
Recoveries 671
93
222
123
460
1,569
Provision (credit) 1,343
150
1,584
4,623
3,274
10,974
Ending balance 21,989
1,592
3,610
19,663
3,817
50,671
Acquired loans:
Beginning balance 11
—
6
29
—
46
Charge-offs (93 ) —
(57 ) —
(15 ) (165 )
Recoveries 31

6
75
—
24
136
Provision (credit) 71
(6 ) 23
(21 ) (9 ) 58
Ending balance 20
—
47
8
—
75
Total ending balance $ 22,009
$ 1,592
$ 3,657
$ 19,671
$ 3,817
$ 50,746
Ending balance: individually evaluated for impairment $ 3,474
$ —
$ 167
$ 1,722
$ —
$ 5,363
Ending balance: collectively evaluated for impairment 18,535
1,592
3,490
17,949
3,817
45,383
Loans:
Ending balance 1,116,204
298,395
1,533,338
2,136,431
578,414
5,662,782
Ending balance: individually evaluated for impairment 12,864
—
4,522
12,012
—
29,398
Ending balance: collectively evaluated for impairment 1,103,340
298,395
1,528,816
2,124,419
578,414
5,633,384

For the Three Months Ended September 30, 2019
Commercial,
financial,
agricultural
and other Real estate
construction Residential
real estate Commercial
real estate Loans to
individuals Total
(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance $ 20,678
$ 2,491
$ 4,133
$ 19,287
$ 4,407
$ 50,996
Charge-offs (742 ) —
(383 ) (6 ) (1,571 ) (2,702 )
Recoveries 41
74
6
81
162
364
Provision (credit) (37 ) (155 ) 160
(335 ) 1,715
1,348
Ending balance 19,940
2,410
3,916
19,027
4,713
50,006
Acquired loans:
Beginning balance 15
—
25
25
—
65
Charge-offs (49 ) —
—
(1,376 ) (3 ) (1,428 )
Recoveries 21
—
11
—
—
32
Provision (credit) 20
—
(35 ) 1,372
3
1,360
Ending balance 7
—
1
21
—
29
Total ending balance $ 19,947
$ 2,410
$ 3,917
$ 19,048
$ 4,713
$ 50,035

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	For the Six Months Ended June 30, 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	(842)		—		(234)		(299)		(2,478)		(3,853)
Recoveries	139		84		184		79		257		743
Provision (credit)	2,146		405		249		1,125		2,595		6,520
Ending balance	20,678		2,491		4,133		19,287		4,407		50,996
Acquired loans:
Beginning balance	139		—		35		4		—		178
Charge-offs	(552)		—		(46)		—		(6)		(604)
Recoveries	32		—		35		—		14		81
Provision (credit)	396		—		1		21		(8)		410
Ending balance	15		—		25		25		—		65
Total ending balance	$	20,693	$	2,491	$	4,158	$	19,312	$	4,407	$	51,061
Ending balance: individually evaluated for impairment	$	1,330	$	—	$	87	$	1,113	$	—	$	2,530
Ending balance: collectively evaluated for impairment	19,363		2,491		4,071		18,199		4,407		48,531
Loans:
Ending balance	1,236,424		441,854		1,579,441		2,118,582		626,758		6,003,059
Ending balance: individually evaluated for impairment	11,206		—		4,065		10,216		—		25,487
Ending balance: collectively evaluated for impairment	1,225,218		441,854		1,575,376		2,108,366		626,758		5,977,572

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	For the Three Months Ended June 30, 2020
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	27,378	$	2,852	$	7,724	$	31,265	$	8,268	$	77,487
Charge-offs	(1,285)		—		(7)		(2,150)		(1,326)		(4,768)
Recoveries	49		26		59		—		264		398
Provision (credit)	(1,330)		189		1,463		4,015		2,128		6,465
Ending balance	24,812		3,067		9,239		33,130		9,334		79,582
Acquired loans:
Beginning balance	350		—		—		1,238		—		1,588
Charge-offs	—		—		(66)		(1)		(71)		(138)
Recoveries	2		—		12		—		1		15
Provision (credit)	(20)		171		54		119		70		394
Ending balance	332		171		—		1,356		—		1,859
Total ending balance	$	25,144	$	3,238	$	9,239	$	34,486	$	9,334	$	81,441


	For the Three Months Ended June 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	$	19,815	$	2,254	$	4,150	$	19,218	$	4,163	$	49,600
Charge-offs	(359)		—		(98)		—		(1,368)		(1,825)
Recoveries	63		42		103		38		143		389
Provision (credit)	1,159		195		(22)		31		1,469		2,832
Ending balance	20,678		2,491		4,133		19,287		4,407		50,996
Acquired loans:
Beginning balance	18		—		35		—		—		53
Charge-offs	(26)		—		(1)		—		(1)		(28)
Recoveries	21		—		11		—		5		37
Provision (credit)	2		—		(20)		25		(4)		3
Ending balance	15		—		25		25		—		65
Total ending balance	$	20,693	$	2,491	$	4,158	$	19,312	$	4,407	$	51,061

Note 109 Leases

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Adoption of this standard resulted in the Company recognizing ~~an ROU asset~~right of-use ("ROU") assets of $38.5 million and a lease liability of $41.8 million on January 1, 2019.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

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


					June 30, 2020			December 31, 2019
Balance sheet:
Operating lease asset classified as premises and equipment					$	46,881		$	48,642
Operating lease liability classified as other liabilities					51,232			52,894
	For the Three Months Ended							For the Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020			June 30, 2019
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	1,368	$	1,347	$	2,736		$	2,684

Weighted average lease term, in years					14.96			16.10
Weighted average discount rate					3.41		%	3.48		%
Operating cash flows					$	1,325		$	1,136

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

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

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~September~~June 30, ~~2019~~2020 were as follows (dollars in thousands):


For the twelve months ended:
June 30, 2021	$	5,129
June 30, 2022	5,027
June 30, 2023	4,963
June 30, 2024	4,866
June 30, 2025	4,753
Thereafter	42,020
Total future minimum lease payments	66,758
Less remaining imputed interest	15,526
Operating lease liability	$	51,232

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1110 Income Taxes

In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income ~~Taxes”,~~Taxes,” at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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, 2016 are no longer open to examination by federal and state taxing authorities.

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

Note 1211 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”,~~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 identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, loans held for sale, interest rate derivatives (including interest rate caps, interest rate collars, interest rate swaps and risk participation agreements), certain other real estate owned and certain impaired loans.

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

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

Other investments recorded in the 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 8,7, “Impairment of Investment Securities.”

Loans held for sale primarily include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair value for these loans was determined on the basis of rates obtained in the respective secondary market. Loans

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

held for sale could also include commercial loans for which fair value is determined using an executed trade or market bid obtained from potential buyers.

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' and/or loan customers' credit risk since origination of the interest rate swap as well as interest rate caps, interest rate collars and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note ~~13,~~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 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 ~~2019~~,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 ~~pooled trust preferred collateralized debt obligations,~~ non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.

The estimated fair value of other investments included in Level 3 is based on carrying value as these securities do not have a readily determinable fair value.

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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In accordance with ASU No. ~~2011~~-4,2011-4, "Fair Value Measurements (Topic 820)," the following table provides information related to quantitative inputs and assumptions used in ~~September~~June 30, ~~2019~~2020 Level 3 fair value measurements.

Fair Value (dollars
in thousands)

Valuation
Technique

Unobservable Inputs

Range /
(weighted average)

June 30, 2020

Other Investments

1,670

CarryingValue

N/A

Impaired Loans

758

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$1.46 - $1.48 (b)

Oil per BBL/d

$36.00 - $36.00 (b)

Limited Partnership Investments

6,406

Par Value

N/A

December 31, 2019

Other Investments

1,670

CarryingValue

N/A

Impaired Loans

884

(a)

Gas Reserve Study

Discount rate

10.00%

Gas per MMBTU

$2.61 - $3.49 (b)

Oil per BBL/d

$47.09 - $53.14 (b)

2,239

Discounted Cash Flow

Discount Rate

$3.84 - $9.50

Limited Partnership Investments

5,795

Par Value

N/A

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

Fair Value (dollars
in thousands) Valuation
Technique Unobservable Inputs Range /
(weighted average)
Other Investments $ 1,670
CarryingValue N/A N/A
Impaired Loans 932 (a) Reserve study Discount rate 10.00%
Gas per MMBTU $2.61 - $3.49 (b)
Oil per BBL/d $47.09 - $53.14 (b)
2,539 (a) Discounted Cash Flow Discount Rate 3.84% - 9.50%
Limited Partnership Investments 4,131
Par Value N/A N/A

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


~~(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:


	June 30, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	7,929	$	—	$	7,929
Mortgage-Backed Securities - Commercial	—		235,594		—		235,594
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		624,155		—		624,155

Other Government-Sponsored Enterprises	—		1,001		—		1,001
Obligations of States and Political Subdivisions	—		8,984		—		8,984
Corporate Securities	—		24,477		—		24,477



Total Securities Available for Sale	—		902,140		—		902,140
Other Investments	—		10,602		1,670		12,272
Loans Held for Sale	—		30,409		—		30,409
Other Assets^(a)	—		62,036		6,406		68,442
Total Assets	$	—	$	1,005,187	$	8,076	$	1,013,263
Other Liabilities^(a)	$	—	$	68,883	$	—	$	68,883
Total Liabilities	$	—	$	68,883	$	—	$	68,883

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

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



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

~~The tables below present~~(a)Hedging and non-hedging interest rate derivatives and limited partnership investments

For the ~~balances of~~six months ended June 30, changes in Level 3 assets and liabilities measured at fair value on a recurring ~~basis:~~basis are summarized as follows:


	2020
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	5,795	$	7,465
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		611		611
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	6,406	$	8,076

September 30, 2019
Level 1 Level 2 Level 3 Total
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential $ —
$ 8,767
$ —
$ 8,767
Mortgage-Backed Securities - Commercial —
171,591
—
171,591
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential —
584,824
—
584,824
Other Government-Sponsored Enterprises —
998
—
998
Obligations of States and Political Subdivisions —
22,168
—
22,168
Corporate Securities —
24,035
—
24,035
Total Securities Available for Sale —
812,383
—
812,383
Other Investments —
9,891
1,670
11,561
Loans Held for Sale —
20,288
—
20,288
Other Assets(a) —
27,571
4,131
31,702
Total Assets $ —
$ 870,133
$ 5,801
$ 875,934
Other Liabilities(a) $ —
$ 27,784
$ —
$ 27,784
Total Liabilities $ —
$ 27,784
$ —
$ 27,784


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

December 31, 2018
Level 1 Level 2 Level 3 Total
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential $ —
$ 9,406
$ —
$ 9,406
Mortgage-Backed Securities - Commercial —
167,744
—
167,744
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential —
673,361
—
673,361
Other Government-Sponsored Enterprises —
10,012
—
10,012
Obligations of States and Political Subdivisions —
27,712
—
27,712
Corporate Securities —
21,012
—
21,012
Total Securities Available for Sale —
909,247
—
909,247
Other Investments —
30,456
1,670
32,126
Loans Held for Sale —
11,881
—
11,881
Other Assets(a) —
1,769
2,696
4,465
Total Assets $ —
$ 953,353
$ 4,366
$ 957,719
Other Liabilities(a) $ —
$ 2,081
$ —
$ 2,081
Total Liabilities $ —
$ 2,081
$ —
$ 2,081


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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

2019
Other Investments Other
Assets Total
(dollars in thousands)
Balance, beginning of period $ 1,670
$ 2,696
$ 4,366
Total gains or losses
Included in earnings —
198
198
Included in other comprehensive income —
—
—
Purchases, issuances, sales and settlements
Purchases —
1,237
1,237
Issuances —
—
—
Sales —
—
—
Settlements —
—
—
Transfers from Level 3 —
—
—
Transfers into Level 3 —
—
—
Balance, end of period $ 1,670
$ 4,131
$ 5,801

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


	2019
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	2,696	$	4,366
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		(47)		(47)
Purchases, issuances, sales and settlements
Purchases	—		663		663
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	3,312	$	4,982

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~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~~June 30, ~~2019~~2020 and ~~2018.~~2019.

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


	2020
	Other Investments		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	1,670	$	6,223	$	7,893
Total gains or losses
Included in earnings	—		—		—
Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements
Purchases	—		183		183
Issuances	—		—		—
Sales	—		—		—
Settlements	—		—		—
Transfers from Level 3	—		—		—
Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	6,406	$	8,076

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, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:~~

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


	2018									2019
	Other Investments		Other Assets			Total				Other Investments		Other Assets		Total
	(dollars in thousands)									(dollars in thousands)
Balance, beginning of period	$	1,670	$	2,297		$	3,967		Balance, beginning of period	$	1,670	$	3,200	$	4,870
Total gains or losses									Total gains or losses
Included in earnings	—		—			—			Included in earnings	—		—		—
Included in other comprehensive income	—		—			—			Included in other comprehensive income	—		—		—
Purchases, issuances, sales and settlements									Purchases, issuances, sales and settlements
Purchases	—		272			272			Purchases	—		112		112
Issuances	—		—			—			Issuances	—		—		—
Sales	—		—			—			Sales	—		—		—
Settlements	—		(48		)	(48		)	Settlements	—		—		—
Transfers from Level 3	—		—			—			Transfers from Level 3	—		—		—
Transfers into Level 3	—		—			—			Transfers into Level 3	—		—		—
Balance, end of period	$	1,670	$	2,521		$	4,191		Balance, end of period	$	1,670	$	3,312	$	4,982

During the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, there were 0no transfers between fair value Levels 1, 2 or 3. There were 0no 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~~June 30, ~~2019~~2020 and ~~2018.~~2019.

