Annual Report 2013
A Message to Fellow Shareowners
2013 was a year of continued momentum for First Commonwealth as we realized net income of $41.5
million for the year. More importantly, the last two quarters of the year represented our strongest
operating earnings in recent history. This momentum was largely attributable to the progress we have
made in key areas of strategic focus.
Highlights from 2013 include:
(cid:120) Total loans grew $79.1 million, or 2%
(cid:120) Non-performing loans decreased by $48.2 million, or 45%
(cid:120) Non-interest expense declined by $8.4 million, or 5%
(cid:120) Demand deposits increased by $29.1 million, or 3%
(cid:120) Quarterly dividends were increased for a fourth consecutive year
(cid:120) More than 10 million shares of First Commonwealth stock were repurchased by the company
over the last 18 months
Efficiency Efforts
While we are pleased with the progress we have made over the past 12 months, we recognize there is
much more to be done. Regulatory requirements, competitive demands, and economic factors compel us
to operate as efficiently as possible. As a result, we have embarked on a course to fundamentally
transform and upgrade our core processing platform and ancillary technology systems.
This conversion is expected to take place in the third quarter of 2014. The upgrading of our systems and
platforms will drive future efficiency, enhance integration across our organization, and make it easier to
do business with First Commonwealth.
Revenue Streams
The launch of our Mortgage offering in the second half of 2014 is anticipated to support our non-interest
income, loan growth, and net interest margin. We have filled key leadership roles in the areas of
operations and sales, and our retail branch network provides an immediate market for our Mortgage
product line.
We are also expanding our Corporate Banking business into the Cleveland, Ohio market with the official
opening of our Cleveland Business Center. This Business Center will provide comprehensive
commercial real estate lending, commercial and industrial lending, treasury management, and customized
corporate banking solutions.
Looking Ahead
Our commitment to a strong credit culture, consistent revenue growth, and organizational efficiency is the
foundation on which we will deliver long-term value to our shareowners. We appreciate your ongoing
support, and we look forward to additional progress in all of our areas of strategic focus.
T. Michael Price
President and Chief Executive Officer
First Commonwealth Financial Corporation
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For the fiscal year ended December 31, 2013
OR
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(cid:40)(cid:59)(cid:38)(cid:43)A(cid:49)(cid:42)(cid:40) A(cid:38)(cid:55) (cid:50)F (cid:20)(cid:28)(cid:22)(cid:23)
For the transition period from to
Commission file Number 001-11138
F(cid:44)(cid:53)S(cid:55) (cid:38)(cid:50)MM(cid:50)(cid:49)(cid:58)(cid:40)A(cid:47)(cid:55)(cid:43) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)A(cid:55)(cid:44)(cid:50)(cid:49)
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of incorporation or organization)
601 PHILADELPHIA STREET INDIANA, PA
(Address of principal executive offices)
25-1428528
(I.R.S. Employer Identification No.)
15701
(Zip Code)
Registrant’s telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
COMMON STOCK, $1 PAR VALUE
Name of each exchange on which registered
NEW YORK STOCK EXCHANGE
No
No
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this form 10-K.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
The aggregate market value of the voting and non-voting common stock, par value $1 per share, held by non-affiliates of the
registrant (based upon the closing sale price on June 30, 2013) was approximately $700,502,967.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of February 28, 2014, was 94,206,690.
Smaller reporting company
Non-accelerated filer
Accelerated filer
No
No
No
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Portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the
annual meeting of shareholders to be held April 22, 2014 are incorporated by reference into Part III.
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Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements include, among others, statements regarding our strategy, evaluations of our asset quality, future interest rate
trends and liquidity, prospects for growth in assets and prospects for future operating results. Forward-looking statements can
generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of
similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Forward-looking
statements are based on assumptions of management and are only expectations of future results. You should not place undue
reliance on our forward-looking statements. Our actual results could differ materially from those projected in the forward-
looking statements as a result of, among others, the risk factors described in Item 1A of this report. Forward-looking statements
speak only as of the date on which they are made. We do not undertake any obligation to update any forward-looking statement
to reflect circumstances or events that occur after the date the forward-looking statements are made.
3
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First Commonwealth Financial Corporation (“First Commonwealth” or “we”) is a financial holding company that is
headquartered in Indiana, Pennsylvania. We provide a diversified array of consumer and commercial banking services through
our bank subsidiary, First Commonwealth Bank (“FCB” or the “Bank”). We also provide trust and wealth management services
and offer insurance products through FCB and our other operating subsidiaries. At December 31, 2013, we had total assets of
$6.2 billion, total loans of $4.3 billion, total deposits of $4.6 billion and shareholders’ equity of $711.7 million. 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, 2013, the Bank operated 110 community banking offices
throughout western and central Pennsylvania and a loan production office in downtown Pittsburgh, Pennsylvania. During the
fourth quarter of 2014, an additional loan production office is scheduled to open in Cleveland, Ohio. The largest concentration
of our branch offices is located within the greater Pittsburgh metropolitan area in Allegheny, Butler, Washington and
Westmoreland counties, while our remaining offices are located in smaller cities, such as Altoona, Johnstown, and Indiana,
Pennsylvania, and in towns and villages throughout predominantly rural counties. The Bank also operates a network of 115
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 670 ATMs in over 50 counties in Pennsylvania, Maryland, New York,
West Virginia and Ohio.
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FCB began in 1934 as First National Bank of Indiana with initial capitalization of $255 thousand. 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, 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.
In recent years, we have primarily 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 acquisition and de novo strategy, FCB operates 61 branches in the Pittsburgh metropolitan
statistical area and currently ranks ninth in deposit market share.
