# First Commonwealth Financial Corp: Form 10-K for the period ended Dec 31, 2020 - Company: [First Commonwealth Financial Corp](/companies/fcf.md) (CIK 712537) - Form: 10-K - Filed: 2021-03-01 - Accepted by EDGAR: Mar 1, 2021, 16:03 ET - Period: 2020-12-31 - Accession: 0000712537-21-000007 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/712537/000071253721000007/fcf-20201231.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/712537/000071253721000007/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2020-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Interest expense | 12 months, 2020-01-01 to 2020-12-31 | $32.9m | us-gaap:InterestExpense | | Income tax | 12 months, 2020-01-01 to 2020-12-31 | $16.8m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2020-01-01 to 2020-12-31 | $73.4m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2020-01-01 to 2020-12-31 | $0.75 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2020-01-01 to 2020-12-31 | $0.75 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2020-01-01 to 2020-12-31 | 97,758,965 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2020-01-01 to 2020-12-31 | $105.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2020-01-01 to 2020-12-31 | $7.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2020-01-01 to 2020-12-31 | $43.0m | us-gaap:PaymentsOfDividends | | Share repurchases | 12 months, 2020-01-01 to 2020-12-31 | $20.9m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2020-12-31 | $9.07bn | us-gaap:Assets | | Total liabilities | at 2020-12-31 | $8.00bn | us-gaap:Liabilities | | Long-term debt | at 2020-12-31 | $233.3m | us-gaap:LongTermDebt | | Short-term borrowings | at 2020-12-31 | $117.4m | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2020-12-31 | $1.07bn | us-gaap:StockholdersEquity | ## Business As filed, 58,623 characters. ### Overview First Commonwealth Financial Corporation (“First Commonwealth,” the “Company” or “we”) is a financial holding company headquartered in Indiana, Pennsylvania. First Commonwealth's subsidiaries include, First Commonwealth Bank ("FCB" or the "Bank"), First Commonwealth Insurance Agency, Inc. ("FCIA"), FRAMAL and First Commonwealth Financial Advisors, Inc ("FCFA"). We provide a diversified array of consumer and commercial banking services through our bank subsidiary, FCB. We also provide trust and wealth management services and offer insurance products through FCB and our other operating subsidiaries. At December 31, 2020, we had total assets of $9.1 billion, total loans of $6.8 billion, total deposits of $7.4 billion and shareholders’ equity of $1.1 billion. Our principal executive office is located at 601 Philadelphia Street, Indiana, Pennsylvania 15701, and our telephone number is (724) 349-7220. FCB is a Pennsylvania bank and trust company. At December 31, 2020, the Bank operated 120 community banking offices throughout western and central Pennsylvania, and northeastern, central and southwestern Ohio, as well as corporate banking centers in Pittsburgh, Pennsylvania, and Columbus, Canton and Cleveland, Ohio, and mortgage banking offices in Wexford, Pennsylvania, and Hudson, Westlake and Lewis Center, Ohio. The Bank also operates a network of 139 automated teller machines, or ATMs, at various branch offices and offsite locations. All of our ATMs are part of the NYCE and MasterCard/Cirrus networks, both of which operate nationwide. The Bank is a member of the Allpoint ATM network, which allows surcharge-free access to over 55,000 ATMs. The Bank is also a member of the “Freedom ATM Alliance,” which affords cardholders surcharge-free access to a network of over 350 ATMs in over 50 counties in Pennsylvania, Maryland, New York, and Ohio. ### Historical and Recent Developments FCB began in 1934 as First National Bank of Indiana. First National Bank of Indiana changed its name to National Bank of the Commonwealth in 1971 and became a subsidiary of First Commonwealth in 1983. Since the formation of the holding company in 1983, we have grown steadily through the acquisition of smaller banks and thrifts in our market area, including Deposit Bank in 1984, Dale National Bank and First National Bank of Leechburg in 1985, Citizens National Bank of Windber in 1986, Peoples Bank and Trust Company in 1990, Central Bank in 1992, Peoples Bank of Western Pennsylvania in 1993, and Unitas National Bank and Reliable Savings Bank in 1994. In 1995, we merged all of our banking subsidiaries (other than Reliable Savings Bank) into Deposit Bank and renamed the resulting institution “First Commonwealth Bank.” We then merged Reliable Savings Bank into FCB in 1997. We acquired Southwest Bank in 1998 and merged it into FCB in 2002. We expanded our presence in the Pittsburgh market through the acquisitions of Pittsburgh Savings Bank (dba BankPittsburgh) in 2003, Great American Federal in 2004 and Laurel Savings Bank in 2006. These acquisitions added 27 branches in Allegheny and Butler Counties. We have also focused on organic growth, improving the reach of our franchise and the breadth of our product offering. As part of this strategy, we have opened fourteen de novo branches since 2005, all of which are in the greater Pittsburgh area. As a result of our prior acquisitions and de novo strategy, FCB operates 46 branches and a corporate banking center in the Pittsburgh metropolitan statistical area and currently ranks tenth in deposit market share. In 2015, we expanded into central Ohio through the acquisition of First Community Bank with four branches in the Columbus area. In 2016, we acquired 13 branches from FirstMerit Bank, National Association, in Canton-Massillon and Ashtabula, Ohio and in 2017, we acquired DCB Financial Corp ("DCB") and its banking subsidiary The Delaware County Bank and Trust Company with nine full-service banking offices in the Columbus, Ohio MSA. In 2018, we acquired Garfield Acquisition Corp., and its banking subsidiary Foundation Bank with five full-service banking offices in the Cincinnati, Ohio area. Additionally, since 2014, we have expanded our presence in this Ohio market by opening a corporate loan production office in Columbus, Canton and Cleveland, Ohio, and mortgage loan offices in Hudson, Westlake and Lewis Center, Ohio. In 2019, we expanded our Pennsylvania markets into State College, Lock Haven, Williamsport and Lewisburg through the acquisition of 14 branches from Santander Bank, N.A. ("Santander"). Our operating objectives include expansion, diversification within our markets, growth of our fee-based income, and growth internally and through acquisitions of financial institutions, branches, and financial services businesses. We generally seek merger or acquisition partners that are culturally similar, have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. We regularly evaluate merger and acquisition opportunities and, from time to time, conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations, may take place and future merger acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of First Commonwealth’s tangible book value and net income per common share may occur in connection with any future transaction. Our ability to engage in certain merger or acquisition transactions, whether or not any regulatory approval is required, will be dependent upon our bank regulators’ views at the time as to the capital levels, quality of management and our overall condition and their assessment of a variety of other factors. Certain merger or acquisition transactions, including those involving the acquisition of a depository institution or the assumption of the deposits of any depository institution, require formal approval from various bank regulatory authorities, which will be subject to a variety of factors and considerations. ### Loan Portfolio The Company’s loan portfolio includes several categories of loans that are discussed in detail below. #### Commercial, Financial, Agricultural and Other Commercial, financial, agricultural and other loans represent term loans used to acquire business assets or revolving lines of credit used to finance working capital. These loans are generally secured by a first lien position on the borrower’s business assets as a secondary source of repayment. The type and amount of the collateral varies depending on the amount and terms of the loan, but generally may include accounts receivable, inventory, equipment or other assets. Loans also may be supported by personal guarantees from the principals of the commercial loan borrowers. Commercial loans are underwritten for credit-worthiness based on the borrowers’ financial information, cash flow, net worth, prior loan performance, existing debt levels, type of business and the industry in which it operates. Advance rates on commercial loans are generally collateral-dependent and are determined based on the type of equipment, the mix of inventory and the quality of receivables. Credit risk for commercial loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of secured loans, from a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. The Company’s Credit Policy establishes loan concentration limits by borrower, geography and industry. #### Commercial Real Estate Commercial real estate loans represent term loans secured by owner-occupied and non-owner occupied properties. Commercial real estate loans are underwritten based on an evaluation of each borrower’s cash flow as the principal source of loan repayment, and are generally secured by a first lien on the property as a secondary source of repayment. Our underwriting process for non-owner occupied properties evaluates the history of occupancy, quality of tenants, lease terms, operating expenses and cash flow. Commercial real estate loans are subject to the same credit evaluation as previously described for commercial loans. Approximately 19%, by principal amount, of our commercial real estate loans involve owner-occupied properties. For loans secured by commercial real estate, at origination the Company obtains current and independent appraisals from licensed or certified appraisers to assess the value of the underlying collateral. The Company’s general policy for commercial real estate loans is to limit the terms of the loans to not more than 10 years with loan-to-value ratios not exceeding 80% on owner-occupied and income producing properties. For non-owner occupied commercial real estate loans, the loan terms are generally aligned with the property’s lease terms and are generally underwritten with a loan-to-value ratio not exceeding 75%. Credit risk for commercial real estate loans can arise from economic conditions that could impact market demand, rental rates and property vacancy rates and declines in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. #### Real Estate Construction Real estate construction represents financing for real estate development. The underwriting process for these loans is designed to confirm that the project will be economically feasible and financially viable and is generally conducted as though the Company would be providing permanent financing for the project. Development and construction loans are secured by the properties under development or construction, and personal guarantees are typically obtained as a secondary repayment source. The Company considers the financial condition and reputation of the borrower and any guarantors and generally requires a global cash flow analysis in order to assess the overall financial position of the developer. Construction loans to residential builders are generally made for the construction of residential homes for which a binding sales contract exists and for which the prospective buyers have been pre-qualified for permanent mortgage financing by either third-party lenders or the Company. These loans are generally for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. At the end of the construction phase, substantially all of our loans automatically convert to permanent mortgage loans and can either be retained in our loan portfolio or sold on the secondary market. Credit risk for real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed. #### Residential Real Estate Residential real estate loans include first lien mortgages used by the borrower to purchase or refinance a principal residence and home equity loans and lines of credit secured by residential real estate. The Company’s underwriting process for these loans determines credit-worthiness based upon debt-to-income ratios, collateral values and other relevant factors. Credit risk for residential real estate loans can arise from a borrower’s inability or unwillingness to repay the loan or a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent liquidation of the real estate collateral. The residential real estate portfolio includes both conforming and non-conforming mortgage loans. Conforming mortgage loans represent loans originated in accordance with underwriting standards set forth by the government-sponsored entities, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association, which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage lenders. These loans are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or less (or have mortgage insurance to insure down to 80%), and are made to borrowers in good credit standing. Non-conforming mortgage loans represent loans that generally are not saleable in the secondary market to the government-sponsored entities due to factors such as the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan. The Company does not offer “subprime,” “interest-only” or “negative amortization” mortgages. Home equity lines of credit and other home equity loans are originated by the Company for typically up to 90% of the appraised value, less the amount of any existing prior liens on the property. Additionally, the Company’s credit policy requires borrower FICO scores of not less than 661 and a debt-to-income ratio of not more than 43%. #### Loans to Individuals The loans to individuals category includes consumer installment loans, personal lines of credit, consumer credit cards and indirect automobile and recreational vehicle loans. Credit risk for consumer loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of secured loans, by a shortfall in the value of the collateral in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. The underwriting criteria for automobile loans generally allows for such loans to be made for up to 100% of the purchase price or the retail value of the vehicle as listed by the National Automobile Dealers Association. The terms of the loan are determined by the age and condition of the collateral, and range from 36 to 84 months. Collision insurance policies are required on all automobile loans. The Company also makes other consumer loans, which may or may not be secured. The terms of secured consumer loans generally depend upon the nature of the underlying collateral. Unsecured consumer loans and consumer credit cards usually do not exceed $35 thousand. Unsecured consumer loans usually have a term of no longer than 36 months. ### Deposits Deposits are our primary source of funds to support our revenue-generating assets. We offer traditional deposit products to businesses and other customers with a variety of rates and terms. Deposits at our bank are insured by the FDIC up to statutory limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business and prudently managing our cost of funds. At December 31, 2020, we held $7.4 billion of total deposits, which consisted of $2.3 billion, or 31%, in non-interest bearing checking accounts, $4.5 billion, or 61%, in interest bearing checking accounts, money market and savings accounts, and $0.6 billion, or 8%, in CDs and IRAs. ### Competition The banking and financial services industry is extremely competitive in our market area. We face vigorous competition for customers, loans and deposits from many companies, including commercial banks, savings and loan associations, finance companies, credit unions, trust companies, mortgage companies, money market mutual funds, insurance companies, and brokerage and investment firms. Many of these competitors are significantly larger than us, have greater resources, higher lending limits and larger branch systems and offer a wider array of financial services than us. In addition, some of these competitors, such as credit unions, are subject to a lesser degree of regulation or taxation than banks. ### Human Capital Resources Our employees are key to First Commonwealth’s success as an organization. We are committed to attracting, retaining and promoting top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion and physical ability. We strive to identify and select the best candidates for all open positions based on qualifying factors for each job. We are dedicated to providing a workplace for our employees that is inclusive, supportive, and free of any form of discrimination or harassment; rewarding and recognizing our employees based on their individual results and performance; and recognizing and respecting all of the characteristics and differences that make each of our employees unique. At December 31, 2020, First Commonwealth and its subsidiaries employed 1,323 full-time employees and 70 part-time employees. Our team strives to live our core values of accountability, customer service, integrity, excellence and inclusion, while delivering our Customer Service Promise. Our Customer Service Promise represents five critical behaviors designed to create an extraordinary customer experience: put customers first, be relentless, inspire confidence, champion simplicity and obsess with yes. As we navigated the COVID-19 crisis throughout 2020, the safety and