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


	June 30, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	30,026	$	19,102	$	49,128
Other real estate owned	—		1,882		—		1,882
Total Assets	$	—	$	31,908	$	19,102	$	51,010

September 30, 2019
Level 1 Level 2 Level 3 Total
(dollars in thousands)
Impaired loans $ —
$ 20,407
$ 13,372
$ 33,779
Other real estate owned —
1,981
—
1,981
Total Assets $ —
$ 22,388
$ 13,372
$ 35,760

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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


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

The following ~~(losses) gains~~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,
2019 2018 2019 2018
(dollars in thousands)
Impaired loans $ (954 ) $ (239 ) $ (2,606 ) $ (6,659 )
Other real estate owned (42 ) (128 ) (51 ) (544 )
Total losses $ (996 ) $ (367 ) $ (2,657 ) $ (7,203 )


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
	(dollars in thousands)
Impaired loans	$	191	$	(497)	$	(6,822)	$	(1,460)
Other real estate owned	(26)		(532)		(76)		(541)
Total losses	$	165	$	(1,029)	$	(6,898)	$	(2,001)

Impaired loans over ~~$100~~$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~~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~~$250 thousand and over. For real estate secured loans with balances under ~~$250~~$250 thousand,, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned, determined using an internal valuation, is classified as Level 3. OREO has a current carrying value of $1.6 million as of ~~September~~June 30, ~~2019~~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 and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note ~~14,~~13, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the ~~nine~~six months ended~~September~~ June 30, ~~2019~~.2020.

FASB ASC 825-10, “Transition Related to FSP FAS ~~107-1~~”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.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was ~~$0.2~~$0.1 million at both ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019. See Note 6,5, “Commitments and Contingent Liabilities,” for additional information.

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

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

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

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

September 30, 2019
Fair Value Measurements Using:
Carrying
Amount Total Level 1 Level 2 Level 3
(dollars in thousands)
Financial assets
Cash and due from banks $ 112,241
$ 112,241
$ 112,241
$ —
$ —
Interest-bearing deposits 16,408
16,408
16,408
—
—
Securities available for sale 812,383
812,383
—
812,383
—
Securities held to maturity 357,890
360,224
—
360,224
—
Other investments 11,561
11,561
—
9,891
1,670
Loans held for sale 20,288
20,288
—
20,288
—
Loans 6,099,561
6,213,529
—
20,407
6,193,122
Financial liabilities
Deposits 6,677,996
6,685,082
—
6,685,082
—
Short-term borrowings 83,735
83,698
—
83,698
—
Subordinated debt 170,409
169,601
—
—
169,601
Long-term debt 57,078
57,389
—
57,389
—
Capital lease obligation 6,917
6,917
—
6,917
—

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:


	June 30, 2020
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	108,970	$	108,970	$	108,970	$	—	$	—
Interest-bearing deposits	348,763		348,763		348,763		—		—
Securities available for sale	902,140		902,140		—		902,140		—
Securities held to maturity	297,986		307,874		—		307,874		—
Other investments	12,272		12,272		—		10,602		1,670
Loans held for sale	30,409		30,409		—		30,409		—
Loans	6,922,075		7,273,280		—		30,026		7,243,254
Financial liabilities
Deposits	7,782,201		7,788,041		—		7,788,041		—
Short-term borrowings	108,484		107,903		—		107,903		—
Subordinated debt	170,531		159,149		—		—		159,149
Long-term debt	56,590		58,476		—		58,476		—
Capital lease obligation	6,602		6,602		—		6,602		—

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


	December 31, 2019
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	102,346	$	102,346	$	102,346	$	—	$	—
Interest-bearing deposits	19,510		19,510		19,510		—		—
Securities available for sale	902,292		902,292		—		902,292		—
Securities held to maturity	337,123		338,718		—		338,718		—
Other investments	16,761		16,761		—		15,091		1,670
Loans held for sale	15,989		15,989		—		15,989		—
Loans	6,189,148		6,393,872		—		12,267		6,381,605
Financial liabilities
Deposits	6,677,615		6,677,595		—		6,677,595		—
Short-term borrowings	201,853		201,151		—		201,151		—
Subordinated debt	170,450		171,772		—		—		171,772
Long-term debt	56,917		58,051		—		58,051		—
Capital lease obligation	6,815		6,815		—		6,815		—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1312 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 3537 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 1214 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.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

Derivatives Designated as Hedging Instruments

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

In August 2019, the Company entered into two interest rate swap contracts that are designated as cash flow hedges. These contracts mature on August 15, 2024 and August 15, 2026 and have notional amounts of $30.0 million and $40.0 million, respectively. The Company's risk management objective for 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~~six months ended ~~September~~June 30, ~~2019~~2020 there was a ~~$0.1 million positive~~negative impact of $66 thousand and $11 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",~~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~~June 30, ~~2019,~~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 "Other noninterest income" in the unaudited Consolidated Statements of Income. The impact to noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was an increase of ~~$12 thousand~~$1.9 and ~~$0.5~~$1.2 million, respectively.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At ~~September~~June 30, ~~2019,~~2020, the underlying funded mortgage loan commitments had a carrying value of ~~$23.4~~$19.9 million and a fair value of ~~$24.8~~$22.8 million, while the underlying unfunded mortgage loan commitments had a notional amount of ~~$32.7~~$44.9 million. At December 31, ~~2018,~~2019, the underlying funded mortgage loan commitments had a carrying value of ~~$6.9~~$9.8 million and a fair value of ~~$7.6~~$10.7 million, while the underlying unfunded mortgage loan commitments had a notional amount of ~~$9.9~~$25.5 million. The interest rate lock commitments decreased noninterest income by $0.2 million and increased other noninterest income by $0.2 million ~~and $0.1 million~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~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 noninterest expense" in the unaudited Consolidated Statements of Income. The increase in other noninterest expense for the ~~nine~~three and six months ended ~~September~~June 30, ~~2019~~2020 totaled $4$8 thousand and $3$12 thousand, ~~for the three months ended September~~respectively. At June 30, ~~2019. At September 30, 2019~~2020 and December 31, ~~2018,~~2019, the underlying loans had a carrying value of ~~$4.9~~$2.1 million and ~~$1.9~~$4.8 million, respectively, and a fair value of ~~$4.8~~$2.1 million and ~~$1.9~~$4.8 million, respectively.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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


	June 30, 2020		December 31, 2019
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(2,235)	$	(272)
Notional amount:
Interest rate derivatives	613,696		587,275
Interest rate caps	75,898		87,188
Interest rate collars	35,354		35,354
Risk participation agreements	226,017		164,632
Sold credit protection on risk participation agreements	(78,764)		(69,011)
Interest rate options	44,941		25,460
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	(4,316)		801
Notional amount	70,000		70,000
Interest rate forwards:
Fair value adjustment	(297)		(63)
Notional amount	45,000		30,000
Foreign exchange forwards:
Fair value adjustment	—		(41)
Notional amount	2,121		4,789

ITEM 1.

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

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
	(dollars in thousands)
Non-hedging interest rate derivatives
Increase (decrease) in other income	$	1,672	$	35	$	(753)	$	453
Increase in other expense	—		—		—		—
Hedging interest rate derivatives
Decrease in interest and fees on loans	—		—		—		(118)
Increase in interest from subordinated debentures	66		—		11		—
Increase in other expense	—		—		—		7
Hedging interest rate forwards
(Decrease) increase in other income	(248)		(15)		234		(79)
Increase in other expense	—		—		—		—
Hedging foreign exchange forwards
Increase (decrease) in other expense	8		(1)		12		1

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

“Other assets” and “Other liabilities.”

Note 1413 Goodwill

FASB ASC Topic 350-20, “Intangibles – Goodwill and Other” requires an annual valuation of the fair value of a reporting unit that has goodwill and a comparison of the fair value to the book value of equity to determine whether the goodwill has been

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as both of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$303.6 million and $274.2 million, respectively. The increase in goodwill during 2019 is the result of the acquisition of 14 branches from Santander, completed in the third quarter of 2019.~~ $303.3 million. NaN impairment charges on goodwill or other intangible assets were incurred in ~~2019~~2020 or ~~2018.~~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 ~~September~~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 June 30, ~~2019, goodwill~~2020. The evaluation concluded that it was more likely than not ~~considered impaired; however,~~that First Commonwealth's fair value exceeded its book value and therefore there was no triggering event. However, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1514 Subordinated Debentures

Subordinated debentures outstanding are as follows:

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


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

First Commonwealth Bank	2028	$	49,268	4.875% until June 1, 2023, then LIBOR + 1.845%	$	49,222	4.875% until June 1, 2023, then LIBOR + 1.845%
First Commonwealth Bank	2033	49,096		5.50% until June 1, 2028, then LIBOR + 2.37%	49,061		5.50% until June 1, 2028, then LIBOR + 2.37%
First Commonwealth Capital Trust II	2034	30,929		LIBOR + 2.85%	30,929		LIBOR + 2.85%
First Commonwealth Capital Trust III	2034	41,238		LIBOR + 2.85%	41,238		LIBOR + 2.85%
Total		$	170,531		$	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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $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 1615 Revenue Recognition

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

The Company also evaluated whether it has any significant contract balances. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration resulting in a contract receivable or before payment is due resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the Company has already received payment from the customer. First Commonwealth’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as trust income which is based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

Trust Income

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

Service Charges on Deposit Accounts

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED 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 ~~$2.3~~$1.4 million and ~~$1.7~~$1.6 million in commission expense as of ~~September~~June 30, ~~2019~~2020 and ~~2018,~~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.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

Other Income

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

Gains(losses) on sales of OREO

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

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

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

~~Note 17 New Accounting Pronouncements~~

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

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

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

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

4744

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:

~~adoption.~~


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
	(dollars in thousands)
Noninterest Income
In-scope of Topic 606:
Trust income	$	2,109	$	1,970	$	4,220	$	3,896
Service charges on deposit accounts	3,286		4,593		8,031		8,838
Insurance and retail brokerage commissions	1,831		2,014		3,826		3,975
Card-related interchange income	5,886		5,441		11,148		10,171
Gain on sale of other loans and assets	173		422		332		680
Other income	824		990		1,768		1,853
Noninterest Income (in-scope of Topic 606)	14,109		15,430		29,325		29,413
Noninterest Income (out-of-scope of Topic 606)	7,703		6,476		11,760		11,365
Total Noninterest Income	$	21,812	$	21,906	$	41,085	$	40,778

Note 16 Subsequent Event

Branch Consolidation

On July 28, 2020, the Company announced a profitability initiative termed "Project THRIVE" with a goal of growing our business, maintaining adequate capital, protecting against further NIM compression and reducing operating expenses. As part of this initiative, 20% of the Company's retail locations will be consolidated into nearby offices prior to December 31, 2020. It is expected that this consolidation will result in approximately $3.5 million in consolidation-related costs to occur primarily in the third quarter of 2020.

Voluntary Retirement Program

On August 4, 2020, the Board of Directors of the Company approved a Voluntary Retirement Program (“VRP”) as part of the Company initiative “Project THRIVE”. Under the terms of the VRP, an eligible employee of the Company or its affiliates who will reach age 60 or above as of December 31, 2020 may elect to voluntarily terminate his or her employment and receive a severance benefit based upon years of service with the Company, subject to the terms and conditions of the VRP, including acceptance of such employee’s participation by the Company. As of July 31, 2020, 193 employees were potentially eligible to participate in the VRP. If all eligible employees were to elect and be accepted for participation in the VRP, the total expense of the VRP would be approximately $7.0 million. The ~~estimated impact at adoption~~actual cost of the VRP, and the amount of expense savings that the Company will realize, will depend onupon the ~~composition, characteristics~~level of participation and ~~quality~~the compensation and years of service of those employees who participate in the VRP, and the pace and salary levels at which employees may be hired to replace VRP participants. The Company expects to determine the number of VRP participants and recognize the estimated initial expense of the ~~loan portfolio as well as~~VRP during the ~~economic environment and forecasts as of the adoption date.~~quarter ended September 30, 2020.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. Income tax effects from any tax deductible goodwill should be taken into consideration of the carrying amount of the reporting unit when measuring for goodwill impairment, if applicable. An entity still has the option to perform the qualitative assessment for the reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

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

Table of Contents

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~,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) ~~local, regional, national~~the length and ~~international~~extent of the economic ~~conditions~~contraction as a result of the COVID-19 pandemic and the impact ~~they may have~~of such contraction on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth or its customers must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth’s goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth’s borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth’s ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth’s markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (19) the reliability of First Commonwealth’s vendors, internal control systems or information systems; (20) the costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals; and (21) other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us.

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

Explanation of Use of Non-GAAP Financial Measure

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe these non-GAAP financial measures provide information that is useful to investors in understanding our underlying operational performance and our business and performance trends as

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

they facilitate comparison with the performance of others in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 5250 and 58page 57 for the ~~nine~~six and three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~,2019, respectively.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Selected Financial Data

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


	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	2020			2019			2020			2019
	(dollars in thousands, except per share data)
Net Income	$	23,851		$	27,280		$	28,578		$	51,869
Per Share Data:
Basic Earnings per Share	$	0.24		$	0.28		$	0.29		$	0.53
Diluted Earnings per Share	0.24			0.28			0.29			0.53
Cash Dividends Declared per Common Share	0.11			0.10			0.22			0.20
Average Balance:
Total assets	$	9,043,554		$	7,986,474		$	8,690,437		$	7,932,988
Total equity	1,071,549			1,009,424			1,071,433			998,192
End of Period Balance:
Net loans ⁽¹⁾							$	6,871,043		$	5,968,034
Total assets							9,364,655			8,070,854
Total deposits							7,782,201			6,155,965
Total equity							1,075,705			1,021,831
Key Ratios:
Return on average assets	1.06		%	1.37		%	0.66		%	1.32		%
Return on average equity	8.95		%	10.84		%	5.36		%	10.48		%
Dividends payout ratio	45.83		%	35.71		%	75.86		%	37.74		%
Average equity to average assets ratio	11.85		%	12.64		%	12.33		%	12.58		%
Net interest margin	3.29		%	3.75		%	3.46		%	3.75		%
Net loans to deposits ratio							88.29		%	96.95		%

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
(dollars in thousands, except per share data)
Net Income $ 26,644
$ 25,149
$ 78,513
$ 80,500
Per Share Data:
Basic Earnings per Share $ 0.27
$ 0.25
$ 0.80
$ 0.81
Diluted Earnings per Share 0.27
0.25
0.80
0.81
Cash Dividends Declared per Common Share 0.10
0.09
0.30
0.26
Average Balance:
Total assets $ 8,050,052
$ 7,662,029
$ 7,972,438
$ 7,495,490
Total equity 1,033,903
970,402
1,010,227
933,489
End of Period Balance:
Net loans ⁽¹⁾
$ 6,069,814
$ 5,620,323
Total assets 8,152,027
7,686,345
Total deposits 6,677,996
5,895,143
Total equity 1,039,030
972,931
Key Ratios:
Return on average assets 1.31 % 1.30 % 1.32 % 1.44 %
Return on average equity 10.22 % 10.28 % 10.39 % 11.53 %
Dividends payout ratio 37.04 % 36.00 % 37.50 % 32.10 %
Average equity to average assets ratio 12.84 % 12.67 % 12.67 % 12.45 %
Net interest margin 3.76 % 3.67 % 3.75 % 3.71 %
Net loans to deposits ratio 90.89 % 95.34 %

⁽¹⁾Includes loans held for sale.