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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, 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 than that imposed on us.
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At December 31, 2013, First Commonwealth and its subsidiaries employed 1,256 full-time employees and 181 part-time
employees.
4
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The following discussion sets forth the material elements of the regulatory framework applicable to financial holding
companies and their subsidiaries and provides certain specific information relevant to First Commonwealth and its 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.
Regulatory Reforms
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010,
significantly restructures the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that
have received the most public attention generally have been those applying to or more likely to affect larger institutions such as
bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect
all bank holding companies and banks, including First Commonwealth and FCB, some of which are described in more detail
below.
Many of the Dodd-Frank Act’s provisions are subject to final rulemaking by the U.S. financial regulatory agencies, and the
implications of the Dodd-Frank Act for First Commonwealth’s businesses will depend to a large extent on how such rules are
adopted and implemented by the primary U.S. financial regulatory agencies. First Commonwealth continues to analyze the
impact of rules adopted under Dodd-Frank, on its businesses. However, the full impact will not be known until the rules, and
other regulatory initiatives that overlap with the rules, are finalized and their combined impacts can be understood.
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. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community
Reinvestment Act (“CRA”) ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions and
open branch offices.
Non-Banking Activities. First Commonwealth is generally prohibited under the BHC Act from engaging in, or acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities unless
the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. In making this determination, the FRB considers whether the performance of these activities
by a bank holding company can reasonably be expected to produce benefits to the public that outweigh the possible adverse
effects.
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. In addition, under the Pennsylvania Banking Code of 1965, the
Pennsylvania Department of Banking has the authority to examine the books, records and affairs of any Pennsylvania bank
holding company or to require any documentation deemed necessary to ensure compliance with the Pennsylvania Banking
Code.
Source of Strength Doctrine. FRB policy has historically required bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”) codifies this policy as a statutory requirement. Under this requirement, 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 by the Federal Reserve Board. These regulations limit the types and amounts of covered transactions
5
engaged in by FCB and generally require those transactions to be on an arm’s-length basis. “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 Federal Reserve Board) 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, these regulations require that any such transaction
by FCB (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited
to certain thresholds on an individual and aggregate basis.
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 Regulations
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 is required to furnish quarterly reports to both agencies. The approval of the
Pennsylvania Department of Banking and FDIC is also required for FCB to establish additional branch offices or merge with or
acquire another banking institution.
Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that 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. FCB has not reduced its surplus through the
payment of dividends.
The FDIC also prohibits the declaration or payout of dividends at a time when FCB is in default in payment of any assessment
due the FDIC. In addition, supervisory guidance issued by the FRB requires, among other things, that a company must consult
with the FRB in advance of paying a dividend that exceeds earnings for the quarter for which the dividend is paid or that could
result in a material adverse change to the company’s capital structure. The guidance also states that a company should, as a
general matter, eliminate, defer or severely limit its dividend if (1) the company’s net income for the past four quarters, net of
dividends paid during that period, is not sufficient to fully fund the dividend; (2) the company’s prospective rate of earnings
retention is not consistent with the company’s capital needs and current and prospective financial condition; or (3) the company
will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Community Reinvestment. Under the Community Reinvestment Act, or 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.
Consumer Protection Laws. The operations of FCB are also subject to numerous federal, state and local consumer protection
laws and regulations including the Truth in Lending Act, Truth in Savings Act, Equal Credit Opportunity Act, Fair Housing Act,
Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other things, these acts:
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require banks to disclose credit terms in meaningful and consistent ways;
prohibit discrimination against an applicant in any consumer or business credit transaction;
prohibit discrimination in housing-related lending activities;
require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement
projects;
require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and
prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
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
6
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.
In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid
assessment was refunded during the second quarter of 2013 and no longer has a balance in the accompanying Statements of
Financial Condition.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by
September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income
projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if
required.
Capital Requirements
As a bank holding company, we are subject to consolidated regulatory capital requirements administered by the FRB. FCB is
subject to similar capital requirements administered by the FDIC and the Pennsylvania Department of Banking. The federal
regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee
on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/
regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in
determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have
adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking
organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including
certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets
and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories.
A depository institution’s or holding company’s capital, in turn, is classified in one of two tiers, depending on type:
• Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual
preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority
interests in equity accounts of consolidated subsidiaries, and qualifying trust preferred securities, less goodwill, most
intangible assets and certain other assets.
•
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred
securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated
debt, and allowances for possible loan and lease losses, subject to limitations.
First Commonwealth, like other bank holding companies, currently is required to maintain Tier 1 capital and “total capital” (the
sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including
various off-balance sheet items, such as letters of credit). FCB, like other depository institutions, is required to maintain similar
capital levels under capital adequacy guidelines. In addition, for a depository institution to be considered “well capitalized”
under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0%
on a risk-adjusted basis, respectively.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio
is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory
purposes). The minimum leverage ratio is 3.0% for bank holding companies and depository institutions that either have the
highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market
risk. All other bank holding companies and depository institutions are required to maintain a minimum leverage ratio of 4.0%,
unless a different minimum is specified by an appropriate regulatory authority. In addition, for a depository institution to be
considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least
5.0%.
As of December 31, 2013, FCB was a “well-capitalized” bank as defined by the FDIC. See Note 26 “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.
