Premises and Equipment

12 Months Ended

Dec. 31, 2020

Property, Plant and Equipment [Abstract]

Premises and Equipment

Premises, Equipment and Lease Commitments

Premises and Equipment

Premises and equipment are described as follows:

	Estimated Useful Life	2020		2019
	(dollars in thousands)
Land	Indefinite	$	15,441	$	15,446
Buildings and improvements	10-50 years	77,003		76,965
Operating lease right of use asset	1-25 years	48,642		52,114
Leasehold improvements	5-40 years	35,347		37,716
Furniture and equipment	3-7 years	73,150		71,548
Software	3-7 years	41,681		40,399
Subtotal		291,264		294,188
Less accumulated depreciation and amortization		165,747		156,920
Total premises and equipment, net		$	125,517	$	137,268

Depreciation related to premises and equipment included in noninterest expense for the years ended December 31, 2020, 2019 and 2018 amounted to $10.9 million, $10.5 million and $9.5 million, respectively. Amortization of lease right-of-use assets totaled $2.6 million in 2020 and $3.5 million in 2019.

At December 31, 2020, $2.6 million in premise and equipment assets are considered available for sale as a result of the branch consolidation initiative.

Lease Commitments

On January 1, 2019, the Company adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842 using the transition option provided in ASU 2018-11, which provides for the modified retrospective approach. Under this

approach, comparative periods were not restated and no cumulative effect adjustment to the opening balance of retained earnings was required.

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

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

The following table represents the lease costs and other lease information for the years ended December 31.

	2020			2019
	(dollars in thousands)
Balance sheet:
Operating lease asset classified as premises and equipment	$	42,617		$	48,642
Operating lease liability classified as other liabilities	46,819			52,894
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	5,930		$	5,328
Weighted average lease term, in years	14.83			15.27
Weighted average discount rate	3.42		%	3.43		%
Operating cash flows	$	5,979		$	4,656

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

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

In July 2020, the Company announced the consolidation of 29 branch locations, including 12 leased locations, into nearby offices prior to December 31, 2020. As a result, during the third quarter, the Company paid $0.7 million in lease termination fees and decreased the ROU asset and lease liability by $3.8 million and $3.6 million, respectively.

The following table reconciles future minimum lease payments due under non-cancelable operating leases (those amounts subject to recognition) to the lease liability as of December 31, 2020 (dollars in thousands):

For the twelve months ended
2021	$	4,765
2022	4,653
2023	4,533
2024	4,399
2025	4,174
Thereafter	38,325
Total future minimum lease payments	60,849
Less remaining imputed interest	14,030
Operating lease liability	$	46,819

Rent expense, net of rental income, for all operating leases totaled $6.7 million in 2020, $4.9 million in 2019 and $4.1 million in 2018. Rent expense includes amounts related to items that are not included in the determination of lease right-of-use assets

including expenses related to short-term leases and non-lease components such as taxes, insurance, and common area maintenance costs.