Results of Operations

~~Nine~~Six Months Ended~~September~~ June 30, ~~2019~~2020 Compared to ~~Nine~~Six Months Ended~~September~~ June 30, ~~2018~~2019

Net Income

For the ~~nine~~six months ended~~September~~ June 30, ~~2019~~,2020, First Commonwealth had net income of ~~$78.5~~$28.6 million,, or ~~$0.80~~$0.29 diluted earnings per share, compared to net income of ~~$80.5~~$51.9 million,, or ~~$0.81~~$0.53 diluted earnings per share, in the ~~nine~~six months ended~~September~~ June 30, ~~2018~~.2019. The decline in net income was primarily the result of ~~$8.1~~$37.8 million ~~in securities gains~~provision for credit losses recognized in order to provide for estimated probable losses related to the ~~first nine months of 2018 as~~COVID-19 pandemic. This was partially offset by a ~~result of~~$6.6 million decrease in the ~~successful sale and auction calls of the Company's remaining pooled trust preferred security portfolio.~~income tax provision due to lower income before income taxes.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Company’s return on average equity was ~~10.39%~~5.36% and its return on average assets was ~~1.32%~~0.66%, compared to ~~11.53%~~10.48% and ~~1.44%~~1.32%, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was ~~$202.4~~$135.2 million in the first ~~nine~~six months of ~~2019~~,2020, compared to ~~$188.7~~$133.5 million for the same period in ~~2018~~.2019. This increase was due to ~~both~~ growth in average ~~interest earning~~interest-earning assets of ~~$416.5~~$672.4 million ~~and~~offset by a 429 basis point ~~increase~~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 ~~76%~~76.6% and ~~73%~~76.5% for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~,2019, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.75% and 3.71% for the nine months ended September 30, 2019 and September 30, 2018, respectively. The net interest margin for the nine months ended September 30, 2018 included a

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

3The net interest margin, on a fully taxable equivalent basis, ~~point benefit from~~was 3.46% and 3.75% for the ~~recognition of $1.5 million in previously unrecognized interest due to the sale of an impaired commercial loan~~six months ended June 30, 2020 and ~~the successful sale and auction call of our pooled trust preferred portfolio.~~June 30, 2019, respectively. The ~~increase~~decline in the net interest margin is primarily attributable to ~~both~~ changes in the level of interest rates ~~and~~partially offset by the amount and composition of interest-earning assets and interest-bearing liabilities.

The taxable equivalent yield on interest-earning assets was ~~4.55%~~3.97% for the ~~nine~~six months ended~~September~~ June 30, ~~2019, an increase~~2020, a decrease of 3060 basis points compared to the ~~4.25%~~4.57% yield for the same period in ~~2018~~.2019. This ~~increase~~decrease is largely due to ~~the~~ loan portfolio yield, which ~~improved~~decreased by 3762 basis points when compared to the ~~nine~~six months ended ~~September~~ June 30, ~~2018.~~2019. Contributing to this ~~increase~~decrease was the yield on our adjustable and variable rate commercial loan portfolio, which ~~increased 37~~declined 88 basis points largely due to the Federal Reserve ~~increasing~~decreasing short-term interest ~~rates~~rates. During the first quarter of 2020, the Federal Reserve decreased the Federal Funds target rate by ~~100~~150 basis points in ~~2018. Since~~addition to the ~~end~~75 basis point rate decreases made during 2019. Although the impact of ~~2018,~~ the ~~Federal Reserve has decreased the target Federal Funds~~2020 rate ~~by 50 basis points. While~~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. ~~Additionally,~~

The loan yield for the ~~2018~~six months ended June 30, 2020, was impacted by $570.9 million in Paycheck Protection Program ("PPP") loans originated under the CARES Act which have a stated loan ~~portfolio~~rate of 1% and a yield ~~included a 3 basis point benefit from~~of 2.7%. The yield on PPP loans includes the recognition of ~~$1.1~~PPP loan deferred processing fees, net of deferred origination costs, of $1.7 million. These amounts are recognized in interest income as a yield adjustment over the life of the loan. As of June 30, 2020, we expect to recognize additional PPP related deferred processing fees, net of origination costs, of approximately $17.1 million as an adjustment to yield over the remaining terms of ~~previously unrecognized~~the loans. PPP loans increased the average balance of loans by $202.9 million during the six months ended June 30, 2020 decreasing the yield on loans by 5 basis points and the net interest ~~due to the sale of an impaired commercial loan.~~ margin by 2 basis points.

The investment portfolio yield decreased 645 basis points in comparison to the prior year primarily due ~~to a 4 basis point benefit~~the decrease in ~~2018 from~~ the ~~recognition of previously unrecognized interest as a result of the successful sale and auction call of our pooled trust preferred security portfolio.~~Federal Reserve short-term rates. Investment portfolio purchases during the ~~nine~~six months ended ~~September~~ June 30, ~~2019~~2020 have been primarily in ~~corporate securities,~~ obligations of U.S. government agencies and obligations of other government-sponsored enterprises with durations of approximately ~~five years and municipal securities with a duration of approximately ten~~4 to 6 years.

The cost of interest-bearing liabilities ~~increased~~decreased to ~~1.08%~~0.72% for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~,2020, from ~~0.71%~~1.09% for the same period in ~~2018~~,2019, primarily due to ~~an increase~~a decrease in the cost of short-term borrowings and ~~an increase in~~the cost of long-term debt ~~largely due to~~as well as the ~~issuance~~cost of ~~$100 million of subordinated debt in~~interest-bearing deposits. Deposit growth during the second quarter of ~~2018. Deposits~~2020 due to the retention of PPP loan proceeds and the deposit of Federal stimulus checks, as well as deposits acquired in our ~~recent acquisitions, along with approximately $50 million~~third quarter 2019 acquisition of ~~the subordinated debt proceeds, the maturity extension on $50.0 million of short-term borrowings and organic growth in consumer checking and savings deposits, contributed~~Santander branches, combined to contribute to a decline in average short-term borrowings of ~~$124.5~~$417.0 million for the ~~nine~~six months ended ~~September~~ June 30, ~~2019~~2020 compared to the same period in ~~2018. Higher~~2019. Decreases in the Federal Funds target rate impacted the cost of long-term debt, decreasing the cost by 81 basis points. Lower market interest rates and managements efforts to reduce deposit costs resulted in the cost of interest-bearing deposits ~~increasing 21~~decreasing 36 basis points and short-term borrowings ~~increasing 60~~decreasing 146 basis points in comparison to the same period last year. ~~The impact of~~

For the ~~subordinated debt on the cost of interest-bearing liabilities was 14 basis points for the nine~~six months ended ~~September~~June 30, ~~2019 compared to 3 basis points for the~~ ~~nine months ended~~ ~~September 30, 2018.~~

~~For the~~ ~~nine months ended~~ ~~September 30, 2019,~~2020, changes in interest rates ~~positively~~negatively impacted net interest income by ~~$2.7~~$17.9 million when compared with the same period in ~~2018~~.2019. The ~~higher~~lower yield on interest-earning assets negatively impacted net interest income by $24.6 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by ~~$15.8 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by~~ ~~$13.1 million~~.$6.7 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by ~~$11.0~~$19.6 million for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~,2020, as compared to the same period in ~~2018~~.2019. Higher levels of interest-earning assets resulted in an increase of ~~$14.0~~$17.1 million in interest income, and changes in the volume of interest-bearing liabilities ~~increased~~decreased interest expense by ~~$2.9~~$2.5 million,, primarily due to ~~an increase~~a decrease in ~~long-term borrowings as a result of the subordinated debt issued in May 2018.~~short-term borrowings. Average earning assets for the ~~nine~~six months ended ~~September~~ June 30, ~~2019~~2020 increased ~~$416.5~~$672.4 million, or ~~6.1%~~9.4%, compared to the same period in ~~2018.~~2019. Average loans for the comparable period increased ~~$393.8~~$636.0 million, or ~~7.1%~~10.8%.

Net interest income also benefited from a ~~$148.0~~$456.1 million increase in average net free funds at ~~September~~June 30, ~~2019~~2020 as compared to ~~September~~June 30, ~~2018~~.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 ~~$81.3~~$422.5 million, or ~~5.7%~~28.5%, in noninterest-bearing demand deposit average ~~balances.~~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~~six months ended~~September~~ June 30, ~~2019~~ ~~increased~~2020 decreased by ~~$148.6~~$66.9 million ~~at higher costs~~ compared to the comparable period in ~~2018, increasing interest expense by $5.4 million. Increases~~2019, while the average rate paid on time deposits decreased 6 basis points compared to the same period in 2019. Decreases in market interest rates ~~negatively~~positively impacted interest expense by ~~$13.1~~$6.7 million ~~while~~and changes in the mix of interest-bearing liabilities had a ~~$2.9~~$2.5 million ~~negative~~positive impact.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table reconciles interest income in the Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the ~~nine~~six months ended ~~September~~ June 30:


	2020		2019
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	154,310	$	161,651
Adjustment to fully taxable equivalent basis	755		912
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	155,065		162,563
Interest expense	19,900		29,039
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	135,165	$	133,524

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	2020										2019
	Average Balance		Income / Expense (a)		Yield or Rate		Average Balance		Income / Expense (a)		Yield or Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks	$	86,804	$	69	0.16	%	$	3,829	$	100	5.27	%
Tax-free investment securities	47,950		737		3.09		68,020		1,055		3.13
Taxable investment securities	1,199,233		13,843		2.32		1,225,787		16,908		2.78
Loans, net of unearned income (b)(c)(e)	6,516,854		140,416		4.33		5,880,840		144,500		4.95
Total interest-earning assets	7,850,841		155,065		3.97		7,178,476		162,563		4.57
Noninterest-earning assets:
Cash	97,129						91,059
Allowance for credit losses	(66,705)						(50,480)
Other assets	809,172						713,933
Total noninterest-earning assets	839,596						754,512
Total Assets	$	8,690,437					$	7,932,988
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,465,901	$	1,469	0.20	%	$	1,228,751	$	3,418	0.56	%
Savings deposits (d)	2,925,862		6,354		0.44		2,498,726		6,957		0.56
Time deposits	801,429		6,312		1.58		868,286		7,077		1.64
Short-term borrowings	157,188		635		0.81		574,203		6,455		2.27
Long-term debt	233,934		5,130		4.41		198,081		5,132		5.22
Total interest-bearing liabilities	5,584,314		19,900		0.72		5,368,047		29,039		1.09
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,903,568						1,481,064
Other liabilities	131,122						85,685
Shareholders’ equity	1,071,433						998,192
Total Noninterest-Bearing Funding Sources	3,106,123						2,564,941
Total Liabilities and Shareholders’ Equity	$	8,690,437					$	7,932,988
Net Interest Income and Net Yield on Interest-Earning Assets			$	135,165	3.46	%			$	133,524	3.75	%

2019 2018
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 $ 5,591
$ 181
4.33 % $ 5,068
$ 109
2.88 %
Tax-free investment securities 67,158
1,557
3.10
67,694
1,559
3.08
Taxable investment securities 1,200,845
24,290
2.70
1,178,190
24,443
2.77
Loans, net of unearned income (b)(c) 5,935,427
219,539
4.95
5,541,600
189,710
4.58
Total interest-earning assets 7,209,021
245,567
4.55
6,792,552
215,821
4.25
Noninterest-earning assets:
Cash 91,954
92,517

Allowance for credit losses (51,192 ) (52,885 )
Other assets 722,655
663,306

Total noninterest-earning assets 763,417
702,938

Total Assets $ 7,972,438
$ 7,495,490

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) $ 1,272,065
$ 5,511
0.58 % $ 1,181,295
$ 3,244
0.37 %
Savings deposits (d) 2,524,703
10,906
0.58
2,446,013
5,884
0.32
Time deposits 866,746
10,881
1.68
718,164
5,511
1.03
Short-term borrowings 489,562
8,075
2.21
614,103
7,387
1.61
Long-term debt 210,353
7,796
4.96
135,368
5,113
5.05
Total interest-bearing liabilities 5,363,429
43,169
1.08
5,094,943
27,139
0.71
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d) 1,507,826
1,426,566

Other liabilities 90,956
40,492

Shareholders’ equity 1,010,227
933,489

Total Noninterest-Bearing Funding Sources 2,609,009
2,400,547

Total Liabilities and Shareholders’ Equity $ 7,972,438
$ 7,495,490

Net Interest Income and Net Yield on Interest-Earning Assets $ 202,398
3.75 % $ 188,682
3.71 %
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the six months ended June 30, 2020 and 2019.


~~(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, 2019 and 2018.~~


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


~~(c)~~	~~Loan income includes loan fees earned.~~


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

(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.