In July 2013, the FRB, the FDIC and other bank regulatory agencies published the Basel III Capital Rules establishing a new
comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010
framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-
Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding
7
companies and depository institutions compared to the current U.S. risk-based capital rules. The Basel III Capital Rules, among
other things:
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introduce a new capital measure called “Common Equity Tier 1” (“CET1”);
define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1
and not to the other components of capital;
specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements;
and
expand the scope of the deductions/adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require First Commonwealth and FCB to maintain:
•
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a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is
added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-
weighted assets of at least 7.0% upon full implementation);
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer
(effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);
a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer
(effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.
Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or
below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face
constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
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.
Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded
for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated
other comprehensive items are not excluded; however, smaller banking organizations, including First Commonwealth and FCB,
may make a one-time permanent election to continue to exclude these items.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a
four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the
capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period
(increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
The Basel III Capital Rules also revise the “prompt corrective action” capital requirements described above. The Basel III
Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current
four Basel I-derived categories (0%, 20%, 50% and 100%) 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.
Management believes that, as of December 31, 2013, First Commonwealth and FCB would meet all capital adequacy
requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
Liquidity Requirements
Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter,
without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure
their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by
banks and regulators for management and supervisory purposes, going forward will be required by regulation. 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, 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. These requirements will incent banking entities to increase their holdings of U.S. Treasury
securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. In
October 2013, the federal banking agencies proposed rules that would implement the LCR for banking organizations that
follow the “advanced approach” to calculating capital and a separate version for banking organizations with consolidated assets
8
of greater than $50 billion, neither of which would apply to First Commonwealth or FCB. The federal banking agencies have
not yet proposed rules to implement the NSFR.
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. The United States
Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the
USA Patriot Act to financial institutions such as FCB. These regulations impose obligations on financial institutions to maintain
appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to
verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial
institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. 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.
A(cid:89)a(cid:76)la(cid:69)(cid:76)l(cid:76)t(cid:92) o(cid:73) F(cid:76)nan(cid:70)(cid:76)al (cid:44)n(cid:73)or(cid:80)at(cid:76)on
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.
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As a financial services company, we are subject to a number of risks, many of which are outside of our control. These risks
include, but are not limited to:
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Our results of operations depend substantially on net interest income, which is the difference between interest earned on
interest-earning assets (such as investments and loans) and interest paid on interest-bearing liabilities (such as deposits and
borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and
international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, and
other factors beyond our control may also affect interest rates. If our interest-earning assets mature or reprice more quickly than
interest-bearing liabilities in a declining interest rate environment, net interest income could be adversely impacted. Likewise, if
interest-bearing liabilities mature or reprice more quickly than interest-earnings assets in a rising interest rate environment, net
interest income could be adversely impacted.
Changes in interest rates also can affect the value of loans and other assets. An increase in interest rates that adversely affects
the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction
of income recognized, which could have a material adverse effect on our results of operations and cash flows.
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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. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and
financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial
services sector. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or
9
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 or
policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a
material adverse effect on our business, financial condition and results of operations. See “Supervision and Regulation”
included in Item 1. Business for a more detailed description of the Dodd-Frank Act and other regulatory requirements
applicable to First Commonwealth.
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(cid:83)lanne(cid:71)(cid:15) or (cid:88)nant(cid:76)(cid:70)(cid:76)(cid:83)ate(cid:71) e(cid:89)ents o(cid:70)(cid:70)(cid:88)r (cid:71)(cid:88)r(cid:76)ng the trans(cid:76)t(cid:76)on(cid:15) o(cid:88)r o(cid:83)erat(cid:76)ons(cid:15) net (cid:76)n(cid:70)o(cid:80)e(cid:15) or re(cid:83)(cid:88)tat(cid:76)on (cid:70)o(cid:88)l(cid:71) (cid:69)e
a(cid:71)(cid:89)ersel(cid:92) a(cid:73)(cid:73)e(cid:70)te(cid:71)(cid:17)
We will be transitioning to a new core processing system during 2014. The core processing system is 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. First Commonwealth has assembled a team of officers and employees
representing key business units and functional areas throughout the Company to plan and oversee the transition process. This
team, working with the vendor for the core processing system and outside project management consultants, has developed a
comprehensive work plan for completing the transition. Extensive pre-conversion testing of, and employee training in,
processing routines and new core processing system operation will be conducted before FCB is transitioned to the new core
processing system.
If we are not able to complete the transition to the new core processing system as expected in accordance with the work plan, or
if unanticipated events occur during or following the transition, FCB may not be able to timely process transactions for its
customers, those customers may not be able to complete transactions in or affecting their accounts that are maintained on the
core processing system, or FCB may not be able to perform contractual and other obligations to its customers or other parties.
Should any of these consequences occur, First Commonwealth may incur additional expense in its financial and regulatory
reporting, in processing or re-processing transactions, and FCB may not be able to meet customer expectations for transaction
processing and customer service, customers may close their accounts with us, and we may incur liability under contractual or
other arrangements with customers or other parties. Any of these events, should they occur, could have a material and adverse
impact on the Company’s operations, net income, reputation or the trading price of First Commonwealth’s shares, as well as
expose the Company to civil liability or regulatory sanctions.
(cid:39)e(cid:70)l(cid:76)nes (cid:76)n real estate (cid:89)al(cid:88)es (cid:70)o(cid:88)l(cid:71) a(cid:71)(cid:89)ersel(cid:92) a(cid:73)(cid:73)e(cid:70)t o(cid:88)r earn(cid:76)ngs an(cid:71) (cid:73)(cid:76)nan(cid:70)(cid:76)al (cid:70)on(cid:71)(cid:76)t(cid:76)on(cid:17)
As of December 31, 2013, approximately 62% of our loans were secured by real estate. These loans consist of residential real
estate loans (approximately 30% of total loans), commercial real estate loans (approximately 30% of total loans) and real estate
construction loans (approximately 2% of total loans). During the economic recession in 2008, declines in real estate values and
weak demand for new construction, particularly outside of our core Pennsylvania market, caused deterioration in our loan
portfolio and adversely impacted our financial condition and results of operations. Additional declines in real estate values, both
within and outside of Pennsylvania, could adversely affect the value of the collateral for these loans, the ability of borrowers to
make timely repayment of these loans and our ability to recoup the value of the collateral upon foreclosure, further impacting
our earnings and financial condition.