well-being of our employees, customers, partners, and communities remained our top priority. To protect the health and financial security of our employees, the Company directed and enabled approximately 40% of its workforce to work-from-home and relocated onsite employees to create physical separation within departments and between individual employees. We also enhanced our cleaning protocols, provided personal protective equipment to our employees, required face coverings for employees and customers, conducted temperature screening and took other measures to comply with directives of state and local health departments. In addition, we provided up to 40 hours of additional paid time off to employees who work onsite, offered no-interest loans up to $2,000 to all employees, and provided no-cost COVID-19 treatment under the Company’s medical plan. Communication with our employees was a priority through weekly leadership messaging and frequent COVID-19 updates. Employees had direct connection to get their questions answered through an internal COVID-19 Hotline and a streamlined approach to help those with positive test results. We also continued to strengthen our commitment to diversity and inclusion in 2020. Our CEO and leadership team responded to racial injustice by leadership messaging and having conversations with employees of color to listen with understanding. We took an active approach to provide training and have meaningful conversations at the highest levels in the organization and provided financial support to organizations that address anti-racism education or programming. Our objective of creating an environment that encourages diversity and inclusion was best measured by our 2020 employee engagement survey in which employees rated diversity & inclusion as the highest rated category. In 2020, we have made progress toward our internal goals of increasing the representation of racial minorities, individuals with disabilities and veterans within our workforce and women who serve in leadership positions. ### Supervision and Regulation The following discussion sets forth the material elements of the regulatory framework applicable to financial holding companies, such as First Commonwealth, and their subsidiaries. The regulatory framework is intended primarily for the protection of depositors, other customers and the federal deposit insurance fund and not for the protection of security holders. The rules governing the regulation of financial institutions and their holding companies are very detailed and technical. Accordingly, the following discussion is general in nature and is not intended to be complete or to describe all the laws and regulations that apply to First Commonwealth and its subsidiaries. A change in applicable statutes, regulations or regulatory policy may have a material adverse effect on our business, financial condition or results of operations. #### Bank Holding Company Regulation First Commonwealth is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (“FRB”). Acquisitions. Under the BHC Act, First Commonwealth is required to obtain the prior approval of the FRB before it can merge or consolidate with any other bank holding company or acquire all or substantially all of the assets of any bank that is not already majority owned by it, or acquire direct or indirect ownership, or control of, any voting shares of any bank that is not already majority owned by it, if after such acquisition it would directly or indirectly own or control more than 5% of the voting shares of such bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the financial, including capital, position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's performance record under the Community Reinvestment Act ("CRA") and its compliance with fair housing and other consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities. Banking Holding Company Activities. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as First Commonwealth may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, without in either case the prior approval of the FRB. Activities that are financial in nature include securities underwriting and dealing, insurance agency activities and making merchant banking investments. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be well capitalized and well managed. A depository institution subsidiary is considered to be well capitalized if it satisfies the requirements for this status discussed in the section below captioned "Prompt Corrective Action." A depository institution subsidiary is considered well managed if it received a composite rating and management rating of at least satisfactory in its most recent examination. A financial holding company’s status will also depend upon maintaining its status as well capitalized and well managed under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions. In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least satisfactory in its most recent examination under the CRA. The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company. Reporting. Under the BHC Act, First Commonwealth is subject to examination by the FRB and is required to file periodic reports and other information of its operations with the FRB. Source of Strength Doctrine. FRB policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. First Commonwealth is expected to commit resources to support FCB, including at times when First Commonwealth may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. Affiliate Transactions. Transactions between FCB, on the one hand, and First Commonwealth and its other subsidiaries, on the other hand, are regulated under federal banking laws. The Federal Reserve Act imposes quantitative and qualitative requirements and collateral requirements on covered transactions by FCB with, or for the benefit of, its affiliates, and generally requires those transactions to be on terms at least as favorable to FCB as if the transaction were conducted with an unaffiliated third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, any such transaction by FCB (or its subsidiaries) must be limited to certain thresholds on an individual and aggregate basis and, for credit transactions with any affiliate, must be secured by designated amounts of specified collateral. SEC Regulations. First Commonwealth is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and various state securities commissions for matters relating to the offer and sale of its securities and is subject to the SEC rules and regulations relating to periodic reporting, proxy solicitation and insider trading. #### Bank Regulation FCB is a state bank chartered under the Pennsylvania Banking Code and is not a member of the FRB. As such, FCB is subject to the supervision of, and is regularly examined by, both the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities and is required to furnish quarterly reports to both agencies. The approval of the Pennsylvania Department of Banking and Securities and FDIC is also required for FCB to establish additional branch offices or merge with or acquire another banking institution. Dividends. First Commonwealth is a legal entity separate and distinct from its banking and other subsidiaries. As a bank holding company, First Commonwealth is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations. Federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In particular, federal bank regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. A significant portion of our income comes from dividends from our bank, which is also the primary source of our liquidity. In addition to the restrictions discussed above, our bank is subject to limitations under Pennsylvania law regarding the level of dividends that it may pay to us. In general, dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus is at least equal to capital. Dividends may not reduce surplus without the prior consent of the Pennsylvania Department of Banking and Securities. FCB has not reduced its surplus through the payment of dividends. As of December 31, 2020, FCB could pay dividends to First Commonwealth of $295.9 million without reducing its capital levels below "well capitalized" levels and without the approval of the Pennsylvania Department of Banking and Securities. Community Reinvestment. Under the Community Reinvestment Act ("CRA") a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the applicable regulatory agency to assess an institution’s record of meeting the credit needs of its community. The CRA requires public disclosure of an institution’s CRA rating and requires that the applicable regulatory agency provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the basis for denying an application. For its most recent examination, FCB received a “satisfactory” rating. In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. We will continue to monitor the proposed rules and evaluate the impact of any changes to the regulations implementing the CRA on our business. Consumer Financial Protection. We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required. The Consumer Financial Protection Bureau ("CFPB"), has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary responsibility for examination of our bank and enforcement with respect to federal consumer protection laws so long as our bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance with all state consumer laws. The CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as our bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets. Deposit Insurance. Deposits of FCB are insured up to applicable limits by the FDIC and are subject to deposit insurance assessments to maintain the Deposit Insurance Fund (“DIF”). Deposit insurance assessments are based upon average total assets minus average total equity. The insurance assessments are based upon a matrix that takes into account a bank’s capital level and supervisory rating. The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. As an institution with less than $10 billion in assets, FCB’s assessment rates are based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). For institutions with $10 billion or more in assets, assessment rates are calculated using a scorecard that combines the supervisory risk ratings of the institution with certain forward-looking financial measures. These assessment rates are subject to adjustments based upon the insured depository institution’s ratio of long-term unsecured debt to the assessment base, long-term unsecured debt issued by other insured depository institutions to the assessment base, and brokered deposits to the assessment base. However, the adjustments based on brokered deposits to the assessment base will not apply so long as the institution is well capitalized and has a composite CAMELS rating of 1 or 2. The CAMELS rating system is a bank rating system where bank supervisory authorities rate institutions according to six factors: capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk. The FDIC may make additional discretionary assessment rate adjustments. #### Capital Requirements First Commonwealth and FCB are each required to comply with applicable capital adequacy standards established by the FRB. In July 2013, the federal bank regulators approved final rules (the “Basel III Capital Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. Since fully phased in on January 1, 2019, the Basel III Capital Rules require First Commonwealth and FCB to maintain the following: - A minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.0%); - A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); - A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%); and - A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income). The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. During 2015, First Commonwealth and FCB made a one-time permanent election, as permitted under Basel III Capital Rules, to exclude the effects of accumulated other comprehensive income items for the purposes of determining regulatory capital ratios. With respect to FCB, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.” The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. #### Liquidity Requirements The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. Rules applicable to certain large banking organizations have been implemented for LCR and proposed for NSFR; however, based on our asset size, these rules do not currently apply to First Commonwealth and FCB. #### Prompt Corrective Action The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the CET1 capital ratio (a new ratio requirement under the Basel III Capital Rules), the Tier 1 capital ratio and the leverage ratio. A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes. The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan and must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” In addition, the FDIA prohibits an insured depository institution from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where the deposits are solicited), unless it is well capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution that is adequately capitalized and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. First Commonwealth believes that, as of December 31, 2020, FCB was a “well-capitalized” bank as defined by the FDIA. See Note 24 “Regulatory Restrictions and Capital Adequacy” of Notes to the Consolidated Financial Statements, contained in Item 8, for a table that provides a comparison of First Commonwealth’s and FCB’s risk-based capital ratios and the leverage ratio to minimum regulatory requirements. #### The Volcker Rule The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds (so called "covered funds"). The statutory provision is commonly called the “Volcker Rule.” Banks with less than $10 billion in total consolidated assets, such as FCB, are exempt from the Volker Rule. #### Depositor Preference Under federal law, depositors (including the FDIC with respect to the subrogated claims of insured depositors) and certain claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims against such an institution in the liquidation or other resolution of such an institution by any receiver. #### Interchange Fees Under the Durbin Amendment to the Dodd-Frank Act, the FRB adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Under the final rules, the maximum permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. The FRB also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the FRB. The FRB also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. The Dodd-Frank Act contained an exemption from the interchange fee cap for any debit card issuer that, together with its affiliates, has total assets of less than $10 billion as of the end of the previous calendar year. We currently qualify for this exemption. We earned approximately $24.0 million in card related interchange income during the 2019 fiscal year. If we did not qualify for this exemption, we estimate that our interchange income would have been approximately $13.2 million, representing a $10.7 million reduction due to the cap on interchange fees. We would become subject to the interchange fee cap beginning July 1 of the year following the time when the level of our total assets reaches or exceeds $10 billion. #### Financial Privacy The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. #### Anti-Money Laundering and the USA Patriot Act A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. #### Office of Foreign Assets Control Regulation The U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Commonwealth is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. #### Cybersecurity In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity in those areas to continue, and are continually monitoring developments in the states in which our customers are located. In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity. #### Future Legislation and Regulation Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and modify our business strategy, and limit our ability to pursue business opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely affected, perhaps materially, as a result. ### Availability of Financial Information We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Our SEC filings are also available to the public on the SEC website at www.sec.gov and on our website at www.fcbanking.com. We also make available on our website, www.fcbanking.com, and in print to any shareholder who requests them, our Corporate Governance Guidelines, the charters for our Audit, Risk, Compensation and Human Resources, and Governance Committees, and the Code of Conduct and Ethics that applies to all of our directors, officers and employees. Our Chief Executive Officer has certified to the New York Stock Exchange (“NYSE”) that, as of the date of the certification, he was not aware of any violation by First Commonwealth of NYSE’s corporate governance listing standards. In addition, our Chief Executive Officer and Chief Financial Officer have made certain certifications concerning the information contained in this report pursuant to Section 302 of the Sarbanes-Oxley Act. The Section 302 certifications appear as Exhibits 31.1 and 31.2 to this annual report on Form 10-K. ## Risk factors As filed, 48,836 characters. An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of our common stock could decline significantly, and you could lose all or part of your investment. ### Risks Related To Our Business ### Interest Rate Risks #### We Are Subject to Interest Rate Risk Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Some foreign central banks have moved to a negative interest rate environment, which has exerted downward pressure on the profitability of banks in those regions and this interest rate trend could extend to the United States. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the section captioned “Net Interest Income” and Item 7A. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for further discussion related to interest rate sensitivity and our management of interest rate risk. #### We May Be Adversely Impacted by the Transition from LIBOR as a Reference Rate In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. It is not possible to predict what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., AMERIBOR or the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments. We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations. ### Credit and Lending Risks #### We Are Subject to Lending Risk There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. #### We Are Subject to Risk Arising from Conditions in the Commercial Real Estate Market As of December 31, 2020, commercial real estate mortgage loans comprised approximately 33% of our loan portfolio. Commercial real estate mortgage loans generally involve a greater degree of credit risk than residential real estate mortgage loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulations. In recent years, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. Furthermore, commercial real estate markets have been particularly impacted by the economic disruption resulting from the COVID-19 pandemic. Accordingly, the federal banking regulatory agencies have expressed concerns about weaknesses in the current commercial real estate market. Failures in our risk management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which, accordingly, could have a material adverse effect on our business, financial condition and results of operations. #### Our Allowance for Credit Losses may be Insufficient All borrowers carry the potential to default and our remedies to recover may not fully satisfy money previously loaned. We maintain an allowance for credit losses, which represents management’s best estimate of credit losses within the existing portfolio of loans. The allowance, in the judgment of management, is appropriate to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for credit losses reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and unidentified losses in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions or forecasts, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of additional loan charge-offs, based on judgments different than those of management. An increase in the allowance for credit losses results in a decrease in net income or losses, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations. ### Liquidity Risk #### We Are Subject to Liquidity Risk We require liquidity to meet our deposit and debt obligations as they come due. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could reduce our access to liquidity sources include a downturn in the economy, difficult credit markets or adverse regulatory actions against us. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a substantial majority of our liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial condition and results of operations. ### Operational Risks #### Our Accounting Estimates and Risk Management Processes Rely On Analytical and Forecasting Models The processes we use to estimate our expected credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for estimating our expected credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations. #### The Value of Our Goodwill and Other Intangible Assets May Decline in the Future As of December 31, 2020, we had $316.8 million of goodwill and other intangible assets. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of the Company’s common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets which could have a material adverse effect on our business, financial condition and results of operations. #### We Are Subject to Risk Arising from Failure or Circumvention of Our Controls and Procedures Our internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures; failure to comply with regulations related to controls and procedures; or failure to comply with our corporate governance policies and procedures could have a material adverse effect on our reputation, business, financial condition and results of operations. Furthermore, notwithstanding the proliferation of technology and technology-based risk and control systems, our businesses ultimately rely on people as our greatest resource, and, from time-to-time, they make mistakes or engage in violations of applicable policies, laws, rules or procedures that are not always caught immediately by our technological processes or by our controls and other procedures, which are intended to prevent and detect such errors or violations. Human errors, malfeasance and other misconduct, including the intentional misuse of client information in connection with insider trading or for other purposes, even if promptly discovered and remediated, can result in reputational damage or legal risk and have a material adverse effect on our business, financial condition and results of operations. #### New Lines of Business, Products or Services and Technological Advancements May Subject Us to Additional Risks From time to time, we implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively. In addition, cloud technologies are also critical to the operation of our systems, and our reliance on cloud technologies is growing. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition and results of operations. Furthermore, any new line of business, new product or service and/or new technology could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business, new products or services and/or new technologies could have a material adverse effect on our business, financial condition and results of operations. #### Our Reputation and our Business Are Subject to Negative Publicity Risk Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally. In addition, our reputation or prospects may be significantly damaged by adverse publicity or negative information regarding us, whether or not true, that may be posted on social media, non-mainstream news services or other parts of the internet, and this risk is magnified by the speed and pervasiveness with which information is disseminated through those channels. #### Our Business, Financial Condition and Results of Operations Are Subject to Risk from Changes in Customer Behavior Individual, economic, political, industry-specific conditions and other factors outside of our control, such as fuel prices, energy costs, real estate values or other factors that affect customer income levels, could alter anticipated customer behavior, including borrowing, repayment, investment and deposit practices. Such a change in these practices could materially adversely affect our ability to anticipate business needs and meet regulatory requirements. Further, difficult economic conditions may negatively affect consumer confidence levels. A decrease in consumer confidence levels would likely aggravate the adverse effects of these difficult market conditions on us, our customers and others in the financial institutions industry. #### First Commonwealth Relies on Dividends from its Subsidiary Bank for Most of Its Revenue First Commonwealth is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on First Commonwealth’s common stock and interest and principal on First Commonwealth’s debt. Various federal and/or state laws and regulations limit the amount of dividends that FCB and certain non-bank subsidiaries may pay to First Commonwealth. In the event FCB is unable to pay dividends to First Commonwealth, First Commonwealth may not be able to service debt, pay obligations or pay dividends on its common stock. The inability to receive dividends from FCB could have a material adverse effect on First Commonwealth’s business, financial condition and results of operations. *Acts of Cyber-Crime May Compromise Client and Company Information, Disrupt Access to Our Systems or Result in Loss of Client or Company Assets.* Our business is dependent upon the availability of technology, the Internet and telecommunication systems to enable financial transactions by clients, record and monitor transactions and transmit and receive data to and from clients and third parties. Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our technologies, systems, networks and our clients’ devices have been subject to, and are likely to continue to be the target of, cyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’ business operations. Even the most well protected information, networks, systems and facilities remain potentially vulnerable to attempted security breaches or disruptions because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. While we maintain specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. A security breach or other significant disruption of our information systems or those related to our customers, merchants or our third party vendors, including as a result of cyber attacks, could (i) disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and exposing us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. #### Our Operations Rely On Certain External Vendors We rely on certain vendors to provide products and services necessary to maintain the day-to-day operations of First Commonwealth and FCB. In particular, we contracted with an external vendor for our core processing system used to maintain customer and account records, reflect account transactions and activity, and support our customer relationship management systems for substantially all of our deposit and loan customers. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to First Commonwealth’s operations and financial reporting, which could have a material adverse effect on First Commonwealth’s business and, in turn, First Commonwealth’s financial condition and results of operations. In addition, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. Although we have selected these external vendors carefully, we do not control their actions. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our financial condition and results of operations. Replacing these external vendors could also entail significant delay and expense. #### Financial Services Companies Depend on the Accuracy and Completeness of Information About Customers and Counterparties In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations. ### External and Market-Related Risks #### We are Subject to Risk Arising from The Soundness of Other Financial Institutions and Counterparties Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our business, financial condition and results of operations. *Competition from Other Financial Institutions in Originating Loans, Attracting Deposits and Providing Various Financial Services May Adversely Affect Our Profitability.* FCB faces substantial competition in originating loans and attracting deposits. This competition comes principally from other banks, savings institutions, mortgage banking companies and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, better brand recognition, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. These competitors may offer more favorable pricing through lower interest rates on loans or higher interest rates on deposits, which could force us to match competitive rates and thereby reduce our net interest income. ### Compliance and Regulatory Risks #### We are Subject to Extensive Government Regulation and Supervision Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. See “Supervision and Regulation” included in Item 1. Business for a more detailed description of the regulatory requirements applicable to First Commonwealth. ### Risks Related to Acquisition Activity #### Potential Acquisitions May Disrupt Our Business and Dilute Stockholder Value We generally seek merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things, (i) potential exposure to unknown or contingent liabilities of the target company; (ii) exposure to potential asset quality issues of the target company; (iii) potential disruption to our business; (iv) potential diversion of our management’s time and attention; (v) the possible loss of key employees and customers of the target company; (vi) difficulty in estimating the value of the target company; and (vii) potential changes in banking or tax laws or regulations that may affect the target company. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our business, financial condition and results of operations. #### Acquisitions May Be Delayed, Impeded, or Prohibited Due to Regulatory Issues Acquisitions by financial institutions, including us, are subject to approval by a variety of federal and state regulatory agencies (collectively, “regulatory approvals”). The process for obtaining these required regulatory approvals has become substantially more difficult since the global financial crisis, and our ability to engage in certain merger or acquisition transactions depends on the bank regulators' views at the time as to our capital levels, quality of management, and overall condition, in addition to their assessment of a variety of other factors, including our compliance with law. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, financial condition and results of operations. ### Risks Associated with Our Common Stock #### The Trading Volume in Our Common Stock Is Less Than That of Other Larger Financial Services Companies Although First Commonwealth’s common stock is listed for trading on the NYSE, the trading volume in its common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of First Commonwealth’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of First Commonwealth’s common stock, significant sales of First Commonwealth’s common stock, or the expectation of these sales, could cause First Commonwealth’s stock price to fall. #### First Commonwealth May Not Continue to Pay Dividends on Its Common Stock in The Future Holders of First Commonwealth common stock are only entitled to receive such dividends as its board of directors may declare out of funds legally available for such payments. Although First Commonwealth has historically declared cash dividends on its common stock, it is not required to do so and may reduce or eliminate its common stock dividend in the future. This could adversely affect the market price of First Commonwealth’s common stock. Also, First Commonwealth is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the FRB regarding capital adequacy and dividends. As more fully discussed in Part II, Item 8, Financial Statements and Supplementary Data-Note 24, Regulatory Restrictions and Capital Adequacy, which is located elsewhere in this report, the ability of First Commonwealth to declare or pay dividends on its common stock may also be subject to certain restrictions in the event that First Commonwealth elects to defer the payment of interest on its junior subordinated debt securities. #### An Investment in Our Common Stock Is Not an Insured Deposit Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment. *Provisions of Our Articles of Incorporation, Bylaws and Pennsylvania Law, as Well as State and Federal Banking Regulations, Could Delay or Prevent a Takeover of Us by a Third Party.* Provisions in our articles of incorporation and bylaws, the corporate law of the Commonwealth of Pennsylvania, and state and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock. These provisions include, among other things, advance notice requirements for proposing matters that shareholders may act on at shareholder meetings. In addition, under Pennsylvania law, we are prohibited from engaging in a business combination with any interested shareholder for a period of five years from the date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. ### Risks Related to the COVID-19 Pandemic *Our Business, Financial Condition, Liquidity and Results of Operations Have Been, and Will Likely Continue to Be, Adversely Affected by the COVID-19 Pandemic.* The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted and many of which are outside of our control, including the scope and duration of the pandemic, the effectiveness of our Business Continuity and Health Emergency Response plans, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, or inaction, by governmental authorities and other third parties in response to the pandemic. The COVID-19 pandemic has contributed to: - Increased unemployment and business disruption and decreased consumer and business confidence and consumer and commercial activity generally, leading to an increased risk of delinquencies, defaults and foreclosures. - Higher and more volatile credit loss expense and potential for increased charge-offs, particularly as customers may need to draw on their committed credit lines to help finance their businesses and activities. - Ratings downgrades, credit deterioration and defaults in many industries, particularly energy, retail/strip centers, hotels/lodging, restaurants, entertainment and commercial real estate. - A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets. - A decrease in the rates and yields on U.S. Treasury securities, which may lead to decreased net interest income. - Increased demands on capital and liquidity, leading us to cease repurchases of our common stock in order to preserve capital and provide added liquidity. - A reduction in the value of the assets that we manage or otherwise administer or service for others, affecting related fee income and demand for our services. - Heightened cybersecurity, information security and operational risks as a result of a remote workforce and impacts on our service providers. Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties and other sanctions, or harm our reputation. ### General Risk Factors #### We are Subject to Risk from Fluctuating Conditions in the Financial Markets and Economic and Political Conditions Generally Our success depends, to a certain extent, upon local, national and global economic and political conditions, as well as governmental monetary policies. Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by a decline in economic growth both in the U.S. and internationally; declines in business activity or investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; oil price volatility; natural disasters; trade policies and tariffs; or a combination of these or other factors. While recent economic conditions in the United States and worldwide have seen improving trends since the onset of the COVID-19 pandemic, there can be no assurance that this improvement will continue. Economic pressure on consumers and uncertainty regarding continuing economic improvement could result in changes in consumer and business spending, borrowing and savings habits. Such conditions could have a material adverse effect on the credit quality of our loans and our business, financial condition and results of operations. *Changes in The Federal, State or Local Tax Laws May Negatively Impact Our Financial Performance and We Are Subject to Examinations and Challenges by Tax Authorities* We are subject to federal and applicable state tax laws and regulations. Changes in these tax laws and regulations, some of which may be retroactive to previous periods, could increase our effective tax rates and, as a result, could negatively affect our current and future financial performance. Furthermore, tax laws and regulations are often complex and require interpretation. In the normal course of business, we are routinely subject to examinations and challenges from federal and applicable state tax authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we have engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our business, financial condition and results of operations. #### We May Need to Raise Additional Capital in The Future, and Such Capital May Not Be Available When Needed or at All We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. We cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of FCB or counterparties participating in the capital markets, or a downgrade of First Commonwealth’s or FCB’s debt ratings, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition and results of operations. #### Our Stock Price Can Be Volatile Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things, (i) actual or anticipated variations in quarterly results of operations; (ii) recommendations by securities analysts; (iii) operating and stock price performance of other companies that investors deem comparable to us; (iv) news reports relating to trends, concerns and other issues in the financial services industry; (v) perceptions in the marketplace regarding us and/or our competitors; (vi) new technology used, or services offered, by competitors; (vii) the issuance by us of additional securities, including common stock and securities that are convertible into or exchangeable for, or that represent the right to receive, common stock; (viii) sales of a large block of shares of our common stock or similar securities in the market after an equity offering, or the perception that such sales could occur; (ix) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; (x) failure to integrate acquisitions or realize anticipated benefits from acquisitions; (xi) changes in government regulations; and (xii) geopolitical conditions such as acts or threats of terrorism or military conflicts. General market fluctuations, including real or anticipated changes in the strength of the economy; industry factors and general economic and political conditions and events, such as economic slowdowns or recessions; and interest rate changes, oil price volatility or credit loss trends could also cause our stock price to decrease regardless of operating results. #### Changes in Accounting Standards Could Materially Impact Our Financial Statements From time to time accounting standards setters change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results or a cumulative charge to retained earnings. See New Accounting Pronouncements at the end of Item 7. Financial Statements and Supplementary Data elsewhere in this report for further information regarding pending accounting standards updates. #### We May Not Be Able to Attract and Retain Skilled People Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in many activities engaged in by us is intense and we may not be able to hire people or to retain them. We do not currently have employment agreements or non-competition agreements with any of our senior officers. The unexpected loss of services of key personnel could have a material adverse impact on our business, financial condition and results of operations because of their customer relationships, skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, the scope and content of U.S. banking regulators' policies on incentive compensation, as well as changes to these policies, could adversely affect our ability to hire, retain and motivate our key employees. ## Properties As filed, 1,103 characters. Our principal office is located in the old Indiana County courthouse complex, consisting of the former courthouse building and the former sheriff’s residence and jail building for Indiana County. This certified Pennsylvania and national historic landmark was built in 1870 and restored by us in the early 1970s. We lease the complex from Indiana County pursuant to a lease agreement that was originally signed in 1973 and has a current term that expires in 2048. The majority of our administrative personnel are also located in two owned buildings in Indiana, Pennsylvania, each of which is in close proximity to our principal office. First Commonwealth Bank has 120 community banking offices, of which 45 are leased and 75 are owned. We also lease three mortgage loan production offices and four corporate loan production offices. While these facilities are adequate to meet our current needs, available space is limited and additional facilities may be required to support future expansion. However, we have no significant plans to lease, purchase or construct additional administrative facilities. ## Legal proceedings As filed, 173 characters. The information required by this Item is set forth in Part II, Item 8, Note 21, “Contingent Liabilities,” which is incorporated herein by reference in response to this item. ## Management's discussion and analysis As filed, 85,770 characters. The following discussion and analysis represents an overview of the financial condition and the results of operations of First Commonwealth, and its subsidiaries, as of and for the years ended December 31, 2020, and 2019. The purpose of this discussion is to focus on information concerning our financial condition and results of operations that is not readily apparent from the Consolidated Financial Statements. In order to obtain a more thorough understanding of this discussion, you should refer to the Consolidated Financial Statements, the notes thereto and other financial information presented in this Annual Report. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on March 2, 2020 for a discussion and analysis of the factors that affected periods prior to 2019. ### Company Overview First Commonwealth provides a diversified array of consumer and commercial banking services through our bank subsidiary, FCB. We also provide trust and wealth management services through FCB and insurance products through FCIA. At December 31, 2020, FCB operated 120 community banking offices throughout western and central Pennsylvania and northeastern, central and southwestern Ohio, as well as loan production offices in Pittsburgh, Pennsylvania, and Cleveland, Columbus, Canton, Lewis Center, Hudson and Westlake, Ohio. Our consumer services include Internet, mobile and telephone banking, an automated teller machine network, personal checking accounts, interest-earning checking accounts, savings accounts, health savings accounts, insured money market accounts, debit cards, investment certificates, fixed and variable rate certificates of deposit, mortgage loans, secured and unsecured installment loans, construction and real estate loans, safe deposit facilities, credit cards, credit lines with overdraft checking protection and IRA accounts. Commercial banking services include commercial lending, small and high-volume business checking accounts, on-line account management services, ACH origination, payroll direct deposit, commercial cash management services and repurchase agreements. We also provide a variety of trust and asset management services and a full complement of auto, home and business insurance as well as term life insurance. We offer annuities, mutual funds and stock and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. Most of our commercial customers are small and mid-sized businesses in Pennsylvania and Ohio. As a financial institution with a focus on traditional banking activities, we earn the majority of our revenue through net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing our net interest margin, which is net interest income (on a fully taxable-equivalent basis) as a percentage of our average interest-earning assets. We also generate revenue through fees earned on various services and products that we offer to our customers and, less frequently, through sales of assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses on loans, operating expenses, income taxes and, less frequently, loss on sale or other-than-temporary impairments on investment securities. General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan growth, as well as impacting the credit strength of existing and potential borrowers. ### Critical Accounting Policies and Significant Accounting Estimates First Commonwealth’s accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practice in the banking industry. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may significantly affect our reported results and financial position for the period presented or in future periods. We currently view the determination of the allowance for credit losses to be critical because it is highly dependent on subjective or complex judgments, assumptions and estimates made by management. #### Allowance for Credit Losses We account for the credit risk associated with our lending activities through the allowance and provision for credit losses. The allowance represents management’s best estimate of expected losses in our existing loan portfolio as of the balance sheet date. The provision is a periodic charge to earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of expected losses. Management determines and reviews with the Board of Directors the appropriateness of the allowance on a quarterly basis in accordance with the methodology described below. - Loans are segmented into groups with similar characteristics and risks and an allowance for credit losses is calculated for each segment based on the estimate of credit losses. - The allowance for credit losses is calculated by pooling loans of similar credit risk characteristics and applying a discounted cash flow methodology after incorporating probability of default and loss given default estimates. Probability of default represents an estimate of the likelihood of default and loss given default measures the expected loss upon default. Inputs impacting the expected losses includes a forecast of macroeconomic factors, using a weighted forecast from a nationally recognized firm. - Loans that do not have the same risks and characteristics of the loan pools are individually reviewed. These are generally large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based on our internal credit-rating process. - We assess whether the loans identified for review are “nonperforming,”. This means it is expected that all amounts will not be collected according to the contractual terms of the loan agreement, which generally represents loans that management has placed on nonaccrual status and accruing troubled debt restructurings. - For individually analyzed loans we calculate the estimated fair value of the loans that are selected for review based on observable market prices, discounted cash flows or the value of the underlying collateral and record an allowance if needed. - We then review the results to determine the appropriate balance of the allowance for credit losses. This review includes consideration of additional factors, such as the mix of loans in the portfolio, the balance of the allowance relative to total loans and nonperforming assets, trends in the overall risk profile in the portfolio, trends in delinquencies and nonaccrual loans, and local and national economic information and industry data, including trends in the industries we believe are higher risk. There are many factors affecting the allowance for credit losses; some are quantitative, while others require qualitative judgment. These factors require the use of estimates related to the amount and timing of expected future cash flows, appraised values on nonperforming loans, estimated losses for each loan category based on historical loss experience by category, forecasts of economic trends and conditions, all of which may be susceptible to significant judgment and change. To the extent that actual outcomes differ from estimates, additional provisions for credit losses could be required that could adversely affect our earnings or financial position in future periods. ### Results of Operations—2020 Compared to 2019 #### Net Income Net income for 2020 was $73.4 million, or $0.75 per diluted share, as compared to net income of $105.3 million, or $1.07 per diluted share in 2019. The decline in net income was the result of $42.2 million in provision for credit losses recognized in order to provide for estimated losses related to the COVID-19 pandemic and expenses of $3.4 million and $2.7 million related to the voluntary early retirement program and branch consolidation initiatives, respectively. Partially offsetting the higher level of expenses was an increase in noninterest income of $9.0 million, due to gains on sale of mortgage loans of $18.8 million in 2020 compared to $7.8 million in 2019. Our return on average equity was 6.8% and our return on average assets was 0.82% for 2020, compared to 10.3% and 1.31%, respectively, for 2019. Average diluted shares for the year 2020 were 1% less than the comparable period in 2019 primarily due to $20.9 million of common stock buybacks completed during 2020. #### Net Interest Income Net interest income, which is our primary source of revenue, is the difference between interest income from earning assets (loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and long-term debt). The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a fully taxable equivalent basis, to average interest-earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretax equivalent amounts based on the marginal corporate federal income tax rate of 21%. The taxable equivalent adjustment to net interest income for 2020 was $1.5 million compared to $1.7 million in 2019. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income) at 74% and 76% for the years ended December 31, 2020 and 2019, respectively. Net interest income, on a fully taxable equivalent basis, was $269.7 million for the year-ended December 31, 2020, a $1.9 million, or 1%, decrease compared to $271.6 million for the same period in 2019. The net interest margin, on a fully taxable equivalent basis, decreased 43 basis points to 3.32% in 2020 from 3.75% in 2019. The net interest margin is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities. The impact of growth in interest-earning assets in 2020 was offset by the effect of the mix of the asset growth and lower interest rates, resulting in a decrease in the net interest margin for the year ended December 31, 2020. Average earning assets for the year ended December 31, 2020 increased $878.9 million, or 12%, compared to the year ended December 31, 2019. This increase in the volume of interest-earning assets positively increased net interest income by $42.9 million in the year ended December 31, 2020 compared to the same period in 2019, while changes in rates negatively impacted net interest income by $44.8 million. Interest-sensitive assets totaling $2.6 billion will either reprice or mature over the next twelve months. The taxable equivalent yield on interest-earning assets was 3.72% for the year ended December 31, 2020, a decrease of 79 basis points from the 4.51% yield for the same period in 2019. This decrease is largely due to a decrease in the loan portfolio yield, which declined by 80 basis points compared to the prior year. Contributing to this decrease was the decline in the yield on our adjustable and variable rate commercial loan portfolios, which decreased by 95 basis points largely due to the Federal Reserve decreasing short-term interest rates. During the first quarter of 2020, the Federal Reserve decreased the federal funds target rate by 150 basis points in addition to the 75 basis point in rate decreases made during 2019. The loan yield for the year ended December 31, 2020 was also impacted by $589.1 million in Paycheck Protection Program ("PPP") loans originated under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") which have a stated loan rate of 1% and a yield of 3.2% for the year ended December 31 2020. The yield on PPP loans includes the recognition of PPP loan deferred processing fees, net of deferred origination costs, of $8.4 million for the year ended December 31, 2020. These amounts are recognized in interest income as a yield adjustment over the life of the loan with accelerated recognition when a loan is forgiven or paid off. As of December 31, 2020, we expect to recognize additional PPP-related deferred processing fees, net of origination costs, of approximately $10.4 million as an adjustment to yield over the remaining life of the loans. At December 31, 2020, the balance of PPP loans outstanding totaled $478.9 million. PPP loans increased the average balance of loans by $382.6 million during the year ended December 31, 2020, decreasing the loan portfolio yield by 6 basis points and the net interest margin by 1 basis point. The investment portfolio yield decreased 53 basis points in comparison to the prior year as a result of the decrease in short-term interest rates. Investment portfolio purchases during the year ended December 31, 2020 have been primarily in obligations of US government agencies, obligations of other government-sponsored enterprises and obligations of states and political subdivisions with durations of approximately 4 to 11 years. Additionally, as a result of excess liquidity caused by significant growth in deposits during 2020, the average balance of interest-bearing deposits with banks has increased from $15.8 million in 2019 to $179.2 million in 2020. The impact of the level and rate paid on interest-bearing deposits with banks decreased the yield on interest-earnings assets by 8 basis points for the year ended December 31, 2020. Decreases in the cost of interest-bearing liabilities partially offset the negative impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities was 0.58% for the year-ended December 31, 2020, compared to 1.03% for the same period in 2019. Lower market interest rates resulted in the cost of interest-bearing deposits decreasing 36 basis points and short-term borrowings decreasing 163 basis points in comparison to the same period in the prior year. Deposit growth due to the retention of PPP loan proceeds and the deposit of Federal stimulus checks, as well as deposits acquired in the third quarter of 2019 acquisition of Santander branches, combined to contribute to a decline in average short-term borrowings of $248.9 million for the year ended December 31, 2020 compared to the same period in 2019. Lower market interest rates and management's efforts to reduce deposit costs resulted in the cost of interest-bearing deposits decreasing 42 basis points and in the cost of short-term borrowings decreasing 163 basis points in comparison to the same period last year. The decline in short-term interest rates impacted the cost of long-term debt, decreasing the cost by 41 basis points. Comparing the year ended December 31, 2020 with the same period in 2019, changes in rates negatively impacted net interest income by $44.8 million. The lower yield on interest-earning assets decreased net interest income by $64.3 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $19.5 million. Changes in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by $42.9 million in the year ended December 31, 2020 compared to the same period in 2019. Higher levels of interest-earning assets resulted in an increase of $39.9 million in interest income, and changes in the volume of interest-bearing liabilities decreased interest expense by $3.0 million, primarily due to a decreases in short-term borrowings and time deposits. Positively affecting net interest income was a $586.9 million increase in average net free funds at December 31, 2020 as compared to December 31, 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 a $551.9 million increase in average noninterest-bearing demand deposits 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 year ended December 31, 2020 decreased $137.4 million, or 16%, compared to the comparable period in 2019, while the average rate paid on time deposits decreased 28 basis points. Over the next twelve months, $419.1 million in certificates of deposits are scheduled to mature. 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 periods presented: *(dollars in thousands)* | | For the Years Ended December 31, 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | | Interest income per Consolidated Statements of Income | $301,209 | $325,264 | $292,257 | | Adjustment to fully taxable equivalent basis | 1,462 | 1,748 | 1,974 | | Interest income adjusted to fully taxable equivalent basis (non-GAAP) | 302,671 | 327,012 | 294,231 | | Interest expense | 32,938 | 55,402 | 40,035 | | Net interest income adjusted to fully taxable equivalent basis (non-GAAP) | $269,733 | $271,610 | $254,196 | 31 The following table provides information regarding the average balances and yields or rates on interest-earning assets and interest-bearing liabilities for the periods ended December 31: *(dollars in thousands)* | Assets Interest-earning assets: | Average Balance Sheets and Net Interest Analysis 2020 Average Balance | Income / Expense (a) | Yield or Rate | 2019 Average Balance | Income / Expense (a) | Yield or Rate | 2018 Average Balance | Income / Expense (a) | Yield or Rate | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-bearing deposits with banks | $179,180 | $218 | 0.12% | $15,778 | $403 | 2.55% | $5,594 | $172 | 3.07% | | Tax-free investment securities | 44,308 | 1,333 | 3.01 | 65,345 | 2,014 | 3.08 | 67,746 | 2,084 | 3.08 | | Taxable investment securities | 1,167,316 | 24,749 | 2.12 | 1,180,698 | 31,381 | 2.66 | 1,194,131 | 33,123 | 2.77 | | Loans, net of unearned income (b)(c)(e) | 6,737,339 | 276,371 | 4.10 | 5,987,398 | 293,214 | 4.90 | 5,582,651 | 258,852 | 4.64 | | Total interest-earning assets | 8,128,143 | 302,671 | 3.72 | 7,249,219 | 327,012 | 4.51 | 6,850,122 | 294,231 | 4.30 | | Noninterest-earning assets: | | | | | | | | | | | Cash | 97,632 | | | 93,953 | | | 92,729 | | | | Allowance for credit losses | (76,705) | | | (51,274) | | | (52,609) | | | | Other assets | 825,510 | | | 738,154 | | | 665,114 | | | | Total noninterest-earning assets | 846,437 | | | 780,833 | | | 705,234 | | | | **Total Assets** | $8,974,580 | | | $8,030,052 | | | $7,555,356 | | | | **Liabilities and Shareholders’ Equity** | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | | Interest-bearing demand deposits (d) | $1,525,195 | $1,843 | 0.12% | $1,293,588 | $7,025 | 0.54% | $1,179,439 | $4,615 | 0.39% | | Savings deposits (d) | 3,027,016 | 9,966 | 0.33 | 2,597,674 | 15,180 | 0.58 | 2,441,327 | 8,624 | 0.35 | | Time deposits | 726,702 | 10,163 | 1.40 | 864,056 | 14,520 | 1.68 | 749,408 | 8,474 | 1.13 | | Short-term borrowings | 142,634 | 704 | 0.49 | 391,547 | 8,298 | 2.12 | 618,957 | 10,741 | 1.74 | | Long-term debt | 233,701 | 10,262 | 4.39 | 216,383 | 10,379 | 4.80 | 147,915 | 7,581 | 5.13 | | Total interest-bearing liabilities | 5,655,248 | 32,938 | 0.58 | 5,363,248 | 55,402 | 1.03 | 5,137,046 | 40,035 | 0.78 | | Noninterest-bearing liabilities and shareholders’ equity: | | | | | | | | | | | Noninterest-bearing demand deposits (d) | 2,101,412 | | | 1,549,507 | | | 1,434,233 | | | | Other liabilities | 140,612 | | | 96,896 | | | 41,740 | | | | Shareholders’ equity | 1,077,308 | | | 1,020,401 | | | 942,337 | | | | Total noninterest-bearing funding sources | 3,319,332 | | | 2,666,804 | | | 2,418,310 | | | | **Total Liabilities and Shareholders’ Equity** | $8,974,580 | | | $8,030,052 | | | $7,555,356 | | | | **Net Interest Income and Net Yield on Interest-Earning Assets** | | $269,733 | 3.32% | | $271,610 | 3.75% | | $254,196 | 3.71% | (a) Income on interest-earning assets has been computed on a fully taxable equivalent basis using the federal income tax statutory rate of 21%. (b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (c) Loan income includes loan fees. (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. The following table sets forth certain information regarding changes in net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated: *(dollars in thousands)* | Interest-earning assets: | Analysis of Year-to-Year Changes in Net Interest Income 2020 Change from 2019 Total Change | Change Due To Volume | Change Due To Rate (a) | 2019 Change from 2018 Total Change | Change Due To Volume | Change Due To Rate (a) | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-bearing deposits with banks | $(185) | $4,167 | $(4,352) | $231 | $313 | $(82) | | Tax-free investment securities | (681) | (648) | (33) | (70) | (74) | 4 | | Taxable investment securities | (6,632) | (356) | (6,276) | (1,742) | (372) | (1,370) | | Loans | (16,843) | 36,747 | (53,590) | 34,362 | 18,780 | 15,582 | | Total interest income (b) | (24,341) | 39,910 | (64,251) | 32,781 | 18,647 | 14,134 | | Interest-bearing liabilities: | | | | | | | | Interest-bearing demand deposits | (5,182) | 1,251 | (6,433) | 2,410 | 445 | 1,965 | | Savings deposits | (5,214) | 2,490 | (7,704) | 6,556 | 547 | 6,009 | | Time deposits | (4,357) | (2,308) | (2,049) | 6,046 | 1,296 | 4,750 | | Short-term borrowings | (7,594) | (5,277) | (2,317) | (2,443) | (3,957) | 1,514 | | Long-term debt | (117) | 831 | (948) | 2,798 | 3,512 | (714) | | Total interest expense | (22,464) | (3,013) | (19,451) | 15,367 | 1,843 | 13,524 | | Net interest income | $(1,877) | $42,923 | $(44,800) | $17,414 | $16,804 | $610 | (a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances. (b) Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate. #### Provision for Credit Losses The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed to provide for expected losses inherent in the loan portfolio and on off-balance sheet commitments. The provision for credit losses is an amount added to the allowance against which credit losses are charged. The provision for credit losses for loans for the year 2020 totaled $53.5 million, an increase of $38.9 million, or 267.9%, compared to the year 2019. The level of provision expense for the year-ended December 31, 2020 is primarily a result of $17.2 million in net charge-offs and an increase in the allowance for credit losses resulting from the implementation of CECL. The expected loss methodology under CECL uses an economic forecast which incorporates the impact of the COVID-19 pandemic. Provision expense for the commercial, financial, agricultural and other category was impacted by net charge-offs of $6.0 million, offset by a decrease in outstanding balances, excluding PPP loans. Because PPP loans are fully guaranteed by the Small Business Administration ("SBA"), there is no allowance for credit losses recognized for these loans. Provision expense for the commercial real estate category is a result of $4.6 million in net charge-offs and a $21.1 million increase in qualitative reserves due to additional risks related to loans that may be impacted by COVID-19, such as hospitality and retail real estate loans. Net charge-offs related to loans to individuals were $6.0 million for the year ended December 31, 2020, including $3.2 million for indirect auto loans and $1.3 million related to personal lines of credit. The provision expense for loans to individuals was also impacted by growth in the portfolio of $116.4 million as well as increased qualitative reserves due to additional risks related to COVID-19. The table below provides a breakout of the provision for credit losses by loan category for the years ended December 31: *(dollars in thousands)* | | 2020 Dollars | Percentage | 2019 Dollars | Percentage | | --- | ---: | ---: | ---: | ---: | | **Commercial, financial, agricultural and other** | **$1,479** | **3%** | **$3,927** | **27%** | | Time and demand | 1,515 | 3 | | | | Commercial credit cards | (36) | — | | | | **Real estate construction** | **4,820** | **9** | **398** | **3** | | **Residential real estate** | **3,615** | **7** | **851** | **6** | | Residential first liens | 847 | 2 | | | | Residential junior liens/home equity | 2,768 | 5 | | | | **Commercial real estate** | **27,019** | **50** | **3,201** | **22** | | Multifamily | 4,593 | 9 | | | | Nonowner occupied | 20,588 | 38 | | | | Owner occupied | 1,838 | 3 | | | | **Loans to individuals** | **16,539** | **31** | **6,156** | **42** | | Automobile | 13,236 | 25 | | | | Consumer credit cards | 973 | 2 | | | | Consumer other | 2,330 | 4 | | | | **Provision for credit losses on loans** | **$53,472** | **100%** | **$14,533** | **100%** | | **Provision for off-balance sheet credit exposure** | **3,246** | | **—** | | | **Total provision for credit losses** | **$56,718** | | **$14,533** | | Prior to our January 1, 2020 adoption of CECL, the allowance for credit loss calculation, and resulting provision expense, was based on an incurred loss model. The level of provision expense for the year-ended December 31, 2019 is primarily a result of $10.7 million in net charge-offs, growth in the loan portfolio and an increase in the qualitative reserves as a result of increasing economic risks not captured in the quantitative model. Provision expense for the commercial, financial, agricultural, and other category was impacted by net charge-offs of $3.1 million and $103.4 million growth in the portfolio. The provision expense for the commercial real estate category is primarily due to $1.8 million in net charge-offs and a $0.8 million increase in qualitative reserves. Net charge-offs related to loans to individuals were $5.2 million for the year ended December 31, 2019, including $2.6 million related to indirect auto loans and $1.9 million related to personal lines of credit. The provision expense for loans to individuals was also impacted by growth in the portfolio of $108.6 million. The allowance for credit losses was $101.3 million, or 1.50%, of total loans outstanding at December 31, 2020, compared to $51.6 million, or 0.83%, at December 31, 2019. Nonperforming loans as a percentage of total loans increased to 0.80% at December 31, 2020 from 0.52% at December 31, 2019. The allowance to nonperforming loan ratio was 187.4% as of December 31, 2020 and 160.3% at December 31, 2019. Net charge-offs were $17.2 million for the year-ended December 31, 2020 compared to $10.7 million for the same period in 2019. The 2020 provision is a result of management's estimate of credit losses over the contractual life of the loan portfolio. The change in the allowance for credit is impacted by estimated expected losses in the portfolio determined by a discounted cash flow analysis considering inputs such as contractual payment schedules, prepayment estimates, historical loss experience, calculated probability of default and loss given default estimates and forecasts for certain macroeconomic variables, such as unemployment, gross domestic product, the housing price index as well as other macroeconomic variables. Upon adoption of CECL at January 1, 2020, the provision for credit losses on off-balance sheet credit exposures are recorded as part of the provision for credit losses instead of a component of non-interest expense as it previously was recorded. The provision for credit losses recorded for off-balance sheet credit exposures totaled $3.2 million for 2020. Management believes that the allowance for credit losses is at a level deemed appropriate to absorb expected losses inherent in the loan portfolio at December 31, 2020. A detailed analysis of our credit loss experience for the previous five years is shown below: *(dollars in thousands)* | | 2020 | 2019 | 2018 | 2017 | 2016 | | --- | ---: | ---: | ---: | ---: | ---: | | Loans outstanding at end of year | $6,761,183 | $6,189,148 | $5,774,139 | $5,407,376 | $4,879,347 | | Average loans outstanding | $6,737,339 | $5,987,398 | $5,582,651 | $5,278,511 | $4,818,759 | | Balance, beginning of year | $51,637 | $47,764 | $48,298 | $50,185 | $50,812 | | Adoption of accounting standard - ASU 2016-13 | 13,393 | — | — | — | — | | Loans charged off: | | | | | | | Commercial, financial, agricultural and other | 6,318 | 3,393 | 5,294 | 6,634 | 19,603 | | Real estate construction | — | — | — | — | — | | Residential real estate | 1,040 | 1,042 | 1,313 | 1,287 | 1,189 | | Commercial real estate | 4,939 | 2,008 | 3,930 | 340 | 570 | | Loans to individuals | 6,953 | 5,831 | 4,576 | 4,248 | 4,943 | | Total loans charged off | 19,250 | 12,274 | 15,113 | 12,509 | 26,305 | | Recoveries of loans previously charged off: | | | | | | | Commercial, financial, agricultural and other | 314 | 326 | 788 | 3,901 | 4,164 | | Real estate construction | 26 | 158 | 141 | 470 | 562 | | Residential real estate | 414 | 315 | 361 | 371 | 481 | | Commercial real estate | 312 | 189 | 153 | 278 | 1,522 | | Loans to individuals | 991 | 626 | 605 | 515 | 469 | | Total recoveries | 2,057 | 1,614 | 2,048 | 5,535 | 7,198 | | Net charge-offs | 17,193 | 10,660 | 13,065 | 6,974 | 19,107 | | Provision charged to expense | 56,718 | 14,533 | 12,531 | 5,087 | 18,480 | | Balance, end of year | $101,309 | $51,637 | $47,764 | $48,298 | $50,185 | | Ratios: | | | | | | | Net charge-offs as a percentage of average loans outstanding | 0.26% | 0.18% | 0.23% | 0.13% | 0.40% | | Allowance for credit losses as a percentage of end-of-period loans outstanding | 1.50% | 0.83% | 0.83% | 0.89% | 1.03% | | Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans | 1.61% | 0.83% | 0.83% | 0.89% | 1.03% | 35 #### Noninterest Income The components of noninterest income for each year in the three-year period ended December 31 are as follows: *(dollars in thousands)* | Noninterest Income: | 2020 | 2019 | 2018 | 2020 compared to 2019 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | | Trust income | $9,101 | $8,321 | $7,901 | $780 | 