5351

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~~six months ended~~September~~ June 30, ~~2019~~2020 compared with ~~September~~June 30, ~~2018~~: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	$	(31)	$	2,168	$	(2,199)
Tax-free investment securities	(318)		(312)		(6)
Taxable investment securities	(3,065)		(366)		(2,699)
Loans	(4,084)		15,612		(19,696)
Total interest income (b)	(7,498)		17,102		(24,600)
Interest-bearing liabilities:
Interest-bearing demand deposits	(1,949)		659		(2,608)
Savings deposits	(603)		1,186		(1,789)
Time deposits	(765)		(544)		(221)
Short-term borrowings	(5,820)		(4,694)		(1,126)
Long-term debt	(2)		928		(930)
Total interest expense	(9,139)		(2,465)		(6,674)
Net interest income	$	1,641	$	19,567	$	(17,926)

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 $ 72
$ 11
$ 61
Tax-free investment securities (2 ) (12 ) 10
Taxable investment securities (153 ) 469
(622 )
Loans 29,829
13,491
16,338
Total interest income (b) 29,746
13,959
15,787
Interest-bearing liabilities:
Interest-bearing demand deposits 2,267
251
2,016
Savings deposits 5,022
188
4,834
Time deposits 5,370
1,145
4,225
Short-term borrowings 688
(1,500 ) 2,188
Long-term debt 2,683
2,832
(149 )
Total interest expense 16,030
2,916
13,114
Net interest income $ 13,716
$ 11,043
$ 2,673

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


~~(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.~~

(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~~six months ended~~September 30~~: June 30:


	2020						2019
	Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	6,549	17	%	$	2,542	37	%
Real estate construction	654		2		405		6
Residential real estate	5,650		15		250		4
Commercial real estate	17,091		45		1,146		16
Loans to individuals	7,882		21		2,587		37

Total	$	37,826	100	%	$	6,930	100	%

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

The provision for credit losses for the ~~nine~~six months ended~~September~~ June 30, ~~2019decreased~~2020 increased in comparison to the ~~nine~~six months ended ~~September~~ June 30, ~~2018~~2019 by ~~$1.4~~$30.9 million. The level of provision expense in the first ~~nine~~six months of ~~2019~~2020 is primarily ~~a result of $7.4~~to build up 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 six months ended June 30, 2020 was $5.9 million in ~~net charge-offs, growth in~~specific reserves related to loans for four commercial real estate borrowers that were placed on nonaccrual status during the ~~loan portfolio and an increase in~~first six months of 2020. Additionally, $22.3 million of the provision expense is attributable to higher qualitative reserves due to the uncertain economic environment, additional risks related to the large volume of consumer forbearances as ~~a result~~ of ~~a higher probability~~June 30, 2020 and consideration of ~~slightly less favorable economic conditions.~~the estimated probable losses incurred in certain loan categories that may be affected by COVID-19, such as hospitality and retail. Net charge-offs during the first six months of 2020 totaled $8.0 million.

The level of provision expense in the first ~~nine~~six months of ~~2018~~2019 was primarily a result of $3.6 million in net charge-offs, a ~~$1.2~~$0.9 million increase in specific reserves ~~for two commercial real estate loans~~ and ~~a $2.2 million charge-off for another commercial real estate loan. Also impacting~~growth in the ~~provision was $2.9 million in net charge-offs related to loans to individuals.~~

loan portfolio.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The allowance for credit losses was ~~$50.0~~$81.4 million,, or ~~0.82%~~1.18%, of total loans outstanding and ~~0.90%~~1.25% of total originated loans outstanding at ~~September~~June 30, ~~2019~~,2020, compared to ~~$47.8~~$51.6 million,, or 0.83%, and ~~0.91%~~0.90%, respectively, at December 31, ~~2018~~2019 and ~~$50.7~~$51.1 million,, or ~~0.90%~~0.85%, and ~~0.99%~~0.92%, respectively, at ~~September~~June 30, ~~2018~~.2019. Nonperforming loans as a percentage of total loans increased to ~~0.58%~~0.81% at ~~September~~June 30, ~~2019~~2020 from ~~0.55%~~0.52% at December 31, ~~2018~~2019 and ~~0.70%~~0.59% as of ~~September~~June 30, ~~2018~~.2019. The allowance to nonperforming loan ratio was ~~141.64%~~145.37%, ~~149.14%~~160.28% and ~~127.35%~~143.62% as of ~~September~~June 30, ~~2019~~, 2020, December 31, ~~2018~~2019 and ~~September~~June 30, ~~2018~~,2019, respectively.

Below is an analysis of the consolidated allowance for credit losses for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~2019 and the year-ended December 31, ~~2018~~:2019:


	June 30, 2020		June 30, 2019		December 31, 2019
	(dollars in thousands)
Balance, beginning of period	$	51,637	$	47,764	$	47,764
Loans charged off:
Commercial, financial, agricultural and other	1,771		1,394		3,393
Real estate construction	—		—		—
Residential real estate	650		280		1,042
Commercial real estate	2,417		299		2,008
Loans to individuals	4,016		2,484		5,831
Total loans charged off	8,854		4,457		12,274
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	132		171		326
Real estate construction	26		84		158
Residential real estate	146		219		315
Commercial real estate	44		79		189
Loans to individuals	484		271		626
Total recoveries	832		824		1,614
Net credit losses	8,022		3,633		10,660
Provision charged to expense	37,826		6,930		14,533
Balance, end of period	$	81,441	$	51,061	$	51,637

September 30, 2019 September 30, 2018 December 31, 2018
(dollars in thousands)
Balance, beginning of period $ 47,764
$ 48,298
$ 48,298
Loans charged off:
Commercial, financial, agricultural and other 2,185
3,536
5,294
Real estate construction —
—
—
Residential real estate 663
1,006
1,313
Commercial real estate 1,681
2,411
3,930
Loans to individuals 4,058
3,336
4,576
Total loans charged off 8,587
10,289
15,113
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other 233
702
788
Real estate construction 158
99
141
Residential real estate 236
297
361
Commercial real estate 160
123
153
Loans to individuals 433
484
605
Total recoveries 1,220
1,705
2,048
Net credit losses 7,367
8,584
13,065
Provision charged to expense 9,638
11,032
12,531
Balance, end of period $ 50,035
$ 50,746
$ 47,764

Noninterest Income

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


	2019			2018		$ Change			% Change			2020		2019		$ Change		% Change
	(dollars in thousands)											(dollars in thousands)
Noninterest Income:											Noninterest Income:
Trust income	$	6,221		$	6,014	$	207		3	%	Trust income	$	4,220	$	3,896	$	324	8	%
Service charges on deposit accounts	13,792			13,418		374			3		Service charges on deposit accounts	8,031		8,838		(807)		(9)
Insurance and retail brokerage commissions	5,887			5,560		327			6		Insurance and retail brokerage commissions	3,826		3,975		(149)		(4)
Income from bank owned life insurance	4,408			5,241		(833		)	(16	)	Income from bank owned life insurance	3,416		2,868		548		19
Card-related interchange income	15,800			14,929		871			6		Card-related interchange income	11,148		10,171		977		10
Swap fee income	1,634			1,115		519			47		Swap fee income	823		1,213		(390)		(32)
Other income	5,356			5,125		231			5		Other income	3,487		3,491		(4)		—
Subtotal	53,098			51,402		1,696			3		Subtotal	34,951		34,452		499		1
Net securities gains	15			8,102		(8,087		)	(100	)	Net securities gains	27		6		21		350
Gain on sale of mortgage loans	6,101			4,267		1,834			43		Gain on sale of mortgage loans	6,789		3,502		3,287		94
Gain on sale of other loans and assets	3,831			3,548		283			8		Gain on sale of other loans and assets	1,280		2,861		(1,581)		(55)
Derivatives mark to market	(88		)	789		(877		)	(111	)	Derivatives mark to market	(1,962)		(43)		(1,919)		4,463

Total noninterest income	$	62,957		$	68,108	$	(5,151	)	(8	)%	Total noninterest income	$	41,085	$	40,778	$	307	1	%

5553

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Total noninterest income, ~~for the~~ ~~nine months endedSeptember 30, 2019~~ ~~decreased $5.2 million in comparison to the~~ ~~nine months endedSeptember 30, 2018. The most significant changes include an $8.1 million decline in~~excluding net securities gains, ~~resulting from the redemption and~~gain on sale of mortgage loans, gain on sale of other loans and assets and derivatives mark to market for the ~~remainder~~six months ended June 30, 2020 increased $0.5 million, or 1%, compared to the six months ended June 30, 2019. Card-related interchange income increased $1.0 million due to growth in customer accounts and transactions, including $0.9 million attributable to accounts acquired in the Santander branch acquisition in the third quarter of 2019. Service charges on deposit accounts decreased $0.8 million, despite a $0.5 million increase attributable to the ~~pooled trust securities portfolio~~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 quarter of ~~2018,~~2020.

Total noninterest income increased $0.3 million, or 1%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include a ~~$0.9~~$3.3 million ~~decrease~~increase in ~~the~~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 ~~loan~~ customers ~~and an $0.8~~resulted in a decrease of $1.9 million ~~decline~~ in noninterest income ~~from bank owned life insurance~~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 ~~a $0.7 million death claim benefit recognized~~movements in ~~the nine months ended September 30, 2018. Partially offsetting these decreases is a $1.8 million increase in the~~corporate bond spreads and swap rates. The gain on sale of ~~mortgage~~other loans and assets decreased $1.6 million due to ~~growth~~a lower volume of loans being sold in ~~our mortgage lending area, a $0.9 million increase~~the first six months of 2020 compared to the same period in ~~card-related interchange income and a $0.5 million increase in swap fee income as a result of growth in interest rate swaps entered into for our commercial customers.~~2019.

Noninterest Expense

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

2019 2018 $ Change % Change
(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits $ 83,205
$ 77,580
$ 5,625
7 %
Net occupancy 13,878
12,932
946
7
Furniture and equipment 11,396
10,611
785
7
Data processing 7,988
7,764
224
3
Advertising and promotion 3,611
3,185
426
13
Pennsylvania shares tax 3,365
3,398
(33 ) (1 )
Intangible amortization 2,364
2,430
(66 ) (3 )
Collection and repossession 1,656
2,060
(404 ) (20 )
Other professional fees and services 2,755
3,000
(245 ) (8 )
FDIC insurance 1,164
1,590
(426 ) (27 )
Other operating 19,040
17,662
1,378
8
Subtotal 150,422
142,212
8,210
6
Loss on sale or write-down of assets 1,398
875
523
60
Merger and acquisition related 3,772
1,634
2,138
131
Litigation and operational losses 1,264
811
453
56
Total noninterest expense $ 156,856
$ 145,532
$ 11,324
8 %


	2020		2019		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	58,750	$	54,531	$	4,219	8	%
Net occupancy	9,370		9,357		13		—
Furniture and equipment	7,435		7,492		(57)		(1)
Data processing	5,063		5,163		(100)		(2)
Advertising and promotion	2,685		2,471		214		9
Pennsylvania shares tax	1,992		2,176		(184)		(8)
Intangible amortization	1,853		1,499		354		24
Collection and repossession	905		1,007		(102)		(10)
Other professional fees and services	1,818		1,786		32		2
FDIC insurance	761		1,129		(368)		(33)
Unfunded commitment reserve	(1,652)		231		(1,883)		(815)
Other operating	12,543		12,915		(372)		(3)
Subtotal	101,523		99,757		1,766		2
Loss on sale or write-down of assets	353		1,246		(893)		(72)



COVID-19 related	442		—		442		N/A
Litigation and operational losses	709		956		(247)		(26)
Total noninterest expense	$	103,027	$	101,959	$	1,068	1	%

Noninterest expense ~~excluding loss on sale~~increased $1.1 million, or ~~write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased~~ ~~$8.2 million, or~~ 6%1%, for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 compared to the same period in ~~2018~~.2019. Contributing to the higher expenses in ~~2019~~2020 is a ~~$5.6~~$4.2 million increase in salaries and employee benefits as a result of a higher number of full-time equivalent employees, annual merit increases and a ~~$2.7~~$1.6 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 ~~Garfield in May 2018~~ and continued expansion of our mortgage and commercial banking businesses. The Santander ~~and Garfield acquisitions also~~acquisition accounted for ~~$0.3~~$1.8 million of the ~~$0.9~~salaries and employee benefits increase. Partially offsetting these increases in salaries and employee benefit expense was the deferral of $0.6 million ~~increase~~ in ~~net occupancy expense~~salary and ~~$0.3 million~~benefit costs related to the origination of approximately 4,900 PPP loans during the ~~$0.8 million increase in furniture and equipment expense. Expenses contributing to~~second quarter of 2020. Offsetting the increase in ~~other operating expense include checkbook printing, travel~~salaries and ~~higher out~~employee benefits was a $1.9 million decrease in unfunded commitment expense. This decrease is a result of ~~state financial institution tax. Collection~~updates made in the first quarter of 2020 to the probability of default and ~~repossession expense decreased $0.4 million due to costs related to several OREO properties that occurred in 2018 with no similar activity in 2019.~~loss given default information incorporated into the calculation. FDIC insurance decreased $0.4 million in comparison to the prior period asdue to a ~~result of a $0.6~~$0.7 million assessment credit received ~~in the third quarter of 2019. This credit is~~as a result of the FDIC deposit insurance fund reaching the required minimum reserve ratio. ~~The company has $1.3 million in remaining credits that will offset FDIC expense in future quarters.~~

Loss on sale or write-down of assets ~~increased $0.5~~decreased $0.9 million due to a $0.5 million write-down ofon an OREO ~~property. Merger and acquisition related expenses increased $2.1 million due to~~property in the ~~completion~~first six months of 2019 with no similar activity in the ~~acquisition of 14 branches from Santander.~~

current year.

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 ~~increased$0.8~~decreased $6.6 million, or 52.0%, for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~,2020, compared to the corresponding period in ~~2018. While income before taxes decreased in comparison to the prior year, the~~2019. The effective tax rate ~~increased 40~~decreased 210 basis points, or 10.7%, primarily due to ~~the $0.8~~a $29.9 million decrease in income before income taxes offset by a $0.5 million increase in tax-free income from bank owned life ~~insurance as well as certain deduction limitations included in the Tax Cuts and Jobs Act passed in December 2017.~~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~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~.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~~bank owned life insurance and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income. ~~Additionally, the~~ ~~nine months ended~~ September 30, 2018, included a $0.6 million reduction in tax expense due to an adjustment to the deferred tax asset adjustment recorded in the fourth quarter of 2017 as a result of the reduction in the statutory tax rate. These provided for an annual effective tax rate of ~~19.5%~~17.5% and ~~19.1%~~19.6% for the ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~,2019, respectively.