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Our operations and profitability are impacted by general business and economic conditions in the United States and abroad.
These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and
regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance and the strength of
the United States economy, all of which are beyond our control. A deterioration in economic conditions could result in an
increase in loan delinquencies and nonperforming assets, decreases in loan collateral values and a decrease in demand for our
products and services, among other things, any of which could have a material adverse impact on our financial condition and
results of operations.
(cid:50)(cid:88)r allowan(cid:70)e (cid:73)or (cid:70)re(cid:71)(cid:76)t losses (cid:80)a(cid:92) (cid:69)e (cid:76)ns(cid:88)(cid:73)(cid:73)(cid:76)(cid:70)(cid:76)ent(cid:17)
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 is a reserve established through a provision for credit losses charged to expense,
which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of
loans. The allowance, in the judgment of management, is adequate 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
10
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
affecting borrowers, 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, and possibly risk-based capital, and may have a material adverse
effect on our financial condition and results of operations.
A(cid:70)ts o(cid:73) (cid:70)(cid:92)(cid:69)er(cid:16)(cid:70)r(cid:76)(cid:80)e (cid:80)a(cid:92) (cid:70)o(cid:80)(cid:83)ro(cid:80)(cid:76)se (cid:70)l(cid:76)ent an(cid:71) (cid:70)o(cid:80)(cid:83)an(cid:92) (cid:76)n(cid:73)or(cid:80)at(cid:76)on(cid:15) (cid:71)(cid:76)sr(cid:88)(cid:83)t a(cid:70)(cid:70)ess to o(cid:88)r s(cid:92)ste(cid:80)s or res(cid:88)lt (cid:76)n loss o(cid:73)
(cid:70)l(cid:76)ent or (cid:70)o(cid:80)(cid:83)an(cid:92) assets(cid:17)
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.
(cid:58)e ha(cid:89)e a s(cid:76)gn(cid:76)(cid:73)(cid:76)(cid:70)ant (cid:71)e(cid:73)erre(cid:71) ta(cid:91) asset an(cid:71) (cid:70)annot ass(cid:88)re (cid:76)t w(cid:76)ll (cid:69)e (cid:73)(cid:88)ll(cid:92) real(cid:76)(cid:93)e(cid:71)(cid:17)
We had net deferred tax assets of $63.2 million as of December 31, 2013. We did not establish a valuation allowance against
our federal net deferred tax assets as of December 31, 2013 as we believe that it is more likely than not that all of these assets
will be realized. In evaluating the need for a valuation allowance, we estimated future taxable income based on management
approved forecasts. This process required significant judgment by management about matters that are by nature uncertain. If
future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material
adverse effect on our results of operations and financial condition.
(cid:58)e (cid:80)(cid:88)st e(cid:89)al(cid:88)ate whether an(cid:92) (cid:83)ort(cid:76)on o(cid:73) o(cid:88)r re(cid:70)or(cid:71)e(cid:71) goo(cid:71)w(cid:76)ll (cid:76)s (cid:76)(cid:80)(cid:83)a(cid:76)re(cid:71)(cid:17) (cid:44)(cid:80)(cid:83)a(cid:76)r(cid:80)ent test(cid:76)ng (cid:80)a(cid:92) res(cid:88)lt (cid:76)n a
(cid:80)ater(cid:76)al(cid:15) non(cid:16)(cid:70)ash wr(cid:76)te(cid:16)(cid:71)own o(cid:73) o(cid:88)r goo(cid:71)w(cid:76)ll assets an(cid:71) (cid:70)o(cid:88)l(cid:71) ha(cid:89)e a (cid:80)ater(cid:76)al a(cid:71)(cid:89)erse (cid:76)(cid:80)(cid:83)a(cid:70)t on o(cid:88)r res(cid:88)lts o(cid:73)
o(cid:83)erat(cid:76)ons(cid:17)
At December 31, 2013, goodwill represented approximately 3% of our total assets. We have recorded goodwill because we paid
more for some of our businesses than the fair market value of the tangible and separately measurable intangible net assets of
those businesses. We test our goodwill and other intangible assets with indefinite lives for impairment at least annually (or
whenever events occur which may indicate possible impairment). Goodwill impairment is determined by comparing the fair
value of a reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, goodwill of
the reporting unit is not considered impaired. If the fair value of the reporting unit is less than the carrying amount, goodwill is
considered impaired. Determining the fair value of our company requires a high degree of subjective management assumptions.
Any changes in key assumptions about our business and its prospects, changes in market conditions or other externalities, for
impairment testing purposes could result in a non-cash impairment charge and such a charge could have a material adverse
effect on our consolidated results of operations. The challenges of the current economic environment may adversely affect our
earnings, the fair value of our assets and liabilities and our stock price, all of which may increase the risk of goodwill
impairment.