9% | | Service charges on deposit accounts | 16,387 | 18,926 | 18,175 | (2,539) | (13) | | Insurance and retail brokerage commissions | 7,850 | 7,583 | 7,426 | 267 | 4 | | Income from bank owned life insurance | 6,552 | 6,002 | 6,686 | 550 | 9 | | Card related interchange income | 23,966 | 21,677 | 20,187 | 2,289 | 11 | | Swap fee income | 1,588 | 3,397 | 1,874 | (1,809) | (53) | | Other income | 7,892 | 7,268 | 6,790 | 624 | 9 | | Subtotal | 73,336 | 73,174 | 69,039 | 162 | — | | Net securities gains | 70 | 22 | 8,102 | 48 | 218 | | Gain on sale of mortgage loans | 18,764 | 7,765 | 5,436 | 10,999 | 142 | | Gain on sale of loans and other assets | 4,827 | 4,793 | 5,273 | 34 | 1 | | Derivative mark to market | (2,521) | (269) | 787 | (2,252) | 837 | | Total noninterest income | $94,476 | $85,485 | $88,637 | $8,991 | 11% | Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market, remained relatively flat, increasing $0.2 million in 2020. Card-related interchange income increased $2.3 million, due to growth in customer accounts and transactions, including $1.4 million attributable to the Santander acquisition in September 2019. Trust income increased $0.8 million, primarily due to customer growth. Service charges on deposit accounts decreased $2.5 million, despite a $0.7 million increase attributable to the Santander acquisition in 2019. The lower level of service charges on deposit accounts is a result of customers maintaining higher deposit balances due to CARES Act stimulus and lower consumer spending during 2020. Swap fee income decreased $1.8 million due to declines in interest rate swaps entered into for our commercial customers. Total noninterest income increased $9.0 million, or 11%, in comparison to the year ended December 31, 2019. The most significant change, other than the changes noted above, include an increase of $11.0 million in gain on sale of mortgage loans as a result of growth in our mortgage lending area. The mark to market adjustment on interest rate swaps entered into for our commercial customers resulted in a decrease of $2.3 million. This adjustment does not reflect a realized loss on the swaps, but rather relates to a change in fair value due to movements in corporate bond spreads and swap rates as well as changes in counterparty credit risk. If the Company's total assets would equal or exceed $10 billion we would no longer qualify for exemption from the interchange fee cap included in the Dodd-Frank Act. We estimate the application of the interchange fee cap would have decreased interchange income by approximately $10.7 million in 2020. #### Noninterest Expense The components of noninterest expense for each year in the three-year period ended December 31 are as follows: *(dollars in thousands)* | Noninterest Expense: | 2020 | 2019 | 2018 | 2020 Compared to 2019 $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | | Salaries and employee benefits | $118,961 | $112,237 | $105,115 | $6,724 | 6% | | Net occupancy | 17,647 | 18,923 | 17,219 | (1,276) | (7) | | Furniture and equipment | 15,393 | 15,160 | 14,247 | 233 | 2 | | Data processing | 10,543 | 10,692 | 10,470 | (149) | (1) | | Advertising and promotion | 4,679 | 4,250 | 3,956 | 429 | 10 | | Pennsylvania shares tax | 4,500 | 4,602 | 4,875 | (102) | (2) | | Intangible amortization | 3,689 | 3,344 | 3,217 | 345 | 10 | | Other professional fees and services | 3,886 | 4,631 | 4,473 | (745) | (16) | | FDIC insurance | 2,699 | 1,219 | 2,007 | 1,480 | 121 | | Other operating expenses | 24,770 | 27,960 | 26,098 | (3,190) | (11) | | Subtotal | 206,767 | 203,018 | 191,677 | 3,749 | 2 | | Loss on sale or write-down of assets | 680 | 1,724 | 1,080 | (1,044) | (61) | | Litigation and operational losses | 1,411 | 1,687 | 1,162 | (276) | (16) | | Merger and acquisition related | — | 3,536 | 1,637 | (3,536) | (100) | | COVID-19 expense | 874 | — | — | 874 | 100 | | Early retirement | 3,422 | — | — | 3,422 | 100 | | Branch consolidation | 2,672 | — | — | 2,672 | 100 | | Total noninterest expense | $215,826 | $209,965 | $195,556 | $5,861 | 3% | Noninterest expense, excluding the loss on sale or write-down of assets, litigation and operational losses, merger and acquisition expense, COVID-19, early retirement and branch consolidation expenses, increased $3.7 million, or 2%, for the year ended December 31, 2020 compared to 2019. Contributing to the 2020 increase is a $6.7 million increase in salaries and employee benefits resulting from annual merit increases and a $3.1 million increase in hospitalization expense. The Santander acquisition, in September 2019, accounted for $1.9 million of the salaries and employee benefit increase. Partially offsetting these increases in salaries and employee benefit expense was the deferral of $0.6 million in salary and benefit costs related to the origination of approximately 4,900 PPP loans during 2020. FDIC insurance increased $1.5 million as a result of growth in our deposits. Other operating expenses decreased $3.2 million, including $1.8 million less in meeting and travel expense and $0.5 million less in meals and entertainment expense due to a decline in these activities as a result of COVID-19. Also reducing the other operating expenses is a decrease in off-balance sheet commitment expense of $0.7 million. In 2020, as a result of the adoption of CECL, off-balance commitment expense is now recorded as part of provision for credit losses instead of non-interest expense, where it was previously recorded. Net occupancy expense decreased $1.3 million as a result of a decrease in building maintenance and repair expenses. Total noninterest expense increased $5.9 million, or 3%, compared to the year ended December 31, 2019. Other than the changes noted above, increasing noninterest expense is $3.4 million related to the voluntary early retirement program and $2.7 million related to the branch consolidation initiative. The early retirement program was offered to all eligible employees who reached age 60 or above as of December 31, 2020. Approximately 72 employees elected to participate in the early retirement program, resulting in recognition of $3.0 million in severance and $0.4 million in hospitalization expense. The branch consolidation initiative included the combination of 28 of the Company's retail locations into nearby offices in December 2020 and the related expenses include write-downs of $1.4 million on owned properties and leasehold improvements and $0.8 million in lease terminations expense. Offsetting these increases is a $3.5 million decrease in merger-related expenses. Merger expenses in 2019 were the result of the Santander branch acquisition. Also decreasing noninterest expense is a $1.0 million decline in loss on sale or write-down of assets due to a $0.5 million write-down of an OREO property during 2019 with no similar activity in the current year. The year ended December 31, 2020 included $0.8 million in expenses incurred as part of dealing with the COVID-19 pandemic, primarily related to personal protective items such as masks and sanitizer for our employees and customers, cleaning and other items necessary for a safe work environment as well as professional fees related to dealing with COVID-19. #### Income Tax The provision for income taxes of $16.8 million in 2020 reflects a decrease of $8.8 million compared to the provision for income taxes in 2019, as a result of a $40.6 million decrease in the level of income before taxes. The effective tax rate was 18.6% and 19.5% for tax expense in 2020 and 2019, respectively. We ordinarily generate an annual effective tax rate that is less than the statutory rate due to benefits resulting from tax-exempt interest and income from bank owned life insurance, which are relatively consistent regardless of the level of pretax income. ### Financial Condition First Commonwealth’s total assets increased $759.3 million in 2020. Loans, including loans held for sale, increased $589.5 million, or 9%, while interest bearing bank deposits increased $237.1 million. Loan growth in 2020 was impacted by the origination $589.1 million of PPP loans originated under the CARES Act. At December 31, 2020, outstanding PPP loans totaled $478.9 million. The increase in interest-bearing bank deposits can be attributed to the elevated customer deposit balances as a result of PPP loan proceeds and the deposit of Federal stimulus checks into customer deposit accounts. During 2020, approximately $591.2 million in investment securities were sold, called or matured. Most of these securities were higher yielding securities in comparison to the total portfolio yield and, as such, their replacement contributed to the decrease in the yield earned on the portfolio. In total, $250.9 million in agency securities, $225.9 million in mortgage-backed securities, $19.8 million in municipal securities and $0.2 million in other securities were purchased in 2020 to help replace runoff from the portfolio while maintaining a reduced risk profile. First Commonwealth’s total liabilities increased $746.4 million, or 10%, in 2020. Deposits increased $761.1 million, or 11%. This increase is primarily attributed to customer retention of PPP loan proceeds in deposit accounts and Federal stimulus checks. Short-term borrowings decreased $84.5 million, or 42%, largely due to the additional liquidity provided by the increase in deposits. Total shareholders' equity increased $13.0 million in 2020. Growth in shareholders' equity was due to net income of $73.4 million and an $11.7 million increase in accumulated other comprehensive income, partially offset by $43.0 million in dividends declared, $20.9 million in stock repurchases and an $11.2 million charge related to the adoption of CECL. #### Loan Portfolio Following is a summary of our loan portfolio as of December 31: *(dollars in thousands)* | | 2020 Amount% | | 2019 Amount% | | 2018 Amount% | | 2017 Amount% | | 2016 Amount% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Commercial, financial, agricultural and other | $1,555,986 | 23% | $1,241,853 | 20% | $1,138,473 | 20% | $1,163,383 | 22% | $1,139,547 | 23% | | Real estate construction | 427,221 | 6 | 449,039 | 7 | 358,978 | 6 | 248,868 | 5 | 219,621 | 5 | | Residential real estate | 1,750,592 | 26 | 1,681,362 | 27 | 1,562,405 | 27 | 1,426,370 | 26 | 1,229,192 | 25 | | Commercial real estate | 2,211,569 | 33 | 2,117,519 | 34 | 2,123,544 | 37 | 2,019,096 | 37 | 1,742,210 | 36 | | Loans to individuals | 815,815 | 12 | 699,375 | 12 | 590,739 | 10 | 549,659 | 10 | 548,777 | 11 | | Total loans | $6,761,183 | 100% | $6,189,148 | 100% | $5,774,139 | 100% | $5,407,376 | 100% | $4,879,347 | 100% | The loan portfolio totaled $6.8 billion as of December 31, 2020, reflecting growth of $572.0 million, or 9%, compared to December 31, 2019. All categories experienced loan growth, except for real estate construction. Commercial, financial, agricultural and other loans increased $314.1 million, or 25%, as a result of $478.9 million in PPP loans for small businesses who meet the necessary eligibility requirements. These loans carry a fixed rate of 1.00% and yielded 3.2% in 2020 after considering origination fees and costs recognized over the life of the loan or accelerated recognition at payoff or forgiveness. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of loan. PPP loans are for a term of two or five years, if not forgiven, 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 liabilities to the Company associated with participation in the program that cannot be determined at this time. Residential real estate loans increased $69.2 million, or 4%, primarily due to originations of closed-end 1-4 family mortgage loans. Growth in the loans to individuals category of $116.4 million, or 17%, was the result of growth in indirect auto loans. Commercial real estate loans increased $94.1 million, or 4%, partially due to construction real estate loans that converted to permanent loans as well as growth in loans secured by multifamily residential properties. The majority of our loan portfolio is with borrowers located in Pennsylvania. The Company also has a portion of its loan portfolio in Ohio as a result of four recent acquisitions in that state. As of December 31, 2020 and 2019, there were no concentrations of loans relating to any industry in excess of 10% of total loans. Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at December 31, 2020 were as follows: *(dollars in thousands)* | | Within One Year | One to 5 Years | After 5 Years | Total | | --- | ---: | ---: | ---: | ---: | | Commercial, financial, agricultural and other | $152,870 | $976,144 | $426,214 | $1,555,228 | | Real estate construction (a) | 75,516 | 193,328 | 74,476 | 343,320 | | Commercial real estate | 222,643 | 926,768 | 1,062,157 | 2,211,568 | | Other | 2,395 | 27,506 | 111,669 | 141,570 | | Totals | $453,424 | $2,123,746 | $1,674,516 | $4,251,686 | | Loans at fixed interest rates | | 1,106,012 | 407,434 | | | Loans at variable interest rates | | 1,017,734 | 1,267,082 | | | Totals | | $2,123,746 | $1,674,516 | | (a) The maturity of real estate construction loans include term commitments that follow the construction period. Loans with these term commitments will be moved to the commercial real estate category when the construction phase of the project is completed. First Commonwealth has a legal lending limit of $146.2 million to any one borrower or closely related group of borrowers, but has established lower thresholds for credit risk management. #### Nonperforming Loans Nonperforming loans include nonaccrual loans and restructured loans. Nonaccrual loans represent loans on which interest accruals have been discontinued. 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 under terms not available in the market. 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. Consumer loans are placed in nonaccrual status at 150 days past due. Other types of loans are typically placed in nonaccrual status when there is evidence of a significantly weakened financial condition or principal and interest is 90 days or more delinquent. Interest received on a nonaccrual loan is normally applied as a reduction to loan principal rather than interest income utilizing the cost recovery methodology of revenue recognition. Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The estimated credit loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral and the present value of projected future cash flows. Losses are recognized when a loss is expected and the amount is reasonably estimable. The following is a comparison of nonperforming assets and the effects on interest due to nonaccrual loans for the period ended December 31: *(dollars in thousands)* | Nonperforming Loans: | 2020 | 2019 | 2018 | 2017 | 2016 | | --- | ---: | ---: | ---: | ---: | ---: | | Loans on nonaccrual basis | $30,801 | $18,638 | $11,509 | $19,455 | $16,454 | | Troubled debt restructured loans on nonaccrual basis | 14,740 | 6,037 | 11,761 | 11,222 | 11,569 | | Troubled debt restructured loans on accrual basis | 8,512 | 7,542 | 8,757 | 11,563 | 13,790 | | Total nonperforming loans | $54,066 | $32,217 | $32,027 | $42,240 | $41,813 | | Loans past due in excess of 90 days and still accruing | $1,523 | $2,073 | $1,582 | $1,854 | $2,131 | | Other real estate owned | $1,215 | $2,228 | $3,935 | $2,765 | $6,805 | | Loans outstanding at end of period | $6,761,183 | $6,189,148 | $5,774,139 | $5,407,376 | $4,879,347 | | Average loans outstanding | $6,737,339 | $5,987,398 | $5,582,651 | $5,278,511 | $4,818,759 | | Nonperforming loans as a percentage of total loans | 0.80% | 0.52% | 0.55% | 0.78% | 0.86% | | Provision for credit losses on loans | $56,718 | $14,533 | $12,531 | $5,087 | $18,480 | | Allowance for credit losses | $101,309 | $51,637 | $47,764 | $48,298 | $50,185 | | Net charge-offs | $17,193 | $10,660 | $13,065 | $6,974 | $19,107 | | Net charge-offs as a percentage of average loans outstanding | 0.26% | 0.18% | 0.23% | 0.13% | 0.40% | | Provision for credit losses on loans as a percentage of net charge-offs | 311.01% | 136.33% | 95.91% | 72.94% | 96.72% | | Allowance for credit losses as a percentage of end-of-period loans outstanding (a) | 1.50% | 0.83% | 0.83% | 0.89% | 1.03% | | Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans (a) | 1.61% | 0.83% | 0.83% | 0.89% | 1.03% | | Allowance for credit losses as a percentage of nonperforming loans (a) | 187.43% | 160.28% | 149.14% | 114.34% | 120.02% | | Gross income that would have been recorded at original rates | $3,733 | $1,860 | $1,428 | $2,079 | $1,296 | | Interest that was reflected in income | 297 | 262 | 256 | 783 | 533 | | Net reduction to interest income due to nonaccrual | $3,436 | $1,598 | $1,172 | $1,296 | $763 | (a) End of period loans and nonperforming loans exclude loans held for sale. Nonperforming loans increased $21.8 million to $54.1 million at December 31, 2020, compared to $32.2 million at December 31, 2019. Nonperforming loans as a percentage of total loans decreased to 0.8% from 0.5% at December 31, 2020 compared to December 31, 2019. Also included in nonperforming loans are TDRs, which 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 under terms not available in the market. TDRs decreased $9.7 million during 2020. For additional information on TDRs please refer to Note 9 “Loans and Allowance for Credit Losses.” In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The CARES Act, along with a joint agency statement issued by banking regulators, provides that modifications meeting certain criteria made in response to COVID-19 do not need to be accounted for as a TDR. As of December 31, 2020 the Company has granted approximately 6,800 deferrals to its customers with aggregate principal balances of $1.4 billion. Payment