As of ~~September~~June 30, ~~2019~~,2020, our deferred tax assets totaled ~~$16.4 million~~.$16.0 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~~June 30, ~~2019~~2020 Compared to Three Months Ended ~~September~~June 30, ~~2018~~2019

Net Income

For the three months ended ~~September~~June 30, ~~2019,~~2020, First Commonwealth had net income of ~~$26.6~~$23.9 million, or ~~$0.27~~$0.24 diluted earnings per share, compared to net income of ~~$25.1~~$27.3 million, or ~~$0.25~~$0.28 diluted earnings per share, in the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in net income was primarily the result of ana $4.0 million increase in ~~net interest income and noninterest income offset by an increase in noninterest expense.~~the provision for credit losses.

For the three months ended ~~September~~June 30, ~~2019,~~2020, the Company’s return on average equity was ~~10.22%~~8.95% and its return on average assets was ~~1.31%~~1.06%, compared to ~~10.28%~~10.84% and ~~1.30%~~1.37%, respectively, for the three months ended ~~September~~June 30, ~~2018.~~2019.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was ~~$68.9~~$67.0 million in the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$64.3~~$67.6 million for the same period in ~~2018.~~2019. This ~~increase~~decrease was due to both growth in average interest earning assets of ~~$322.5~~$961.8 million and a 946 basis ~~point increase~~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 ~~76% and 76%~~75.4% for both the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively.~~2019.

The net interest margin, on a fully taxable equivalent basis, was ~~3.76%~~3.29% and ~~3.67%~~3.75% for the three months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively. The ~~increase~~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 ~~4.53%~~3.70% for the three months ended ~~September~~June 30, ~~2019, an increase~~2020, a decrease of 2388 basis points compared to the ~~4.30%~~4.58% yield for the same period in ~~2018.~~2019. This ~~increase~~ is largely due to ~~an increase~~a decrease in the loan portfolio yield, which ~~improved~~declined by 2791 basis points when compared to the three months ended ~~September~~June 30, ~~2018.~~2019. Contributing to this ~~increase~~ was ~~an increase~~a decrease in the ~~yield on our adjustable and variable~~Federal Funds target rate ~~commercial loan portfolio, which increased 16~~of 225 basis points ~~largely due~~in comparison to ~~the Federal Reserve increasing short-term interest rates during 2018. Since the end of 2018, the Federal Reserve has decreased the target Federal Funds rate by 50 basis points.~~June 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. The yield on the investment portfolio decreased 1550 basis points in comparison to the prior year. 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%. These loans increased the average balance of loans by $405.7 million for the second quarter of 2020 causing an 8 basis point decrease in the yield on loans and a 2 basis point decrease in the net interest margin. Investment portfolio purchases during the three months ended ~~September~~June 30, ~~2019 have been primarily in U.S. Agency securities~~2020 included only one $200 thousand debt security with ~~durations~~a duration of approximately five years.

The cost of interest-bearing liabilities decreased to 0.59% for the three months ended June 30, 2020, from 1.11% 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. Deposits acquired from the 3rd quarter 2019 acquisition of Santander branches as well as the portion of PPP loan proceeds still

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~The cost of interest-bearing liabilities increased to 1.05% for the three months ended September 30, 2019, from 0.84% for the same period~~remaining in 2018, primarily due to an increase in the cost of short-term borrowings and an increase in long-term debt largely due to the issuance of $100 million of subordinated debt in the second quarter of 2018. Deposits acquired in our recent acquisitions, along with approximately $50 million of the subordinated debt proceeds, the maturity extension on $50.0 million of short-term borrowings and organic growth in consumer checking and savings deposits,customers deposit accounts contributed to a decline in average short-term borrowings of ~~$246.6~~$421.7 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the same period in ~~2018. Higher~~2019. Lower market interest rates resulted in the cost of interest-bearing deposits ~~increasing 17~~decreasing 53 basis points and short-term borrowings ~~increasing 18~~decreasing 210 basis points in comparison to the same period last year. ~~The impact of the subordinated debt on~~Decreases in short term interest rates impacted the cost of ~~interest-bearing liabilities was 14~~long-term debt, decreasing the cost by 60 basis ~~points for the three months ended September 30, 2019 compared to 7 basis points for the three months ended September 30, 2018.~~points.

For the three months ended ~~September~~June 30, ~~2019,~~2020, changes in interest rates ~~positively~~negatively impacted net interest income by ~~$0.4~~$14.5 million when compared with the same period in ~~2018.~~2019. The ~~higher~~lower yield on interest-earning assets negatively impacted net interest income by $19.7 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by ~~$3.5 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $3.0~~$5.3 million.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by ~~$4.1~~$13.9 million in the three months ended ~~September~~June 30, ~~2019,~~2020, as compared to the same period in ~~2018.~~2019. Higher levels of interest-earning assets resulted in an increase of ~~$4.2~~$12.6 million in interest income while changes in the volume of interest-bearing liabilities had a minimal impact on interest expense. Average earning assets for the three months ended ~~September~~June 30, ~~2019~~2020 increased ~~$322.5~~$961.8 million, or ~~4.6%~~13.3%, compared to the same period in ~~2018.~~2019. Average loans for the comparable period increased ~~$385.4~~$828.6 million, or ~~6.8%~~13.9%. 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 ~~$167.6~~$663.2 million increase in average net free funds at ~~September~~June 30, ~~2019~~2020 as compared to ~~September~~June 30, ~~2018.~~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 ~~$112.5~~$633.6 million, or ~~7.8%~~42.3%, in noninterest-bearing demand deposit average balances. Average time deposits for the three months ended ~~September~~June 30, ~~2019 increased~~2020 decreased by ~~$76.8~~$93.7 million at ~~higher~~lower costs compared to the comparable period in ~~2018, increasing~~2019, decreasing interest expense by ~~$1.2~~$0.4 million. Increases in market interest rates negatively impacted interest expense by ~~$3.0~~$5.3 million, while changes in the mix of interest-bearing liabilities had a ~~minimal~~$1.3 million positive impact. ~~Deposits acquired at closing of the Santander branch acquisition contributed $123.0 million to the increase in average deposits during the third quarter of 2019.~~

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~~June 30:


	2020		2019
	(dollars in thousands)
Interest income per Consolidated Statements of Income	$	74,981	$	82,057
Adjustment to fully taxable equivalent basis	359		455
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	75,340		82,512
Interest expense	8,295		14,931
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	67,045	$	67,581

2019 2018
(dollars in thousands)
Interest income per Consolidated Statements of Income $ 82,575
$ 74,873
Adjustment to fully taxable equivalent basis 430
498
Interest income adjusted to fully taxable equivalent basis (non-GAAP) 83,005
75,371
Interest expense 14,130
11,060
Net interest income adjusted to fully taxable equivalent basis (non-GAAP) $ 68,875
$ 64,311

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~~June 30:


	2020										2019
	Average Balance		Income / Expense (a)		Yield or Rate		Average Balance		Income / Expense (a)		Yield or Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks	$	166,282	$	32	0.08	%	$	2,967	$	46	6.22	%
Tax-free investment securities	44,171		338		3.08		67,815		525		3.11
Taxable investment securities	1,201,822		6,606		2.21		1,208,250		8,207		2.72
Loans, net of unearned income (b)(c)(e)	6,777,883		68,364		4.06		5,949,332		73,734		4.97
Total interest-earning assets	8,190,158		75,340		3.70		7,228,364		82,512		4.58
Noninterest-earning assets:
Cash	94,223						89,020
Allowance for credit losses	(80,717)						(51,476)
Other assets	839,890						720,566
Total noninterest-earning assets	853,396						758,110
Total Assets	$	9,043,554					$	7,986,474
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	1,573,595	$	254	0.06	%	$	1,270,135	$	1,853	0.59	%
Savings deposits (d)	2,994,607		2,507		0.34		2,506,881		3,692		0.59
Time deposits	776,892		2,925		1.51		870,603		3,732		1.72
Short-term borrowings	112,063		47		0.17		533,716		3,017		2.27
Long-term debt	233,819		2,562		4.41		211,087		2,637		5.01
Total interest-bearing liabilities	5,690,976		8,295		0.59		5,392,422		14,931		1.11
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	2,130,775						1,497,199
Other liabilities	150,254						87,429
Shareholders’ equity	1,071,549						1,009,424
Total noninterest-bearing funding sources	3,352,578						2,594,052
Total Liabilities and Shareholders’ Equity	$	9,043,554					$	7,986,474
Net Interest Income and Net Yield on Interest-Earning Assets			$	67,045	3.29	%			$	67,581	3.75	%

2019 2018
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 $ 9,033
$ 81
3.56 % $ 2,188
$ 39
7.07 %
Tax-free investment securities 65,463
504
3.05
67,669
520
3.05
Taxable investment securities 1,151,774
7,382
2.54
1,219,321
8,319
2.71
Loans, net of unearned income (b)(c) 6,042,822
75,038
4.93
5,657,390
66,493
4.66
Total interest-earning assets 7,269,092
83,005
4.53
6,946,568
75,371
4.30
Noninterest-earning assets:
Cash 93,740
95,666

Allowance for credit losses (52,593 ) (52,933 )
Other assets 739,813
672,728

Total noninterest-earning assets 780,960
715,461

Total Assets $ 8,050,052
$ 7,662,029

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) $ 1,357,281
$ 2,092
0.61 % $ 1,221,780
$ 1,352
0.44 %
Savings deposits (d) 2,575,810
3,950
0.61
2,435,659
2,307
0.38
Time deposits 863,714
3,804
1.75
786,912
2,347
1.18
Short-term borrowings 323,041
1,620
1.99
569,666
2,603
1.81
Long-term debt 234,497
2,664
4.51
185,401
2,451
5.24
Total interest-bearing liabilities 5,354,343
14,130
1.05
5,199,418
11,060
0.84
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d) 1,560,478
1,447,948

Other liabilities 101,328
44,261

Shareholders’ equity 1,033,903
970,402

Total noninterest-bearing funding sources 2,695,709
2,462,611

Total Liabilities and Shareholders’ Equity $ 8,050,052
$ 7,662,029

Net Interest Income and Net Yield on Interest-Earning Assets $ 68,875
3.76 % $ 64,311
3.67 %
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the three months ended June 30, 2020 and 2019.


~~(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, 2019 and 2018.~~


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


~~(c)~~	~~Loan income includes loan fees earned.~~


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

(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.

5957

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~~June 30, ~~2019~~2020 compared with ~~September~~June 30, ~~2018:~~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	$	(14)	$	2,533	$	(2,547)
Tax-free investment securities	(187)		(183)		(4)
Taxable investment securities	(1,601)		(44)		(1,557)
Loans	(5,370)		10,267		(15,637)
Total interest income (b)	(7,172)		12,573		(19,745)
Interest-bearing liabilities:
Interest-bearing demand deposits	(1,599)		446		(2,045)
Savings deposits	(1,185)		717		(1,902)
Time deposits	(807)		(402)		(405)
Short-term borrowings	(2,970)		(2,386)		(584)
Long-term debt	(75)		284		(359)
Total interest expense	(6,636)		(1,341)		(5,295)
Net interest income	$	(536)	$	13,914	$	(14,450)

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 $ 42
$ 122
$ (80 )
Tax-free investment securities (16 ) (17 ) 1
Taxable investment securities (937 ) (461 ) (476 )
Loans 8,545
4,527
4,018
Total interest income (b) 7,634
4,171
3,463
Interest-bearing liabilities:
Interest-bearing demand deposits 740
150
590
Savings deposits 1,643
134
1,509
Time deposits 1,457
228
1,229
Short-term borrowings (983 ) (1,125 ) 142
Long-term debt 213
648
(435 )
Total interest expense 3,070
35
3,035
Net interest income $ 4,564
$ 4,136
$ 428

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


~~(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.~~

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

Provision for Credit Losses

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


	2019					2018						2020						2019
	Dollars			Percentage		Dollars			Percentage			Dollars		Percentage		Dollars		Percentage
	(dollars in thousands)											(dollars in thousands)
Commercial, financial, agricultural and other	$	(17	)	(1	)%	$	(580	)	(20	)%	Commercial, financial, agricultural and other	$	(1,350)	(19)	%	$	1,161	41	%
Real estate construction	(155		)	(6	)	238			8		Real estate construction	360		5		195		7
Residential real estate	125			5		200			7		Residential real estate	1,517		22		(42)		(1)
Commercial real estate	1,037			38		1,898			64		Commercial real estate	4,134		60		56		2
Loans to individuals	1,718			64		1,205			41		Loans to individuals	2,198		32		1,465		51

Total	$	2,708		100	%	$	2,961		100	%	Total	$	6,859	100	%	$	2,835	100	%

The provision for credit losses for the three months ended ~~September~~June 30, ~~2019 decreased~~2020 increased in comparison to the three months ended ~~September~~June 30, ~~2018~~2019 by ~~$0.3~~$4.0 million. The level of provision expense in the ~~third~~second quarter of ~~2019~~2020 is primarily a result of ~~$3.7~~a $5.6 million increase in ~~net charge-offs.~~qualitative reserves due to the uncertain economic environment, additional risks related to 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. Offsetting these increases is a $2.9 million decrease in specific reserves due to the payoff of two commercial real estate relationships. Charge-offs for the three months ended June 30, 2020 were $4.5 million, of which $2.7 million was provided for in previous quarters.

The level of provision expense in the ~~third~~second quarter of ~~2018~~2019 was primarily due to $1.4 million in net charge-offs, a ~~$1.2~~$0.5 million increase in specific reserves ~~related to two commercial real estate loans~~ and ~~$3.5 million~~growth in ~~net charge-offs.~~the loan portfolio.