(cid:58)e ha(cid:89)e s(cid:76)gn(cid:76)(cid:73)(cid:76)(cid:70)ant e(cid:91)(cid:83)os(cid:88)re to a (cid:71)ownt(cid:88)rn (cid:76)n the (cid:73)(cid:76)nan(cid:70)(cid:76)al ser(cid:89)(cid:76)(cid:70)es (cid:76)n(cid:71)(cid:88)str(cid:92) (cid:71)(cid:88)e to o(cid:88)r (cid:76)n(cid:89)est(cid:80)ents (cid:76)n tr(cid:88)st (cid:83)re(cid:73)erre(cid:71)
se(cid:70)(cid:88)r(cid:76)t(cid:76)es(cid:17)
As of December 31, 2013, we had single issuer trust preferred securities and trust preferred collateralized debt obligations with
an aggregate book value of $48.7 million and an unrealized loss of approximately $18.2 million. These securities were issued
by banks, bank holding companies and other financial services providers. Depending on the severe economic recession and its
impact on the financial services industry, we may be required to record additional impairment charges on other investment
securities if they suffer a decline in value that is considered other-than-temporary. If the credit quality of the securities in our
investment portfolio deteriorates, we may also experience a loss in interest income from the suspension of either interest or
dividend payments. Numerous factors, including lack of liquidity for resales of certain investment securities, absence of reliable
pricing information for investment securities, adverse changes in business climate or adverse actions by regulators could have a
negative effect on our investment portfolio in future periods. If an impairment charge is significant enough it could affect the
11
ability of FCB to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability to pay
dividends to shareholders and could also negatively impact our regulatory capital ratios and result in us not being classified as
“well-capitalized” for regulatory purposes.
F(cid:76)rst (cid:38)o(cid:80)(cid:80)onwealth rel(cid:76)es on (cid:71)(cid:76)(cid:89)(cid:76)(cid:71)en(cid:71)s (cid:73)ro(cid:80) (cid:76)ts s(cid:88)(cid:69)s(cid:76)(cid:71)(cid:76)ar(cid:76)es (cid:73)or (cid:80)ost o(cid:73) (cid:76)ts re(cid:89)en(cid:88)es(cid:17)
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.
(cid:38)o(cid:80)(cid:83)et(cid:76)t(cid:76)on (cid:73)ro(cid:80) other (cid:73)(cid:76)nan(cid:70)(cid:76)al (cid:76)nst(cid:76)t(cid:88)t(cid:76)ons (cid:76)n or(cid:76)g(cid:76)nat(cid:76)ng loans(cid:15) attra(cid:70)t(cid:76)ng (cid:71)e(cid:83)os(cid:76)ts an(cid:71) (cid:83)ro(cid:89)(cid:76)(cid:71)(cid:76)ng (cid:89)ar(cid:76)o(cid:88)s (cid:73)(cid:76)nan(cid:70)(cid:76)al
ser(cid:89)(cid:76)(cid:70)es (cid:80)a(cid:92) a(cid:71)(cid:89)ersel(cid:92) a(cid:73)(cid:73)e(cid:70)t o(cid:88)r (cid:83)ro(cid:73)(cid:76)ta(cid:69)(cid:76)l(cid:76)t(cid:92)(cid:17)
We face 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.
(cid:49)egat(cid:76)(cid:89)e (cid:83)(cid:88)(cid:69)l(cid:76)(cid:70)(cid:76)t(cid:92) (cid:70)o(cid:88)l(cid:71) (cid:71)a(cid:80)age o(cid:88)r re(cid:83)(cid:88)tat(cid:76)on(cid:17)
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. Because we conduct all of our business under the “First Commonwealth” brand, negative public opinion about
one business could affect our other businesses.
An (cid:76)nterr(cid:88)(cid:83)t(cid:76)on to o(cid:88)r (cid:76)n(cid:73)or(cid:80)at(cid:76)on s(cid:92)ste(cid:80)s (cid:70)o(cid:88)l(cid:71) a(cid:71)(cid:89)ersel(cid:92) (cid:76)(cid:80)(cid:83)a(cid:70)t o(cid:88)r o(cid:83)erat(cid:76)ons(cid:17)
We rely upon our information systems for operating and monitoring all major aspects of our business, including deposit and
loan operations, as well as internal management functions. These systems and our operations could be damaged or interrupted
by natural disasters, power loss, network failure, improper operation by our employees, security breaches, computer viruses,
intentional attacks by third parties or other unexpected events. Any disruption in the operation of our information systems could
adversely impact our operations, which may affect our financial condition, results of operations and cash flows.
(cid:51)ro(cid:89)(cid:76)s(cid:76)ons o(cid:73) o(cid:88)r art(cid:76)(cid:70)les o(cid:73) (cid:76)n(cid:70)or(cid:83)orat(cid:76)on(cid:15) (cid:69)(cid:92)laws an(cid:71) (cid:51)enns(cid:92)l(cid:89)an(cid:76)a law(cid:15) as well as state an(cid:71) (cid:73)e(cid:71)eral (cid:69)an(cid:78)(cid:76)ng
reg(cid:88)lat(cid:76)ons(cid:15) (cid:70)o(cid:88)l(cid:71) (cid:71)ela(cid:92) or (cid:83)re(cid:89)ent a ta(cid:78)eo(cid:89)er o(cid:73) (cid:88)s (cid:69)(cid:92) a th(cid:76)r(cid:71) (cid:83)art(cid:92)(cid:17)
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.
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:37)(cid:17)
(cid:56)nresol(cid:89)e(cid:71) Sta(cid:73)(cid:73) (cid:38)o(cid:80)(cid:80)ents
None.
12
(cid:44)(cid:55)(cid:40)M (cid:21)(cid:17)
(cid:51)ro(cid:83)ert(cid:76)es
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 and one leased premise in Indiana,
Pennsylvania, each of which is in close proximity to our principal office.