deferrals granted on approximately 6,100 accounts or $1.2 billion in balances have expired as of December 31, 2020. It is possible that some of these deferrals will be extended in order to provide support for certain COVID-19 impacted customers. Net charge-offs were $17.2 million in 2020 compared to $10.7 million for the year 2019. The most significant credit losses recognized during the year include $4.7 million in charge-offs recognized on two commercial real estate relationships and $5.3 million in charge-offs related to three commercial, financial, agricultural and other borrowers. Net charge-offs in the loans to individual category totaled $6.0 million for 2020, primarily due to charge-offs of indirect auto loans. Additional detail on credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Provision for Credit Losses,” “Allowance for Credit Losses" and "Credit Risk.” Provision for credit losses on loans as a percentage of net charge-offs increased to 311.0% for the year ended December 31, 2020 from 136.3% for the year ended December 31, 2019. #### Allowance for Credit Losses Following is a summary of the allocation of the allowance for credit losses at December 31: *(dollars in thousands)* | | 2020 Allowance Amount | % (a) | 2019 Allowance Amount | % (a) | 2018 Allowance Amount | % (a) | 2017 Allowance Amount | % (a) | 2016 Allowance Amount | % (a) | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Commercial, financial, agricultural and other | $17,187 | 23% | $20,234 | 20% | $19,374 | 20% | $23,429 | 22% | $35,974 | 23% | | Real estate construction | 7,966 | 6 | 2,558 | 7 | 2,002 | 6 | 1,349 | 5 | 577 | 5 | | Residential real estate | 14,358 | 26 | 4,093 | 27 | 3,969 | 27 | 2,759 | 26 | 2,511 | 25 | | Commercial real estate | 41,953 | 33 | 19,768 | 34 | 18,386 | 37 | 17,357 | 37 | 6,619 | 36 | | Loans to individuals | 19,845 | 12 | 4,984 | 12 | 4,033 | 10 | 3,404 | 10 | 4,504 | 11 | | **Total** | $101,309 | | $51,637 | | $47,764 | | $48,298 | | $50,185 | | | Allowance for credit losses as percentage of end-of-period loans outstanding | 1.50% | | 0.83% | | 0.83% | | 0.89% | | 1.03% | | | Allowance for credit losses as a percentage of end-of-period loans outstanding, excluding PPP loans | 1.61% | | 0.83% | | 0.83% | | 0.89% | | 1.03% | | (a) Represents the ratio of loans in each category to total loans. On March 27, 2020, the CARES Act was signed into law, providing banking organizations with optional, temporary relief from complying with CECL. The Company elected to defer its adoption of CECL until the fourth quarter 2020. At the end of the deferral period, CECL was adopted effective January 1, 2020, therefore December 31, 2020 results reflect a full years impact of accounting for the allowance for credit losses under CECL. The allowance for credit losses increased $49.7 million from December 31, 2019 to December 31, 2020. On January 1, 2020, as a result of the Company's adoption of CECL, the allowance for credit losses was increased by $13.4 million. This represents the difference between the incurred allowance as of December 31, 2019 and the CECL allowance as of January 1, 2020. The allowance for credit losses as a percentage of end-of-period loans outstanding was 1.50% at December 31, 2020. The increase compared to December 31, 2019 is largely due to the impact of calculating the allowance at December 31, 2020 in accordance with CECL, which provides for expected losses over the life of a loan. Prior years allowance for credit losses was calculated to provide for credit losses as they were incurred. The allowance for credit losses includes both a general reserve for performing loans and specific reserves for nonperforming loans. Comparing December 31, 2020 to December 31, 2019, the general reserve for performing loans is 0.80% of total performing loans for both periods. Specific reserves increased from 7.5% of nonperforming loans at December 31, 2019 to 9.1% of nonperforming loans at December 31, 2020. The allowance for credit losses as a percentage of nonperforming loans was 187.4% and 160.3% at December 31, 2020 and 2019, respectively. The allowance for credit losses represents management’s estimate of expected losses in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the appropriateness of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, contractual payment schedules, prepayment estimates, calculated probability of default and loss given default estimates and forecasts of certain macroeconomic variables, such as unemployment, gross domestic product, housing price index as well as other macroeconomic variables. This evaluation is subjective and requires material estimates that may change over time. For a description of the methodology used to calculate the allowance for credit losses, please refer to “Critical Accounting Policies and Significant Accounting Estimates—Allowance for Credit Losses for Loans.” #### Investment Portfolio Marketable securities that we hold in our investment portfolio, which are classified as “securities available for sale,” act as a source of liquidity. However, we do not anticipate liquidating the investments prior to maturity. Following is a detail schedule of the amortized cost of securities available for sale as of December 31: *(dollars in thousands)* | Obligations of U.S. Government Agencies: | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | | Mortgage-Backed Securities—Residential | $6,492 | $7,745 | $9,011 | | Mortgage-Backed Securities—Commercial | 182,823 | 186,316 | 169,633 | | Obligations of U.S. Government-Sponsored Enterprises: | | | | | Mortgage-Backed Securities—Residential | 481,109 | 660,777 | 686,906 | | Other Government-Sponsored Enterprises | 100,996 | 1,000 | 10,000 | | Obligations of States and Political Subdivisions | 11,154 | 17,738 | 27,592 | | Corporate Securities | 22,941 | 22,919 | 20,912 | | Total Securities Available for Sale | $805,515 | $896,495 | $924,054 | As of December 31, 2020, securities available for sale had a fair value of $831.2 million. Gross unrealized gains were $25.7 million and there were no gross unrealized losses. The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2020. *(dollars in thousands)* | | U.S. Government Agencies and Corporations | States and Political Subdivisions | Other Securities | Total Amortized Cost (a) | Weighted Average Yield (b) | | --- | ---: | ---: | ---: | ---: | ---: | | Within 1 year | $100,015 | $— | $4,999 | $105,014 | 0.22% | | After 1 but within 5 years | 6,888 | 3,362 | 15,986 | 26,236 | 3.25 | | After 5 but within 10 years | 133,905 | 7,792 | 1,956 | 143,653 | 1.94 | | After 10 years | 530,612 | — | — | 530,612 | 2.24 | | Total | $771,420 | $11,154 | $22,941 | $805,515 | 1.96% | (a) Equities are excluded from this schedule because they have an indefinite maturity. (b) Yields are calculated on a taxable equivalent basis. Mortgage-backed securities, which include mortgage-backed obligations of U.S. Government agencies and obligations of U.S. Government-sponsored enterprises, have contractual maturities ranging from less than one year to approximately 30 years and have anticipated average lives to maturity ranging from less than one year to approximately eight years. The available for sale investment portfolio amortized cost decreased $91.0 million, or 10%, at December 31, 2020 compared to 2019. Available for sale investment purchases of $411.2 million were offset by the sale, call or maturity of $472.3 million in investments. Liquidity provided from sales, calls and maturities was utilized to fund growth in the loan portfolio or reinvested into investment securities and interest bearing deposits with banks. Following is a detail schedule of the amortized cost of securities held to maturity as of December 31: *(dollars in thousands)* | Obligations of U.S. Government Agencies: | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | | Mortgage-Backed Securities—Residential | $2,766 | $3,392 | $3,635 | | Mortgage-Backed Securities—Commercial | 36,799 | 51,291 | 55,221 | | Obligations of U.S. Government-Sponsored Enterprises: | | | | | Mortgage-Backed Securities—Residential | 277,351 | 229,667 | 279,109 | | Mortgage-Backed Securities—Commercial | 9,737 | 12,081 | 13,159 | | Obligations of States and Political Subdivisions | 34,391 | 40,092 | 42,331 | | Debt Securities Issued by Foreign Governments | 800 | 600 | 400 | | Total Securities Held to Maturity | $361,844 | $337,123 | $393,855 | The following is a schedule of the contractual maturity distribution of securities held to maturity at December 31, 2020. *(dollars in thousands)* | | U.S. Government Agencies and Corporations | States and Political Subdivisions | Other Securities | Total Amortized Cost | Weighted Average Yield | | --- | ---: | ---: | ---: | ---: | ---: | | Within 1 year | $— | $2,500 | $— | $2,500 | 2.80% | | After 1 but within 5 years | 9,737 | 6,868 | 800 | 17,405 | 2.60 | | After 5 but within 10 years | 9,423 | 20,126 | — | 29,549 | 2.39 | | After 10 years | 307,493 | 4,897 | — | 312,390 | 1.59 | | Total | $326,653 | $34,391 | $800 | $361,844 | 1.71% | The held to maturity investment portfolio decreased $24.7 million, or 7%, at December 31, 2020 compared to 2019. Held to maturity investment purchases of $85.7 million were offset by the sale, call or maturity of $118.9 million in investments. See Note 8 “Investment Securities and Note 17 “Fair Values of Assets and Liabilities” for additional information related to the investment portfolio. #### Deposits Total deposits increased $761.1 million, or 11%, in 2020. Interest-bearing demand and savings deposits increased $404.2 million, noninterest-bearing demand deposits increased $629.7 million and time deposits decreased $272.9 million. The deposit increase is a result of elevated customer deposit balances from PPP loan proceeds and the deposit of Federal stimulus checks into our customers' deposit accounts. For additional information concerning our deposits, please refer to Note 13 “Interest-Bearing Deposits.” Time deposits of $100 thousand or more had remaining maturities as follows as of the end of each year in the three-year period ended December 31: *(dollars in thousands)* | | 2020 Amount% | | 2019 Amount% | | 2018 Amount% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | 3 months or less | $79,135 | 34% | $51,625 | 14% | $51,619 | 13% | | Over 3 months through 6 months | 59,193 | 26 | 88,352 | 23 | 59,201 | 15 | | Over 6 months through 12 months | 52,447 | 23 | 133,893 | 35 | 133,285 | 35 | | Over 12 months | 40,675 | 17 | 103,759 | 28 | 140,429 | 37 | | Total | $231,450 | 100% | $377,629 | 100% | $384,534 | 100% | #### Short-Term Borrowings and Long-Term Debt Short-term borrowings decreased $84.5 million, or 42%, from $201.9 million at December 31, 2019 to $117.4 million at December 31, 2020. Long-term debt decreased $0.9 million, from $234.2 million at December 31, 2019 to $233.3 million at December 31, 2020. For additional information concerning our short-term borrowings, subordinated debentures and other long-term debt, please refer to Note 14 “Short-term Borrowings,” Note 15 “Subordinated Debentures” and Note 16 “Other Long-term Debt” of the Consolidated Financial Statements. #### Contractual Obligations and Off-Balance Sheet Arrangements The table below sets forth our contractual obligations to make future payments as of December 31, 2020. For a more detailed description of each category of obligation, refer to the note in our Consolidated Financial Statements indicated in the table below. *(dollars in thousands)* | | Footnote Number Reference | 1 Year or Less | After 1 But Within 3 Years | After 3 But Within 5 Years | After 5 Years | Total | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | FHLB advances | 16 | $50,685 | $1,451 | $1,568 | $2,554 | $56,258 | | Subordinated debentures | 15 | — | — | — | 170,612 | 170,612 | | Operating leases | 11 | 4,765 | 9,186 | 8,573 | 38,325 | 60,849 | | Total contractual obligations | | $55,450 | $10,637 | $10,141 | $211,491 | $287,719 | The table above excludes our cash obligations upon maturity of certificates of deposit, which is set forth in Note 13 “Interest-Bearing Deposits” of the Consolidated Financial Statements. In addition, see Note 10 “Commitments and Letters of Credit” for detail related to our off-balance sheet commitments to extend credit, financial standby letters of credit, performance standby letters of credit and commercial letters of credit as of December 31, 2020. Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements since it is unknown if the borrower will draw upon these commitments and often these commitments expire without being drawn upon. As of December 31, 2020, a reserve for expected credit losses of $7.4 million was recorded for unused commitments and letters of credit. ### 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. Liquidity risk arises from the possibility that we may not be able to meet our financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, our Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements based on limits approved by our Board of Directors. This policy designates our Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by our Treasury Department, which monitors it by using such measures as a 30-day liquidity stress analysis, liquidity gap ratios and noncore funding ratios. We generate funds to meet our cash flow needs primarily through the core deposit base of FCB and the maturity or repayment of loans and other interest-earning assets, including investments. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes 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. Deposits increased $761.1 million, or 11%, during 2020, and comprised 93% of total liabilities at December 31, 2020, as compared to 92% at December 31, 2019. The increase in deposits in 2020 is a result of elevated customer deposit balances from PPP loan proceeds and the deposit of Federal stimulus checks into our customer's deposit accounts. Proceeds from the sale, maturity and redemption of investment securities totaled $591.2 million during 2020 and provided liquidity to fund loans, pay down short-term borrowings, purchase investment securities and fund depositor withdrawals. We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the Federal Home Loan Bank of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland and access to certificates of deposit through brokers. We have increased our borrowing capacity at the Federal Reserve by establishing a Borrower-in-Custody of Collateral arrangement that enables us to pledge certain loans, not being used as collateral at the Federal Home Loan Bank, as collateral for borrowings at the Federal Reserve. At December 31, 2020 our borrowing capacity at the Federal Reserve related to this program was $840.0 million and there were no amounts outstanding. Additionally, as of December 31, 2020, our maximum borrowing capacity at the Federal Home Loan Bank of Pittsburgh was $1.5 billion and as of that date amounts used against this capacity included $0.1 billion in outstanding borrowings. We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an ALCO strategy to increase and diversify funding sources. As of December 31, 2020, our maximum borrowing capacity under this program was $0.9 billion and as of that date there was $4.5 million outstanding. We also participate in a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. As of December 31, 2020, our outstanding certificates of deposits from this program have an average weighted rate of 0.51% and an average original term of 263 days. We also have available unused federal funds lines with five correspondent banks. These lines have an aggregate commitment of $180.0 million and there were no amounts outstanding as of December 31, 2020. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $509.4 million with no outstanding balance as of December 31, 2020. The liquidity needs of First Commonwealth on an unconsolidated basis (the "Parent Company") consist primarily of operating expenses, debt service payments and dividend payments to our stockholders, which totaled $50.9 million for the year ended December 31, 2020, as well as any cash necessary to repurchase our shares, which totaled $20.9 million for the year ended December 31, 2020. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent Company had $72.2 million in junior subordinated debentures and cash and interest-bearing deposits of $34.4 million at December 31, 2020. At the end of 2020, the Parent Company had a $20.0 million short-term, unsecured revolving line of credit with another financial institution. As of December 31, 2020, there were no amounts outstanding under this line. The Parent Company has the ability to enhance its liquidity position by raising capital or incurring debt. Refer to “Financial Condition” above for additional information concerning our deposits, loan portfolio, investment securities and borrowings. ### Market Risk Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. Our market risk is composed primarily of interest rate risk. Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indices, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products as certain borrowers have the option to prepay their loans when rates fall, while certain depositors can redeem or withdraw their deposits early when rates rise. The process by which we manage our interest rate risk is called asset/liability management. The goals of our asset/liability management are increasing net interest income without taking undue interest rate risk or material loss of net market value of our equity, while maintaining adequate liquidity. Net interest income is increased by growing earning assets and increasing the difference between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Liquidity is measured by the ability to meet both depositors’ and credit customers’ requirements. We use an asset/liability model to measure our interest rate risk. Interest rate risk measures include earnings simulation and gap analysis. Gap analysis is a static measure that does not incorporate assumptions regarding future events. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. Under simulation analysis, our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. Our net interest income simulations assume a level balance sheet whereby new volume equals run-off. The ALCO reviews earnings simulations over multiple years under various interest rate scenarios. Reviewing these various measures provides us with a reasonably comprehensive view of our interest rate profile. 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 0.51 and 0.80 at December 31, 2020 and 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. Following is the gap analysis as of December 31: *(dollars in thousands)* | | 2020 0-90 Days | 91-180 Days | 181-365 Days | Cumulative 0-365 Days | Over 1 Year Through 5 Years | Over 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Loans | $596,292 | $495,759 | $942,174 | $2,034,225 | $3,424,936 | $1,270,694 | | Investments | 109,706 | 82,052 | 158,357 | 350,115 | 495,013 | 150,976 | | Other interest-earning assets | 256,572 | — | — | 256,572 | — | — | | Total interest-sensitive assets (ISA) | 962,570 | 577,811 | 1,100,531 | 2,640,912 | 3,919,949 | 1,421,670 | | Certificates of deposit | 163,340 | 120,458 | 135,285 | 419,083 | 141,577 | 2,153 | | Other deposits | 4,555,744 | — | — | 4,555,744 | — | — | | Borrowings | 189,645 | 50,105 | 209 | 239,959 | 1,673 | 104,166 | | Total interest-sensitive liabilities (ISL) | 4,908,729 | 170,563 | 135,494 | 5,214,786 | 143,250 | 106,319 | | Gap | $(3,946,159) | $407,248 | $965,037 | $(2,573,874) | $3,776,699 | $1,315,351 | | ISA/ISL | 0.20 | 3.39 | 8.12 | 0.51 | 27.36 | 13.37 | | Gap/Total assets | 43.52% | 4.49% | 10.64% | 28.38% | 41.65% | 14.51% | 46 *(dollars in thousands)* | | 2019 0-90 Days | 91-180 Days | 181-365 Days | Cumulative 0-365 Days | Over 1 Year Through 5 Years | Over 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | 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 | $655,513 | | ISA/ISL | 0.65 | 2.43 | 2.16 | 0.80 | 7.68 | 12.73 | | Gap/Total assets | 19.33% | 2.79% | 4.25% | 12.29% | 28.12% | 7.89% | Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below the gap analysis. The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in interest rates over a 12-month time frame as compared with net interest income if rates remained unchanged and there are no changes in balance sheet categories. | | Net interest income change (12 months) | | | | | --- | ---: | ---: | ---: | ---: | | | **-200** | **-100** | **+100** | **+200** | | | **(dollars in thousands)** | | | | | December 31, 2020 ($) | $(4,911) | $(2,621) | $3,340 | $6,229 | | December 31, 2020 (%) | (1.79)% | (0.95)% | 1.22% | 2.27% | | December 31, 2019 ($) | $(12,540) | $(5,880) | $4,279 | $8,032 | | December 31, 2019 (%) | (4.52)% | (2.12)% | 1.54% | 2.90% | The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates as compared to if rates remained unchanged, assuming there are no changes in balance sheet categories. | | Net interest income change (12 months) | | | | | --- | ---: | ---: | ---: | ---: | | | **-200** | **-100** | **+100** | **+200** | | | **(dollars in thousands)** | | | | | December 31, 2020 ($) | $(13,807) | $(9,175) | $9,921 | $18,408 | | December 31, 2020 (%) | (5.03)% | (3.34)% | 3.61% | 6.70% | | December 31, 2019 ($) | $(41,661) | $(21,604) | $12,259 | $22,291 | | December 31, 2019 (%) | (15.02)% | (7.79)% | 4.42% | 8.04% | 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. For the years 2020 and 2019, the cost of our interest-bearing liabilities averaged 0.58% and 1.03%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.72% and 4.51%, respectively. The ALCO is responsible for the identification and management of interest rate risk exposure. As such, the ALCO continuously evaluates strategies to manage our exposure to interest rate fluctuations. Asset/liability models require that certain assumptions be made, such as prepayment rates on earning assets and the impact of pricing on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our experience, business plans and published industry experience. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will approximate actual results. ### Credit Risk First Commonwealth maintains an allowance for credit losses at a level deemed sufficient for losses inherent in the loan portfolio at the date of each statement of financial condition. Management reviews the appropriateness of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of estimated expected losses. First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual nonperforming loans with a balance greater than $250 thousand, loss experience trends and other relevant factors. First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled $7.4 million at December 31, 2020 and is classified in “Other liabilities” on the 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 alternate financing sources. In 2020, 41 loans totaling $14.9 million were identified as troubled debt restructurings, requiring $0.6 million additional specific reserves. 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 in 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 risk of loss on these loans is evaluated by comparing the loan balance to the estimated fair value of any underlying collateral or the present value of projected future cash flows. Losses or specifically assigned allowance for credit losses are recognized where appropriate. The allowance for credit losses was $101.3 million at December 31, 2020 or 1.50% of loans outstanding, compared to $51.6 million or 0.83% of loans outstanding at December 31, 2019. Credit measures as of December 31, 2020 compared to December 31, 2019 reflect an increase in the level of criticized loans of $202.2 million from $100.6 million at December 31, 2019 to $302.8 million at December 31, 2020. Commercial real estate loans accounted for $183.3 million of this increase, primarily due to the impact of COVID-19 on hospitality and retail real estate loans. Classified assets increased $24.1 million from $52.0 million at December 31, 2019 to $76.2 million at December 31, 2020. Delinquency on accruing loans decreased $1.3 million, or 10%, and the level of nonperforming loans increased $21.8 million for the same period. The allowance for credit losses as a percentage of nonperforming loans was 187.4% at December 31, 2020 and 160.3% as of December 31, 2019. The allowance for credit losses includes specific allocations of $4.9 million related to nonperforming loans covering 9% of the total nonperforming balance at December 31, 2020 and specific allocations of $2.4 million covering 8% of the total nonperforming balance at December 31, 2019. The amount of allowance related to nonperforming loans was determined by using estimated fair values obtained from current appraisals and updated discounted cash flow analyses. Management believes that the allowance for credit losses is at a level that is sufficient to absorb expected losses in the loan portfolio at December 31, 2020. The following table provides information on net charge-offs and nonperforming loans by loan category: *(dollars in thousands)* | | For the Period Ended December 31, 2020 Net Charge-offs | % of Total Net Charge- offs | Net Charge-offs as a % of Average Loans | As of December 31, 2020 Nonperforming Loans | % of Total Nonperforming Loans | Nonperforming Loans as a % of Total Loans | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Commercial, financial, agricultural and other | $6,004 | 34.92% | 0.09% | $6,235 | 11.54% | 0.09% | | Real estate construction | (26) | (0.15) | — | 54 | 0.10 | — | | Residential real estate | 626 | 3.64 | 0.01 | 10,939 | 20.24 | 0.16 | | Commercial real estate | 4,627 | 26.91 | 0.07 | 36,407 | 67.35 | 0.54 | | Loans to individuals | 5,962 | 34.68 | 0.09 | 418 | 0.77 | 0.01 | | Total loans, net of unearned income | $17,193 | 100.00% | 0.26% | $54,053 | 100.00% | 0.80% | As the above table illustrates, commercial real estate and residential real estate loans were the most significant portions of the nonperforming loans as of December 31, 2020. See discussions related to the provision for credit losses and loans for more information. ### New Accounting Pronouncements In March 2020, FASB released Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848), which provides optional guidance to ease the accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of the potential discontinuance of the London Interbank Offered Rate ("LIBOR") as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company has established a cross-functional working group to manage the Company’s transition from LIBOR. Products that utilize LIBOR have been identified and have incorporated enhanced language to accommodate the transition to alternative reference rates. The Company continues to evaluate the impact of adopting the new standard and at this time does not expect it to have a material impact on its consolidated financial statements. In December 2019, FASB released ASU 2019-12 - Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing multiple exceptions to the general principles in Topic 740. The standard is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements. ## Market risk As filed, 140 characters. Information appearing in Item 7 of this report under the caption “Market Risk” is incorporated herein by reference in response to this item. ## Controls and procedures As filed, 19,074 characters. ### Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission. In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. No such changes were identified in connection with this evaluation. ### MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING First Commonwealth is responsible for the preparation, the integrity, and the fair presentation of the Consolidated Financial Statements included in this annual report. The Consolidated Financial Statements and notes to the financial statements have been prepared in conformity with generally accepted accounting principles and include some amounts based upon management’s best estimates and judgments. First Commonwealth’s management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), that is designed to produce reliable financial statements in conformity with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Under the supervision and with the participation of management, including First Commonwealth’s principal executive officer and principal financial officer, First Commonwealth conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in *Internal Control-Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). All internal control systems, no matter how well designed, have inherent limitations, including the possibility that a control can be circumvented and that misstatements due to error or fraud may occur without detection. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on First Commonwealth’s evaluation based on criteria established in *Internal Control-Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that internal control over financial reporting was effective as of December 31, 2020. The effectiveness of First Commonwealth’s internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein. First Commonwealth Financial Corporation Indiana, Pennsylvania March 1, 2021 | | | | --- | --- | | /S/ T. Michael Price | /S/ James R. Reske | | **T. Michael Price** | **James R. Reske** | | **President and Chief Executive Officer** | **Executive Vice President, Chief Financial Officer and Treasurer** | 116 ### Report of Ernst & Young LLP, Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of First Commonwealth Financial Corporation ### Opinion on Internal Control over Financial Reporting We have audited First Commonwealth Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, First Commonwealth Financial Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholder’s equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and our report dated March 1, 2021 expressed an unqualified opinion thereon. ### Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment Of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. ### Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania March 1, 2021 ### Report of Ernst & Young LLP, Independent Registered Public Accounting Firm The Board of Directors and Stockholders of First Commonwealth Financial Corporation ### Opinion on the Financial Statements We have audited the accompanying consolidated statement of financial condition of First Commonwealth Financial Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2021 expressed an unqualified opinion thereon. ### Adoption of New Accounting Standard As discussed in Notes 1 and 9 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. As explained below, auditing the Company’s allowance for credit losses (ACL), including the adoption of the new accounting guidance, was a critical audit matter. ### Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. ### Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. | | Allowance for Credit Losses | | --- | --- | | **Description of the Matter** | Effective January 1, 2020, the Company adopted Topic 326, which resulted in an increase to the ACL of $13.4 million. The Company’s loan portfolio totaled $6.8 billion as of December 31, 2020 and the associated ACL was $101.3 million. As discussed in Note 1 and 9 to the consolidated financial statements, the ACL represents management’s estimate of losses over the contractual life of the loan portfolio, including unfunded commitments. The ACL is calculated by pooling loans of similar risk characteristics and applying a discounted cash flow methodology after incorporating probability of default and loss given default estimates. Inputs impacting the expected losses include a forecast of economic factors including national unemployment, gross domestic product, and housing price index. The ACL also includes qualitative factors related to loan portfolio risks not reflected in the calculated model, including lending practices, ability and experience of the credit staff, the overall lending environment and external factors such as the regulatory environment and competition, as well as the impact of COVID-19. Auditing management’s ACL estimate and related provision for credit losses was complex due to the discounted cash flow model and related inputs used to compute the reserve and involves a high degree of subjectivity due to the judgment required in evaluating management’s determination of the qualitative factors described above. | | **How We Addressed the Matter in Our Audit** | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the ACL process, including controls over the appropriateness over the ACL methodology, the expected loss models, the reliability and accuracy of data used in developing the ACL estimate, and management’s review and approval process over the forecast, qualitative adjustments and overall ACL results. With the assistance of EY specialists, we tested management’s expected loss models including evaluating the conceptual soundness of model methodology, assessing model performance and governance, testing key model assumptions, including the reasonable and supportable forecast period, and independently recalculating model output. We also compared the underlying economic forecast data used to estimate the quantitative reserve to external sources to determine whether it was complete and accurate. To test the qualitative factor adjustments, among other procedures, we assessed management’s methodology and considered whether relevant risks were reflected in the models and whether adjustments to the model output were appropriate. We tested the completeness, accuracy, and relevance of the underlying data used to estimate the qualitative adjustments. We evaluated whether qualitative adjustments were reasonable based on changes in economic conditions and the loan portfolio. For example, we evaluated the reasonableness of qualitative adjustments for economic trends and conditions by independently comparing loan portfolio information. We also assessed whether qualitative adjustments were consistent with publicly available information (e.g. macroeconomic data). Further, we performed an independent search for the existence of new or contrary information relating to risks impacting the qualitative factor adjustments to validate that management’s considerations are appropriate. Additionally, we evaluated whether the overall ACL, inclusive of qualitative factor adjustments, appropriately reflects losses expected in the loan portfolio by comparing to historical losses and peer bank data. | /s/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Pittsburgh, Pennsylvania March 1, 2021 ### Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors First Commonwealth Financial Corporation: #### Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of First Commonwealth Financial Corporation and subsidiaries (the Company) for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. #### Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. #### (signed) KPMG LLP We served as the Company’s auditor from 2006 to 2018. Pittsburgh, Pennsylvania March 1, 2019 Filed Mar 1, 2021. Source: SEC EDGAR, the filing index for accession 0000712537-21-000007. Last ingested by Listed: Nov 6, 2026, 18:15 ET. No prices; not investment advice.