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~~June 30, ~~2019~~2020 and ~~2018~~2019 and the year-ended December 31, ~~2018:~~2019:


	6/30/2020		6/30/2019		12/31/2019
	(dollars in thousands)
Balance, beginning of period	$	79,075	$	49,653	$	47,764
Loans charged off:
Commercial, financial, agricultural and other	1,285		385		3,393
Real estate construction	—		—		—
Residential real estate	73		99		1,042
Commercial real estate	2,151		—		2,008
Loans to individuals	1,397		1,369		5,831
Total loans charged off	4,906		1,853		12,274
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	51		84		326
Real estate construction	26		42		158
Residential real estate	71		114		315
Commercial real estate	—		38		189
Loans to individuals	265		148		626
Total recoveries	413		426		1,614
Net credit losses	4,493		1,427		10,660
Provision charged to expense	6,859		2,835		14,533
Balance, end of period	$	81,441	$	51,061	$	51,637

September 30, 2019 September 30, 2018 December 31, 2018
(dollars in thousands)
Balance, beginning of period $ 51,061
$ 51,314
$ 48,298
Loans charged off:
Commercial, financial, agricultural and other 791
2,582
5,294
Real estate construction —
—
—
Residential real estate 383
277
1,313
Commercial real estate 1,382
—
3,930
Loans to individuals 1,574
1,080
4,576
Total loans charged off 4,130
3,939
15,113
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other 62
66
788
Real estate construction 74
92
141
Residential real estate 17
51
361
Commercial real estate 81
36
153
Loans to individuals 162
165
605
Total recoveries 396
410
2,048
Net credit losses 3,734
3,529
13,065
Provision charged to expense 2,708
2,961
12,531
Balance, end of period $ 50,035
$ 50,746
$ 47,764

Noninterest Income

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


	2019			2018		$ Change			% Change			2020		2019		$ Change		% Change
	(dollars in thousands)											(dollars in thousands)
Noninterest Income:											Noninterest Income:
Trust income	$	2,325		$	2,206	$	119		5	%	Trust income	$	2,109	$	1,970	$	139	7	%
Service charges on deposit accounts	4,954			4,589		365			8		Service charges on deposit accounts	3,286		4,593		(1,307)		(28)
Insurance and retail brokerage commissions	1,912			1,872		40			2		Insurance and retail brokerage commissions	1,831		2,014		(183)		(9)
Income from bank owned life insurance	1,540			1,579		(39		)	(2	)	Income from bank owned life insurance	1,800		1,442		358		25
Card related interchange income	5,629			5,044		585			12		Card related interchange income	5,886		5,441		445		8
Swap fee income	421			528		(107		)	(20	)	Swap fee income	609		820		(211)		(26)
Other income	1,865			1,754		111			6		Other income	1,680		1,786		(106)		(6)
Subtotal	18,646			17,572		1,074			6		Subtotal	17,201		18,066		(865)		(5)
Net securities gains	9			—		9			N/A		Net securities gains	8		6		2		33
Gain on sale of mortgage loans	2,599			1,542		1,057			69		Gain on sale of mortgage loans	4,243		2,074		2,169		105
Gain on sale of other loans and assets	970			643		327			51		Gain on sale of other loans and assets	581		1,777		(1,196)		(67)
Derivatives mark to market	(45		)	—		(45		)	N/A		Derivatives mark to market	(221)		(17)		(204)		1,200

Total noninterest income	$	22,179		$	19,757	$	2,422		12	%	Total noninterest income	$	21,812	$	21,906	$	(94)	—	%

Total noninterest income for the three months ended ~~September~~June 30, ~~2019~~ ~~increased $2.4~~2020 decreased $0.1 million in comparison to the three months ended ~~September~~June 30, ~~2018.~~2019. The most significant changes include a ~~$1.1~~$2.2 million increase in the gain on sale of mortgage loans primarily due to growth in our mortgage lending ~~area.~~area offset by a $1.2 million decrease in gain on sale of other loans and assets due to a decline in the volume of SBA loans sold during the quarter due to the focus on PPP loan orignation. Additionally, ~~card related~~card-related interchange income increased ~~$0.6 million. The~~$0.4 million as a result of the Santander branches, which were acquired on September 6, ~~2019, contributed $0.1 million in noninterest income during the third quarter of 2019.~~

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

2019. Service charges on deposits decreased $1.3 million for the three months ended due to customers maintaining higher deposit balances as a result of the CARES Act stimulus during the second quarter of 2020.

Noninterest Expense

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


	2020		2019		$ Change		% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	28,773	$	27,311	$	1,462	5	%
Net occupancy	4,397		4,441		(44)		(1)
Furniture and equipment	3,657		3,824		(167)		(4)
Data processing	2,596		2,619		(23)		(1)
Advertising and promotion	1,535		1,231		304		25
Pennsylvania shares tax	1,254		1,260		(6)		—
Intangible amortization	919		745		174		23
Collection and repossession	341		460		(119)		(26)
Other professional fees and services	920		1,032		(112)		(11)
FDIC insurance	733		555		178		32
Unfunded commitment reserve	887		612		275		45
Other operating	5,866		6,403		(537)		(8)
Subtotal	51,878		50,493		1,385		3
Loss on sale or write-down of assets	140		1,181		(1,041)		(88)



COVID-19 related	419		—		419		—
Litigation and operational losses	319		555		(236)		(43)
Total noninterest expense	$	52,756	$	52,229	$	527	1	%

2019 2018 $ Change % Change
(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits $ 28,674
$ 26,553
$ 2,121
8 %
Net occupancy 4,521
4,341
180
4
Furniture and equipment 3,904
3,424
480
14
Data processing 2,825
2,853
(28 ) (1 )
Advertising and promotion 1,140
1,200
(60 ) (5 )
Pennsylvania shares tax 1,189
1,248
(59 ) (5 )
Intangible amortization 865
817
48
6
Collection and repossession 649
630
19
3
Other professional fees and services 969
962
7
1
FDIC insurance 35
217
(182 ) (84 )
Other operating 5,928
6,645
(717 ) (11 )
Subtotal 50,699
48,890
1,809
4
Loss on sale or write-down of assets 152
181
(29 ) (16 )
Merger and acquisition related 3,738
24
3,714
15,475
Litigation and operational losses 308
435
(127 ) (29 )
Total noninterest expense $ 54,897
$ 49,530
$ 5,367
11 %

Noninterest expense ~~excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses,~~ increased ~~$1.8~~$0.5 million, or 4%1%, for the three months ended ~~September~~June 30, ~~2019~~2020 compared to the same period in ~~2018. Merger and acquisition related expenses totaled $3.7 million in the third quarter of~~ 2019. Contributing to the higher expenses in ~~2019~~2020 is a ~~$2.1~~$1.5 million increase in salaries and employee benefits as a result of a higher number of full-time equivalent employees due to the Santander branch acquisition in the third quarter of 2019, annual merit increases and a ~~$0.8~~$1.0 million increase in hospitalization expense. The higher number of employees is a result of the Santander branch acquisition in September 2019 as well as continued expansion of our mortgage and commercial banking businesses. Partially offsetting the increase is a $0.7 million decrease in other operating expense, which is primarily due to a $0.5 million decrease in unfunded commitment expense. Operating expenses related to the Santander branches, which were acquired on September 6, 2019, resulted in ~~$0.8~~$1.8 million in noninterest expense during the ~~third~~second quarter of ~~2019.~~

FDIC insurance decreased $0.2 million in comparison to the prior period as a result of a $0.6 million assessment credit received in the third quarter of 2019. This credit is a result of the FDIC deposit insurance fund reaching the required minimum reserve ratio. The company has $1.3 million in remaining credits that will offset FDIC expense in future quarters.

~~Total noninterest expense increased $5.4 million for the three months ended September 30, 2019 compared to the same period in 2018. Include in~~2020. Offsetting this increase is a ~~$3.7~~$1.0 million ~~increase~~decrease in ~~merger and acquisition expense. The acquisition~~loss on sale or write-down of ~~Santander was completed~~assets. This is primarily due to a $0.5 million write-down recognized on an OREO property in ~~September~~the second quarter of 2019 with no similar activity in ~~the third quarter of 2018.~~2020.

Income Tax

The provision for income taxes ~~increased $0.4~~decreased $1.7 million for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to the corresponding period in ~~2018.~~2019. The effective tax rate ~~increased 20~~decreased 230 basis points from ~~19.1%~~19.7% to ~~19.3%~~17.4% due to ~~the increase~~a $5.1 million decrease in income before income taxes ~~as well as certain deduction limitations included~~offset by a $0.4 million increase in ~~the Tax Cuts and Jobs Act passed in December 2017.~~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 three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~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 six months of 2020, the maturity and redemption of investment securities provided $167.3 million in liquidity. These funds contributed to the liquidity used to pay down short-term borrowings, originate loans, purchase investment securities and fund depositor withdrawals.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

the first nine months of 2019, the maturity and redemption of investment securities provided $169.6 million in liquidity. These funds contributed to the liquidity used to pay down of short-term borrowings, originate loans, purchase investment securities and fund depositor withdrawals. Additionally, in September 2019, $243.3 million in short-term borrowings were paid off with proceeds from the Santander branch acquisition.

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

We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of ~~September~~June 30, ~~2019~~,2020, our maximum borrowing capacity under this program was ~~$1.2~~$1.4 billion and as of that date there was ~~$4.7~~$4.2 million outstanding with an average weighted rate of ~~1.46%~~0.94% and an average original term of ~~336~~332 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~~June 30, ~~2019~~,2020, the borrowing capacity under this program totaled ~~$840.5~~$805.4 million and there ~~were~~ was no ~~amounts~~ balance outstanding. As of ~~September~~June 30, ~~2019~~,2020, our maximum borrowing capacity at the FHLB of Pittsburgh was ~~$1.5~~$1.5 billion and as of that date amounts used against this capacity included ~~$0.1 billion~~$56.6 million in outstanding borrowings and no outstanding letters of credit.

We also have available unused federal funds lines with six correspondent banks. These lines have an aggregate commitment of ~~$205.0~~$180.0 million with ~~$7.0 million~~no outstanding balance as of ~~September~~June 30, ~~2019~~.2020. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of ~~$488.4~~$455.9 million with no outstanding balance as of ~~September~~June 30, ~~2019.~~2020.

First Commonwealth Financial Corporation has an unsecured ~~$20~~$20.0 million line of credit with another financial institution. As of ~~September~~June 30, ~~2019,~~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:


	June 30, 2020		December 31, 2019
	(dollars in thousands)
Noninterest-bearing demand deposits^(a)	$	2,288,299	$	1,690,247
Interest-bearing demand deposits^(a)	327,691		254,981
Savings deposits^(a)	4,431,919		3,896,536
Time deposits	734,292		835,851
Total	$	7,782,201	$	6,677,615

September 30, 2019 December 31, 2018
(dollars in thousands)
Noninterest-bearing demand deposits^(a)
$ 1,657,507
$ 1,466,213
Interest-bearing demand deposits^(a)
263,312
180,209
Savings deposits^(a)
3,867,034
3,401,354
Time deposits 890,143
850,216
Total $ 6,677,996
$ 5,897,992
(a)Balances include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.


~~(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~~six months of ~~2019,~~2020, total deposits increased $780.0 million, with $470.8 million of that increase related to the acquisition of 14 branches from Santander. The acquisition provided for an additional $86.6 million in noninterest-bearing deposits, $312.0 million in interest bearing demand and savings deposits and $72.2 million in time deposits. Exclusive of the acquisition, interest bearing$1.1 billion. Interest-bearing demand and savings deposits increased ~~$236.8~~$608.1 million, noninterest-bearing demand deposits increased ~~$104.7~~$598.1 million and time deposits decreased ~~$32.3~~$101.6 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 ~~0.80~~0.51 and ~~0.74~~0.80 at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~,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.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and ~~interest-bearing~~interest-

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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~~June 30, ~~2019~~2020 and December 31, ~~2018~~:2019:


	June 30, 2020
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years
	(dollars in thousands)
Loans	$	551,035		$	519,138		$	949,394		$	2,019,567		$	3,358,984		$	1,544,837
Investments	144,139			124,786			190,014			458,939			461,451			248,640
Other interest-earning assets	348,763			—			—			348,763			—			—
Total interest-sensitive assets (ISA)	1,043,937			643,924			1,139,408			2,827,269			3,820,435			1,793,477
Certificates of deposit	160,323			189,759			233,152			583,234			148,541			2,156
Other deposits	4,759,609			—			—			4,759,609			—			—
Borrowings	180,846			194			50,389			231,429			3,110			102,702
Total interest-sensitive liabilities (ISL)	5,100,778			189,953			283,541			5,574,272			151,651			104,858
Gap	$	(4,056,841)		$	453,971		$	855,867		$	(2,747,003)		$	3,668,784		$	1,688,619
ISA/ISL	0.20			3.39			4.02			0.51			25.19			17.10
Gap/Total assets	43.32		%	4.85		%	9.14		%	29.33		%	39.18		%	18.03		%

September 30, 2019
0-90 Days 91-180
Days 181-365
Days Cumulative
0-365 Days Over 1 Year
Through 5
Years Over 5
Years
(dollars in thousands)
Loans $ 2,773,709
$ 303,122
$ 475,440
$ 3,552,271
$ 1,970,024
$ 569,937
Investments 90,752
72,881
127,711
291,344
565,144
315,253
Other interest-earning assets 16,408
—
—
16,408
—
—
Total interest-sensitive assets (ISA) 2,880,869
376,003
603,151
3,860,023
2,535,168
885,190
Certificates of deposit 174,941
113,576
275,779
564,296
323,213
2,634
Other deposits 4,130,346
—
—
4,130,346
—
—
Borrowings 156,125
228
466
156,819
104,262
57,058
Total interest-sensitive liabilities (ISL) 4,461,412
113,804
276,245
4,851,461
427,475
59,692
Gap $ (1,580,543 ) $ 262,199
$ 326,906
$ (991,438 ) $ 2,107,693
$ 825,498
ISA/ISL 0.65
3.30
2.18
0.80
5.93
14.83
Gap/Total assets 19.39 % 3.22 % 4.01 % 12.16 % 25.85 % 10.13 %