First Commonwealth Bank has 110 banking offices of which 23 are leased and 87 are owned. We also lease two loan
production office.
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 current plans to lease, purchase or construct additional administrative
facilities.
(cid:44)(cid:55)(cid:40)M (cid:22)(cid:17)
(cid:47)egal (cid:51)ro(cid:70)ee(cid:71)(cid:76)ngs
The information required by this Item is set forth in Part II, Item 8, Note 24, “Contingent Liabilities,” which is incorporated
herein by reference in response to this item.
(cid:44)(cid:55)(cid:40)M (cid:23)(cid:17)
M(cid:76)ne Sa(cid:73)et(cid:92) (cid:39)(cid:76)s(cid:70)los(cid:88)res
Not applicable
13
(cid:40)(cid:91)e(cid:70)(cid:88)t(cid:76)(cid:89)e (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)ers o(cid:73) F(cid:76)rst (cid:38)o(cid:80)(cid:80)onwealth F(cid:76)nan(cid:70)(cid:76)al (cid:38)or(cid:83)orat(cid:76)on
The name, age and principal occupation for each of the executive officers of First Commonwealth Financial Corporation as of
December 31, 2013 is set forth below:
I. Robert Emmerich, age 63, has served as Executive Vice President and Chief Credit Officer of First Commonwealth Bank
since 2009. Prior to joining First Commonwealth, Mr. Emmerich was retired from a 31-year career at National City
Corporation, where he most recently served as Executive Vice President & Chief Credit Officer for Consumer Lending.
Jane Grebenc, age 55, has served as Executive Vice President and Chief Revenue Officer of First Commonwealth Financial
Corporation and President of First Commonwealth Bank since May 31, 2013. Ms. Grebenc's financial services career includes
executive leadership roles at a variety of institutions, including Park View Federal Savings Bank, Key Bank, and National City
Bank. She was formerly the Executive Vice President in charge of the retail, marketing, IT and operations and the mortgage
segments at Park View Federal Savings Bank from 2009 until 2012, the Executive Vice President in charge of the Wealth
Segment at Key Bank from 2007 until 2009 and the Executive Vice President / Branch Network at National City Bank prior to
2007.
Leonard V. Lombardi, age 54, has served as Executive Vice President and Chief Audit Executive of First Commonwealth
Financial Corporation since January 1, 2009. He was formerly Senior Vice President / Loan Review and Audit Manager.
Norman J. Montgomery, age 46, has served as the Executive Vice President of Business Integration of First Commonwealth
Bank since May 2011. He oversees First Commonwealth’s product development and business analysis functions and assumed
oversight of First Commonwealth’s technology and operations functions in July 2012. He served as Senior Vice President/
Business Integration of First Commonwealth Bank from September 2007 until May 2011 and previously held positions in the
technology, operations, audit and marketing areas.
T. Michael Price, age 51, has served as President of First Commonwealth Bank since November 2007. On March 7, 2012, he
began serving as President and Chief Executive Officer of First Commonwealth Financial Corporation. From January 1, 2012
to March 7, 2012, he served as Interim President and Chief Executive Officer of First Commonwealth Financial Corporation.
He was formerly Chief Executive Officer of the Cincinnati and Northern Kentucky Region of National City Bank from July
2004 to November 2007 and Executive Vice President and Head of Small Business Banking of National City Bank prior to July
2004.
Carrie L. Riggle, age 44, has served as Executive Vice President / Human Resources since March 1, 2013. Ms. Riggle has been
with First Commonwealth for more than 20 years. Over the course of her tenure, Ms. Riggle has been responsible for the daily
operations of the Human Resources function and was actively involved in the establishment and development of a centralized
corporate human resources function within the Company.
Robert E. Rout, age 62, joined First Commonwealth Financial Corporation as Executive Vice President and Chief Financial
Officer in February 2010. Prior to joining First Commonwealth, Mr. Rout served as Chief Financial Officer and Secretary for
S&T Bancorp, Inc. in Indiana, PA, since 1999 and as Chief Administrative Officer of S&T Bancorp, Inc. since April 2008. On
November 27, 2013, Mr. Rout notified the Company of his intention to retire during the first half of 2014.
Matthew C. Tomb, age 37, has served as Executive Vice President, Chief Risk Officer and General Counsel of First
Commonwealth Financial Corporation since November 2010. He previously served as Senior Vice President / Legal and
Compliance since September 2007. Before joining First Commonwealth, Mr. Tomb practiced law with Sherman & Howard
L.L.C. in Denver, Colorado.
14
(cid:51)A(cid:53)(cid:55) (cid:44)(cid:44)
(cid:44)(cid:55)(cid:40)M (cid:24)(cid:17)
Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
Mar(cid:78)et (cid:73)or (cid:53)eg(cid:76)strant(cid:182)s (cid:38)o(cid:80)(cid:80)on (cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)(cid:15) (cid:53)elate(cid:71) Sto(cid:70)(cid:78)hol(cid:71)er Matters an(cid:71) (cid:44)ss(cid:88)er (cid:51)(cid:88)r(cid:70)hase o(cid:73) (cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
First Commonwealth is listed on the NYSE under the symbol “FCF.” As of December 31, 2013, there were approximately
7,300 holders of record of First Commonwealth’s common stock. The table below sets forth the high and low sales prices per
share and cash dividends declared per share for common stock of First Commonwealth for each quarter during the last two
fiscal years.