	December 31, 2019
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years
	(dollars in thousands)
Loans	$	2,818,183		$	313,651		$	494,467		$	3,626,301		$	2,052,952		$	475,962
Investments	103,225			79,866			162,225			345,316			633,178			235,437
Other interest-earning assets	19,510			—			—			19,510			—			—
Total interest-sensitive assets (ISA)	2,940,918			393,517			656,692			3,991,127			2,686,130			711,399
Certificates of deposit	121,302			161,488			303,245			586,035			246,512			2,822
Other deposits	4,151,518			—			—			4,151,518			—			—
Borrowings	274,213			193			385			274,791			103,082			53,064
Total interest-sensitive liabilities (ISL)	4,547,033			161,681			303,630			5,012,344			349,594			55,886
Gap	$	(1,606,115)		$	231,836		$	353,062		$	(1,021,217)		$	2,336,536		$	655,513
ISA/ISL	0.65			2.43			2.16			0.80			7.68			12.73
Gap/Total assets	19.33		%	2.79		%	4.25		%	12.29		%	28.12		%	7.89		%

December 31, 2018
0-90 Days 91-180
Days 181-365
Days Cumulative
0-365 Days Over 1 Year
Through 5
Years Over 5
Years
(dollars in thousands)
Loans $ 2,659,890
$ 291,134
$ 439,098
$ 3,390,122
$ 1,802,605
$ 569,659
Investments 81,971
60,654
99,288
241,913
612,407
468,916
Other interest-earning assets 3,013
—
—
3,013
—
—
Total interest-sensitive assets (ISA) 2,744,874
351,788
538,386
3,635,048
2,415,012
1,038,575
Certificates of deposit 116,469
116,664
276,101
509,234
338,148
2,834
Other deposits 3,581,563
—
—
3,581,563
—
—
Borrowings 794,206
218
443
794,867
54,080
57,932
Total interest-sensitive liabilities (ISL) 4,492,238
116,882
276,544
4,885,664
392,228
60,766
Gap $ (1,747,364 ) $ 234,906
$ 261,842
$ (1,250,616 ) $ 2,022,784
$ 977,809
ISA/ISL 0.61
3.01
1.95
0.74
6.16
17.09
Gap/Total assets 22.32 % 3.00 % 3.34 % 15.98 % 25.84 % 12.49 %

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

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


	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
June 30, 2020 ($)	$	(6,288)		$	(4,198)		$	2,955		$	5,583
June 30, 2020 (%)	(2.25)		%	(1.50)		%	1.06		%	2.00		%

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

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


	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
June 30, 2020 ($)	$	(15,453)		$	(11,213)		$	10,018		$	17,592
June 30, 2020 (%)	(5.54)		%	(4.02)		%	3.59		%	6.31		%

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

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

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

The analysis and model used to quantify the sensitivity of our net interest income becomes less meaningful in a decreasing 200 basis point scenario given the current interest rate environment. Results of the 100 and 200 basis point interest rate decline scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1%, with an assumed floor of zero in the model. In the ~~nine~~six months ended~~September~~ June 30, ~~2019~~2020 and ~~2018~~,2019, the cost of our interest-bearing liabilities averaged ~~1.08%~~0.72% and ~~0.71%~~1.09%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged ~~4.55%~~3.97% and ~~4.25%~~4.57%, respectively.

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

Credit Risk

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

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

First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual impaired loans with a balance greater than ~~$0.1 million,~~$250 thousand, loss experience trends and other relevant factors.

First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled ~~$4.8~~$2.9 million at ~~September~~June 30, ~~2019~~2020 and is classified in "Other liabilities" on the unaudited Consolidated Statements of Financial Condition.

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

the borrower, who could not obtain comparable terms from alternative financing sources. In the first six months of 2020, 16 loans totaling $0.5 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans decreased ~~$1.4~~$2.5 million from December 31, ~~2018.~~2019. Changes during the first ~~nine~~six months of ~~2019 are largely~~2020 can be attributed to new restructurings in conjunction with bankruptcy offset by payments received on existing troubled debt restructured loans, including the ~~result of the pay-off~~$1.9 million payoff of a ~~$6.0 million~~ commercial ~~financial, agricultural and other~~loan relationship. Please refer to Note 98 “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The CARES Act, along with a joint agency statement issued by banking regulators, provides that short-term modifications of up to 180 days made in response to COVID-19 do not need to be accounted for as a TDR. As of July 24, 2020, the Company has granted approximately 6,500 deferrals to its customers with aggregate principal balances of $1.4 billion. Payment deferrals granted on approximately 6,300 accounts or $1.2 billion in balances have expired as of July 24th, 2020. It is likely that some of these deferrals will be extended for an additional 90 days in order to provide support for certain COVID-19 impacted customers.

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

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

Nonperforming loans, including loans held for sale, increased ~~$3.3~~$23.8 million to ~~$35.3~~$56.0 million at ~~September~~June 30, ~~2019~~2020 compared to ~~$32.0~~$32.2 million at December 31, ~~2018.~~2019. During the ~~nine~~six months ended ~~September~~June 30, ~~2019, $17.1~~2020, $38.6 million of loans were moved to ~~nonaccrual. Offsetting these additions was~~nonaccrual including the ~~payoff~~transfer of ~~a $6.0~~five commercial real estate relationships totaling $28.8 million and one commercial, financial, agricultural and other relationship ~~payoffs~~totaling $5.5 million. Offsetting these additions was a $3.9 million payoff of ~~$5.0 million related to two~~a commercial real estate ~~loans, the charge-off~~relationship, a $1.9 million payoff of a ~~$0.5 million~~ commercial, financial, agricultural and other ~~loan~~relationship and ~~the $0.3~~a $2.3 million ~~charge-off~~paydown of a commercial, ~~real estate loan.~~financial, agricultural and other relationship.

The allowance for credit losses as a percentage of nonperforming loans was ~~141.64%~~145.37% as of ~~September~~June 30, ~~2019~~,2020, compared to ~~149.14%~~160.28% at December 31, ~~2018~~,2019, and ~~127.35%~~143.62% at ~~September~~June 30, ~~2018~~.2019. The amount of specific reserves included in the allowance for nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific reserves of ~~$1.5~~$6.9 million and general reserves of ~~$48.5~~$74.5 million as of ~~September~~June 30, ~~2019~~.2020. Specific reserves ~~decreased $0.1~~increased $4.5 million from December 31, ~~2018~~,2019, and ~~decreased $3.8~~$4.4 million from ~~September~~June 30, ~~2018.~~2019. The ~~decrease~~increase from ~~September 30, 2018~~both periods is primarily due to ~~the payoff of two commercial relationships totaling $14.3 million and the sale of a $3.7 million dollar commercial relationship. These three relationships had total~~ specific reserves of ~~$9.0 million.~~$5.9 million added on the $28.8 million in new commercial real estate nonaccrual loans. Offsetting this was a $0.9 million decrease in specific reserves related to commercial, financial, agricultural and other loans and an $0.8 million decrease related to commercial real estate loans due to the aforementioned payoffs. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at ~~September~~June 30, ~~2019~~.2020.

Criticized loans totaled ~~$128.7~~$125.4 million at ~~September~~June 30, ~~2019~~2020 and represented ~~2.1%~~1.8% of the loan portfolio. The level of criticized loans increased as of ~~September~~June 30, ~~2019~~2020 when compared to December 31, ~~2018,~~2019, by ~~$1.5~~$24.8 million, or ~~1.1%~~24.7%. Classified loans totaled ~~$50.7~~$76.9 million at ~~September~~June 30, ~~2019~~2020 compared to ~~$40.2~~$52.0 million at December 31, ~~2018,~~2019, an increase of ~~$10.5~~$24.9 million, or ~~26.0%~~47.8%. The increase in criticized loans is primarily the result of the aforementioned changes in nonperforming loans. Delinquency on accruing loans for the same period ~~increased$4.1~~decreased $6.0 million,, or ~~39.6%~~44.3%, the majority of which are ~~commercial, financial, agricultural and other loans and commercial~~residential real estate loans.

The allowance for credit losses was ~~$50.0~~$81.4 million at ~~September~~June 30, ~~2019~~,2020, or ~~0.82%~~1.18% of total loans outstanding, compared to 0.83% reported at December 31, ~~2018~~,2019, and ~~0.90%~~0.85% at ~~September~~June 30, ~~2018~~.2019. General reserves, or the portion of the allowance related to loans that were not specifically evaluated for impairment, as a percentage of non-impaired loans were ~~0.80%~~1.09% at ~~September~~June 30, ~~2019~~2020 compared to 0.80% at December 31, ~~2018~~2019 and 0.81% at ~~September~~June 30, ~~2018~~.2019. General reserves as a percentage of non-impaired originated loans were ~~0.87%~~1.15% at ~~September~~June 30, ~~2019~~2020 compared to ~~0.88%~~0.87% at December 31, ~~2018~~2019 and ~~0.89%~~0.88% at ~~September~~June 30, ~~2018.~~

2019. The increase in the general reserve for both periods is reflective of higher qualitative reserves maintained at June 30, 2020 as a result of the COVID-19 pandemic. These reserves were increased in order to provide for risks related to the uncertain economic environment, the large volume of consumer forbearances granted as of June 30, 2020 as a result of COVID-19 as well as consideration of the probable losses incurred in certain loan categories, such as hospitality and retail.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	June 30,												December 31, 2019
	2020				2019
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	44,968			$	15,665			$	18,638
Loans held for sale on a nonaccrual basis	—				—				—
Troubled debt restructured loans on nonaccrual basis	3,600				10,914				6,037
Troubled debt restructured loans on accrual basis	7,455				8,975				7,542
Total nonperforming loans	$	56,023			$	35,554			$	32,217
Loans past due 30 to 90 days and still accruing	$	6,077			$	10,030			$	11,378
Loans past due in excess of 90 days and still accruing	$	1,421			$	2,656			$	2,073
Other real estate owned	$	1,634			$	1,884			$	2,228
Loans held for sale at end of period	$	30,409			$	16,036			$	15,989
Portfolio loans outstanding at end of period	$	6,922,075			$	6,003,059			$	6,189,148
Average loans outstanding	$	6,516,854		(a)	$	5,880,840		(a)	$	5,987,398		(b)
Nonperforming loans as a percentage of total loans	0.81		%		0.59		%		0.52		%
Provision for credit losses	$	37,826		(a)	$	6,930		(a)	$	14,533		(b)
Allowance for credit losses	$	81,441			$	51,061			$	51,637
Net charge-offs	$	8,022		(a)	$	3,633		(a)	$	10,660		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.25		%		0.12		%		0.18		%
Provision for credit losses as a percentage of net charge-offs	471.53		%	(a)	190.75		%	(a)	136.33		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	1.18		%		0.85		%		0.83		%
Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans (c)	1.28		%		0.85		%		0.83		%
Allowance for credit losses on originated loans as a percentage of end-of-period originated loans outstanding	1.22		%		0.92		%		0.90		%
Allowance for credit losses on originated loans as a percentage of end-of-period originated loans outstanding, excluding PPP loans	1.34		%		0.92		%		0.90		%
Allowance for credit losses as a percentage of nonperforming loans (d)	145.37		%		143.62		%		160.28		%

(a)

September 30, December 31, 2018
2019 2018
(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 16,227
   $ 17,921

$ 11,509

Loans held for sale on a nonaccrual basis —
   —
   —

Troubled debt restructured loans on nonaccrual basis 11,074
   13,876
   11,761

Troubled debt restructured loans on accrual basis 8,024
   8,052
   8,757

Total nonperforming loans $ 35,325
   $ 39,849
   $ 32,027

Loans past due 30 to 90 days and still accruing $ 12,387
$ 10,702
$ 8,760

Loans past due in excess of 90 days and still accruing $ 2,054
   $ 1,647
   $ 1,582

Other real estate owned $ 1,622
   $ 3,874
   $ 3,935

Loans held for sale at end of period $ 20,288
$ 8,287
$ 11,881

Portfolio loans outstanding at end of period $ 6,099,561
   $ 5,662,782

$ 5,774,139

Average loans outstanding $ 5,935,427
(a) $ 5,541,600
(a) $ 5,582,651
(b)
Nonperforming loans as a percentage of total loans 0.58 % 0.70 % 0.55 %
Provision for credit losses $ 9,638
(a) $ 11,032
(a) $ 12,531
(b)
Allowance for credit losses $ 50,035
   $ 50,746
   $ 47,764

Net charge-offs $ 7,367
(a) $ 8,584
(a) $ 13,065
(b)
Net charge-offs as a percentage of average loans outstanding (annualized) 0.17 % 0.21 % 0.23 %
Provision for credit losses as a percentage of net charge-offs 130.83 % (a) 128.52 % (a) 95.91 % (b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c) 0.82 % 0.90 % 0.83 %
Allowance for credit losses as a percentage of end-of-period originated loans outstanding 0.90 % 0.99 % 0.91 %
Allowance for credit losses as a percentage of nonperforming loans (d) 141.64 % 127.35 % 149.14 %

For the six-month period ended.


~~(a)~~	(b)For the twelve-month period ended. (c)Does not include loans held for sale. (d)Does not include nonperforming loans held for sale. ~~nine-month period ended.~~


~~(b)~~	~~For the twelve-month period ended.~~


~~(c)~~	~~Does not include loans held for sale.~~


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

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

September 30, 2019 December 31, 2018
Amount % Amount %
(dollars in thousands)
Commercial, financial, agricultural and other $ 1,210,936
20 % $ 1,138,473
20 %
Real estate construction 420,281
7
358,978
6
Residential real estate 1,666,220
27
1,562,405
27
Commercial real estate 2,124,240
35
2,123,544
37
Loans to individuals 677,884
11
590,739
10
Total loans and leases net of unearned income $ 6,099,561
100 % $ 5,774,139
100 %

During the nine months ended September 30, 2019, loans increased $325.4 million, or 5.6%, compared to balances outstanding at December 31, 2018, of which $100.0 million was acquired at the time of the Santander branch acquisition. All loan categories reflect growth for the nine months ended September 30, 2019, with residential real estate, loans to individuals and commercial, financial, agricultural providing a majority of the growth. Commercial, financial, agricultural and other loans increased $72.5 million, or 6.4%, largely due to growth in direct lending in Pennsylvania and Ohio. Loans acquired from


	June 30, 2020						December 31, 2019
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,773,099	26	%	$	1,241,853	20	%
Real estate construction	416,329		6		449,039		7
Residential real estate	1,723,288		25		1,681,362		27
Commercial real estate	2,224,710		32		2,117,519		34
Loans to individuals	784,649		11		699,375		12
Total loans and leases net of unearned income	$	6,922,075	100	%	$	6,189,148	100	%

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~Santander accounted~~During the six months ended June 30, 2020, loans increased $732.9 million, or 11.8%, compared to balances outstanding at December 31, 2019. All loan categories, except real estate construction, reflect growth for ~~$7.0 million~~the six months ended June 30, 2020, with commercial real estate, loans to individuals and commercial, financial, agricultural and other providing a majority of the ~~growth~~growth.