(cid:51)er(cid:76)o(cid:71)
(cid:21)(cid:19)(cid:20)(cid:22)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(cid:51)er(cid:76)o(cid:71)
(cid:21)(cid:19)(cid:20)(cid:21)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(cid:43)(cid:76)gh Sale
(cid:47)ow Sale
(cid:38)ash (cid:39)(cid:76)(cid:89)(cid:76)(cid:71)en(cid:71)s
(cid:51)er Share
$
$
$
7.73
7.49
8.09
9.36
(cid:43)(cid:76)gh Sale
(cid:47)ow Sale
$
6.68
6.73
7.55
7.30
$
$
7.03
6.79
7.31
7.49
5.47
5.73
6.67
5.92
0.05
0.06
0.06
0.06
(cid:38)ash (cid:39)(cid:76)(cid:89)(cid:76)(cid:71)en(cid:71)s
(cid:51)er Share
0.03
0.05
0.05
0.05
Federal and state regulations contain restrictions on the ability of First Commonwealth to pay dividends. For information
regarding restrictions on dividends, see Part I, Item 1 “Business—Supervision and Regulation—Restrictions on Dividends” and
Part II, Item 8, “Financial Statements and Supplementary Data—Note 26, Regulatory Restrictions and Capital Adequacy.” In
addition, under the terms of the capital securities issued by First Commonwealth Capital Trust I, II, and III, First
Commonwealth could not pay dividends on its common stock if First Commonwealth deferred payments on the junior
subordinated debt securities which provide the cash flow for the payments on the capital securities.
15
The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of
dividends) on First Commonwealth’s common stock to the KBW Regional Banking Index and the Russell 2000 Index. The
stock performance graph assumes $100 was invested on December 31, 2008, and the cumulative return is measured as of each
subsequent fiscal year end.
300
250
200
150
e
u
l
a
V
x
e
d
n
I
♦
100
50
0
12/31/08
Total Return Performance
♦
First Commonwealth Financial Corporation
Russell 2000
KBW Regional Banking Index
♦
♦
♦
♦
♦
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
(cid:44)n(cid:71)e(cid:91)
First Commonwealth Financial Corporation
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:19)(cid:27)
100.00
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:19)(cid:28)
38.43
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:19)
59.10
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)
44.86
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:21)
59.81
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:22)
79.74
Russell 2000
KBW Regional Banking Index
100.00
100.00
127.17
77.87
161.32
93.75
154.59
88.93
179.86
100.86
249.69
148.09
(cid:51)er(cid:76)o(cid:71) (cid:40)n(cid:71)(cid:76)ng
(cid:56)nreg(cid:76)stere(cid:71) Sales o(cid:73) (cid:40)(cid:84)(cid:88)(cid:76)t(cid:92) Se(cid:70)(cid:88)r(cid:76)t(cid:76)es an(cid:71) (cid:56)se o(cid:73) (cid:51)ro(cid:70)ee(cid:71)s
On June 19, 2012, the Company announced a share repurchase program through which the Board of Directors authorized
management to repurchase up to $50.0 million of the Company’s common stock. On January 29, 2013, an additional share
repurchase program was authorized for up to $25.0 million in shares of the Company’s common stock. The following table
details the amount of shares repurchased under this program during the fourth quarter of 2013:
Month (cid:40)n(cid:71)(cid:76)ng(cid:29)
October 31, 2013
November 30, 2013
December 31, 2013
Total
A(cid:89)erage (cid:51)r(cid:76)(cid:70)e
(cid:51)a(cid:76)(cid:71) (cid:83)er Share
(cid:11)or (cid:56)n(cid:76)t(cid:12)
(cid:55)otal (cid:49)(cid:88)(cid:80)(cid:69)er o(cid:73)
Shares (cid:51)(cid:88)r(cid:70)hase(cid:71)
as (cid:51)art o(cid:73) (cid:51)(cid:88)(cid:69)l(cid:76)(cid:70)l(cid:92)
Anno(cid:88)n(cid:70)e(cid:71) (cid:51)lans
or (cid:51)rogra(cid:80)s
Ma(cid:91)(cid:76)(cid:80)(cid:88)(cid:80) (cid:49)(cid:88)(cid:80)(cid:69)er
o(cid:73) Shares that
Ma(cid:92) (cid:60)et (cid:37)e
(cid:51)(cid:88)r(cid:70)hase(cid:71) (cid:56)n(cid:71)er
the (cid:51)lans or
(cid:51)rogra(cid:80)s (cid:13)
7.52
—
—
7.52
294,550
—
—
294,550
619,392
575,055
610,262
(cid:55)otal (cid:49)(cid:88)(cid:80)(cid:69)er o(cid:73)
Shares (cid:51)(cid:88)r(cid:70)hase(cid:71)
294,550
$
—
—
294,550
$
*
common stock of $8.69 at October 31, 2013, $9.36 at November 30, 2013 and $8.82 at December 31, 2013.
Remaining number of shares approved under the Plan is estimated based on the market value of the Company’s
16
(cid:44)(cid:55)(cid:40)M (cid:25)(cid:17)
Sele(cid:70)te(cid:71) F(cid:76)nan(cid:70)(cid:76)al (cid:39)ata
The following selected financial data is not covered by the auditor’s report and should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the
Consolidated Financial Statements and related notes.