Commercial, financial, agricultural and other loans increased $531.2 million, or 42.8%, due to the origination of $570.9 million in PPP loans for small businesses who meet the necessary eligibility requirements. PPP loans are 100% guaranteed by the SBA under the CARES Act and are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the PPP requirements. Because PPP loans are fully guaranteed by the SBA, there is no allowance for credit losses recognized for these loans. These loans carry a fixed rate of 1.00% and currently yield 2.7% after considering origination fees and costs. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of loan. The loans are for a term of two years, if not forgiven, in whole or in part and payments are deferred for the first six months of the loan. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program that cannot be determined at this ~~category.~~ time.

Real estate construction loans ~~increased $61.3~~decreased $32.7 million, or ~~17.1%~~7.3%, ~~with $55.2 million resulting from growth in commercial~~primarily due to the completion of construction projects ~~primarily in Pennsylvania and Ohio and $27.7 million due~~converting to ~~growth in consumer construction.~~commercial real estate loans. Residential real estate grew ~~$103.8~~$41.9 million, or 2.5%, primarily due to ~~$71.8~~originations of closed-end 1-4 family mortgage loans. Commercial real estate loans increased $107.2 million, ~~acquired as part of the Santander branch acquisition and continued growth in residential mortgages.~~or 5.1%, primarily due to construction real estate loans that converted to permanent loans. Loans to individuals increased ~~$87.1~~$85.3 million, or 12.2%, as a result of growth in the indirect auto and recreational vehicle portfolio ~~and $11.8~~of $97.5 million offset by a decrease in other consumer loans ~~acquired from Santander.~~of $12.2 million.

As indicated in the table below, commercial, financial, agricultural and other, residential real estate and commercial real estate loans represented a significant portion of the nonperforming loans as of ~~September~~June 30, ~~2019.~~2020. See discussions related to the provision for credit losses and loans for more information.


	For the Six Months Ended June 30, 2020										As of June 30, 2020
	Net Charge- offs		% of Total Net Charge-offs		Net Charge- offs as a % of Average Loans (annualized)		Nonperforming Loans		% of Total Nonperforming Loans		Nonperforming Loans as a % of Total Loans
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,639	20.43	%	0.05	%	$	9,713	17.34	%	0.14	%
Real estate construction	(26)		(0.32)		—		308		0.55		—
Residential real estate	504		6.28		0.02		11,531		20.58		0.17
Commercial real estate	2,373		29.58		0.07		33,985		60.66		0.49
Loans to individuals	3,532		44.03		0.11		486		0.87		0.01
Total loans, net of unearned income	$	8,022	100.00	%	0.25	%	$	56,023	100.00	%	0.81	%

For the Nine Months Ended September 30, 2019 As of September 30, 2019

Net
Charge-
offs

% of
Total Net
Charge-offs

Net Charge-
offs as a % of
Average
Loans (annualized)

Nonperforming
Loans

% of Total
Nonperforming
Loans

Nonperforming
Loans as a % of
Total Loans
(dollars in thousands)
Commercial, financial, agricultural and other $ 1,952
26.50 % 0.05 % $ 10,975
31.07 % 0.18 %
Real estate construction (158 ) (2.14 ) —
—
—
—
Residential real estate 427
5.79
0.01
12,651
35.81
0.21
Commercial real estate 1,521
20.64
0.03
11,294
31.97
0.18
Loans to individuals 3,625
49.21
0.08
405
1.15
0.01
Total loans, net of unearned income $ 7,367
100.00 % 0.17 % $ 35,325
100.00 % 0.58 %

Net charge-offs for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 totaled ~~$7.4~~$8.0 million, compared to ~~$8.6~~$3.6 million for the ~~nine~~six months ended ~~September~~ June 30, ~~2018.~~2019. The most significant charge-offs during the ~~nine~~six months ended ~~September~~ June 30, ~~2019~~2020 included $1.0 million in charge-offs related to two commercial, financial, agricultural and other loan relationships and a ~~$1.3~~$2.2 million charge-off related to a ~~$0.5 million charge-off and a $0.3 million charge-off for three~~ commercial ~~customers and $3.6~~real estate loan relationship as well as $3.5 million in net charge-offs related to loans to individuals, primarily indirect auto loans and personal credit lines. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At ~~September~~June 30, ~~2019,~~2020, shareholders’ equity was ~~$1.0~~$1.1 billion, an increase of ~~$63.6~~$20.0 million from December 31, ~~2018.~~2019. The increase was primarily the result of ~~$78.5~~$28.6 million in net income, ~~$3.5~~$2.4 million in treasury stock sales and an increase of ~~$17.4~~$15.9 million in the fair value of available for sale investments. These increases were partially offset by ~~$29.6~~$21.6 million of dividends paid to shareholders and ~~$6.2~~$5.2 million of common stock repurchases. Cash dividends declared per common share were ~~$0.30~~$0.22 and ~~$0.26~~$0.20 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

First Commonwealth and First Commonwealth Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Effective January 1, 2015, the Company became subject to the new regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. The most significant changes included higher minimum capital requirements, as the minimum Tier I capital ratio increased from 4.0% to 6.0% and a new common equity Tier I capital ratio was established with a minimum level of 4.5%. Additionally, the rules improved the quality of capital by providing stricter eligibility criteria for regulatory capital instruments and provide for a phase-in, beginning January 1, 2016, of a capital conservation buffer of 2.5% of risk-weighted assets. This buffer, which was fully phased-in as of January 1, 2019, provides a requirement to hold common equity Tier 1 capital above the minimum risk-based capital requirements, resulting in an effective common equity Tier I risk-weighted asset minimum ratio of 7%7.0% on a fully phased-in basis.

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

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

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

As of ~~September~~June 30, ~~2019,~~2020, the Company has originated $570.9 million in PPP loans under the CARES Act. Because these loans are 100% guaranteed by the SBA, banking regulators confirmed that they have a zero percent risk weight under applicable risk-based capital rules. Additionally, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from average total assets when calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. The PPP loans originated by the Company are included in our leverage ratio as of June 30, 2020, as we did not utilize the PPP Facility

As of June 30, 2020, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which they are subject and was considered well-capitalized under the regulatory rules, all on a fully phased-in basis. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital, Tier I leverage ratio and Common equity tier I risk-based capital as set forth in the table below:


	Actual				Minimum Capital Required				Required to be Considered Well Capitalized					Actual						Minimum Capital Required						Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio			Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	(dollars in thousands)													(dollars in thousands)
Total Capital to Risk Weighted Assets													Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	935,130	14.11	%	$	695,859	10.50	%	$	662,723	10.00	%	First Commonwealth Financial Corporation	$	989,978	14.40	%	$	721,630	10.50	%	$	687,267	10.00	%
First Commonwealth Bank	897,035		13.56		694,517		10.50		661,445		10.00		First Commonwealth Bank	954,739		13.92		720,060		10.50		685,771		10.00
Tier I Capital to Risk Weighted Assets													Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	782,068	11.80	%	$	563,315	8.50	%	$	530,178	8.00	%	First Commonwealth Financial Corporation	$	807,280	11.75	%	$	584,177	8.50	%	$	549,814	8.00	%
First Commonwealth Bank	743,973		11.25		562,228		8.50		529,156		8.00		First Commonwealth Bank	772,041		11.26		582,906		8.50		548,617		8.00
Tier I Capital to Average Assets													Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	782,068	10.13	%	$	308,930	4.00	%	$	386,163	5.00	%	First Commonwealth Financial Corporation	$	807,280	9.28	%	$	347,900	4.00	%	$	434,874	5.00	%
First Commonwealth Bank	743,973		9.65		308,358		4.00		385,447		5.00		First Commonwealth Bank	772,041		8.90		347,151		4.00		433,938		5.00
Common Equity Tier I to Risk Weighted Assets													Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	712,068	10.74	%	$	463,906	7.00	%	$	430,770	6.50	%	First Commonwealth Financial Corporation	$	737,280	10.73	%	$	481,087	7.00	%	$	446,724	6.50	%
First Commonwealth Bank	743,973		11.25		463,012		7.00		429,939		6.50		First Commonwealth Bank	772,041		11.26		480,040		7.00		445,751		6.50

On ~~October 29, 2019,~~July 28, 2020, First Commonwealth Financial Corporation declared a quarterly dividend of ~~$0.10~~$0.11 per share payable on ~~November 22, 2019~~August 21, 2020 to shareholders of record as of ~~November 8, 2019.~~August 7, 2020. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.

On March 4, 2019, a share repurchase program was authorized by the Board of Directors for up to an additional $25.0 million in shares of the Company's common stock. As of ~~September~~June 30, ~~2019, 177,723~~2020, 761,558 common shares were repurchased at an average price

ITEM 2. Management’s Discussion and Analysis of ~~$12.37~~Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

of $12.30 per share. ~~First Commonwealth may suspend~~In March 2020, as a result of the COVID-19 pandemic, the Company temporarily suspended the share repurchase program.

New Accounting Pronouncements

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

The standard is effective for the Company as of January 1, 2020, however, on March 27, 2020, the CARES Act was signed into law, providing banking organizations with optional, temporary relief from implementing CECL until the earlier of the date on which the national emergency related to COVID-19 ends or ~~discontinue~~December 31, 2020. As provided by the ~~program~~CARES Act, the Company has elected to delay its adoption of CECL as a result of the uncertainty and volatility around economic forecasts.

During our implementation process, we established a CECL implementation team, which includes members from the finance and credit areas, with oversight by the Chief Executive Officer, Chief Financial Officer and Chief Credit Officer. In the fourth quarter of 2018, a third party was engaged to assist with evaluation of data and methodologies related to this standard.

As part of its process of adopting CECL, Management implemented a third party software solution and determined appropriate loan segments, methodologies, model assumptions and qualitative components. Our implementation plan also included the assessment and documentation of appropriate processes, policies and internal controls. Refinement and completion of this documentation was completed during the first quarter of 2020. Additionally, Management engaged a third party to perform a model validation, which was completed during the fourth quarter of 2019 and first quarter of 2020.

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

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

Table of Contents

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

ITEM 4. Controls and Procedures

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

Table of Contents

PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


ITEM 1. LEGAL PROCEEDINGS	~~LEGAL PROCEEDINGS~~

The information required by this item is set forth in Part I, Item 1, Note 6,5, "Commitments and Contingent Liabilities," which is incorporated herein by reference in response to this item.


~~ITEM 1A.~~	~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed ~~in our~~under Part I, Item 1A of the Company's Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2018~~.


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

~~On March 4,~~ 2019 ~~a share repurchase program was authorized for up to $25.0 million in shares~~and Part II, Item 1A of the Company's ~~common stock. The following table details~~Quarterly Report on Form 10-Q for the ~~amount of shares repurchased under this program during the third~~ quarter ~~of 2019:~~ended March 31, 2020.

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

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

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


~~ITEM 3.~~	~~DEFAULTS UPON SENIOR SECURITIES~~

None


~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable


~~ITEM 5.~~	~~OTHER INFORMATION~~

ITEM 5. OTHER INFORMATION

None

Table of Contents

PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS

Exhibit
Number

Description

Incorporated by Reference to

~~Exhibit~~

~~Number~~31.1

~~Description~~

~~Incorporated by Reference to~~

~~31.1~~

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

Filed herewith

31.2

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

Filed herewith

32.1

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

Filed herewith

32.2

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

Filed herewith

101

The following materials from First Commonwealth Financial Corporation’s Quarterly Report on Form 10-Q, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements. Note that XBRL tags are embedded within the document.

Filed herewith

Table of Contents

SIGNATURES

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

FIRST COMMONWEALTH FINANCIAL CORPORATION

(Registrant)



DATED: ~~November~~August 7, ~~2019~~2020						/s/ T. Michael Price
						T. Michael Price President and Chief Executive Officer

DATED: ~~November~~August 7, ~~2019~~2020						/s/ James R. Reske
						James R. Reske Executive Vice President, Chief Financial Officer and Treasurer



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



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

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

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

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

Goodwill			$	29,430



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

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

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

Total Fair Value of Identifiable Net Assets			39,939

Goodwill			$	19,022



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



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



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



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



	September 30, 2019		September 30, 2018		December 31, 2018
	(dollars in thousands)
Balance, beginning of period	$	47,764	$	48,298	$	48,298
Loans charged off:
Commercial, financial, agricultural and other	2,185		3,536		5,294
Real estate construction	—		—		—
Residential real estate	663		1,006		1,313
Commercial real estate	1,681		2,411		3,930
Loans to individuals	4,058		3,336		4,576
Total loans charged off	8,587		10,289		15,113
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	233		702		788
Real estate construction	158		99		141
Residential real estate	236		297		361
Commercial real estate	160		123		153
Loans to individuals	433		484		605
Total recoveries	1,220		1,705		2,048
Net credit losses	7,367		8,584		13,065
Provision charged to expense	9,638		11,032		12,531
Balance, end of period	$	50,035	$	50,746	$	47,764



	For the Nine Months Ended September 30, 2019							As of September 30, 2019
	Net Charge- offs			% of Total Net Charge-offs		Net Charge- offs as a % of Average Loans (annualized)		Nonperforming Loans		% of Total Nonperforming Loans		Nonperforming Loans as a % of Total Loans
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,952		26.50	%	0.05	%	$	10,975	31.07	%	0.18	%
Real estate construction	(158		)	(2.14	)	—		—		—		—
Residential real estate	427			5.79		0.01		12,651		35.81		0.21
Commercial real estate	1,521			20.64		0.03		11,294		31.97		0.18
Loans to individuals	3,625			49.21		0.08		405		1.15		0.01
Total loans, net of unearned income	$	7,367		100.00	%	0.17	%	$	35,325	100.00	%	0.58	%



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

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