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
for credit losses
Net impairment losses
Net securities (losses) gains
Other income
Other expenses
Income (loss) before income taxes
Income tax provision (benefit)
Net Income (Loss)
(cid:51)er Share (cid:39)ata(cid:178)(cid:37)as(cid:76)(cid:70)
Net Income (Loss)
Dividends declared
Average shares outstanding
(cid:51)er Share (cid:39)ata(cid:178)(cid:39)(cid:76)l(cid:88)te(cid:71)
Net Income (Loss)
(cid:51)er(cid:76)o(cid:71)s (cid:40)n(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:21)(cid:19)(cid:20)(cid:19)
(cid:21)(cid:19)(cid:19)(cid:28)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t share (cid:71)ata(cid:12)
$
206,358
$
219,075
$
231,545
$
268,360
$
293,281
21,707
184,651
19,227
30,146
188,929
20,544
41,678
189,867
55,816
165,424
168,385
134,051
—
(1,158)
61,321
168,824
56,763
15,281
41,482
0.43
0.23
$
$
$
—
192
65,242
177,207
56,612
14,658
41,954
0.40
0.18
—
2,185
55,484
176,826
14,894
(380)
15,274
0.15
0.12
$
$
$
$
$
$
61,599
206,761
61,552
145,209
(9,193)
2,422
56,005
171,226
23,217
239
22,978
0.25
0.06
86,771
206,510
100,569
105,941
(36,185)
273
55,237
171,151
(45,885)
(25,821)
(20,064)
(0.24)
0.18
$
$
$
97,028,157
103,885,396
104,700,227
93,197,225
84,589,780
0.43
$
0.40
$
0.15
$
0.25
$
(0.24)
$
$
$
$
Average shares outstanding
97,029,832
103,885,663
104,700,393
93,199,773
84,589,780
At (cid:40)n(cid:71) o(cid:73) (cid:51)er(cid:76)o(cid:71)
Total assets
Investment securities
Loans and leases, net of unearned
income
Allowance for credit losses
Deposits
Short-term borrowings
Subordinated debentures
Other long-term debt
Shareholders’ equity
(cid:46)e(cid:92) (cid:53)at(cid:76)os
Return on average assets
Return on average equity
Net loans to deposits ratio
Dividends per share as a percent of
net income per share
Average equity to average assets ratio
$ 6,214,861
$ 5,995,390
$ 5,841,122
$ 5,812,842
$ 6,446,293
1,353,809
1,199,531
1,182,572
1,016,574
1,222,045
4,283,833
4,204,704
4,057,055
4,218,083
4,636,501
54,225
67,187
61,234
71,229
81,639
4,603,863
4,557,881
4,504,684
4,617,852
4,535,785
626,615
72,167
144,385
711,697
356,227
105,750
174,471
746,007
312,777
105,750
101,664
758,543
187,861
105,750
98,748
749,777
958,932
105,750
168,697
638,811
0.68%
0.71%
0.27%
0.37%
5.70
91.87
53.49
11.87
5.46
90.78
44.57
12.95
2.00
88.70
82.26
13.33
3.33
89.80
23.72
11.26
(0.31)%
(3.06)
100.42
NA
10.16
17
(cid:44)(cid:55)(cid:40)M (cid:26)(cid:17)
Manage(cid:80)ent(cid:182)s (cid:39)(cid:76)s(cid:70)(cid:88)ss(cid:76)on an(cid:71) Anal(cid:92)s(cid:76)s o(cid:73) F(cid:76)nan(cid:70)(cid:76)al (cid:38)on(cid:71)(cid:76)t(cid:76)on an(cid:71) (cid:53)es(cid:88)lts o(cid:73) (cid:50)(cid:83)erat(cid:76)ons
The following discussion and analysis represents an overview of the financial condition and the results of operations of First
Commonwealth and its subsidiaries, FCB, First Commonwealth Insurance Agency, Inc. (“FCIA”) and First Commonwealth
Financial Advisors, Inc. (“FCFA”), as of and for the years ended December 31, 2013, 2012 and 2011. 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 clear understanding of this discussion, you should refer to the
Consolidated Financial Statements, the notes thereto and other financial information presented in this Annual Report.
(cid:38)o(cid:80)(cid:83)an(cid:92) (cid:50)(cid:89)er(cid:89)(cid:76)ew
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 FCFA and insurance products through FCIA. At
December 31, 2013, FCB operated 110 community banking offices throughout western Pennsylvania and one loan production
office in downtown Pittsburgh, Pennsylvania.
Our consumer services include Internet, mobile and telephone banking, an automated teller machine network, personal
checking accounts, interest-earning checking accounts, savings accounts, insured money market accounts, debit cards,
investment certificates, fixed and variable rate certificates of deposit, secured and unsecured installment loans, construction and
real estate loans, safe deposit facilities, 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, 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 central and western
Pennsylvania.
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 through sales of
assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses on loans, loss
on sale or other-than-temporary impairments on investment securities, operating expenses and income taxes.
General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan
growth, and impacting the credit strength of existing and potential borrowers.
(cid:38)r(cid:76)t(cid:76)(cid:70)al A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng (cid:51)ol(cid:76)(cid:70)(cid:76)es an(cid:71) S(cid:76)gn(cid:76)(cid:73)(cid:76)(cid:70)ant A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng (cid:40)st(cid:76)(cid:80)ates
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, fair value of financial
instruments, goodwill and other intangible assets, and income taxes to be critical because they are 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 probable losses that are inherent 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 probable estimated losses. Management determines and reviews with
the Board of Directors the adequacy of the allowance on a quarterly basis in accordance with the methodology described below.
18
•
Individual loans are selected for review in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 310, “Receivables.” 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 in step one are “impaired,” which means that it is probable 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.
•
For impaired 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 select pools of homogenous smaller balance loans having similar risk characteristics as well as unimpaired
larger commercial loans for evaluation collectively under the provisions of FASB ASC Topic 450, “Contingencies.”
These smaller balance loans generally include residential mortgages, consumer loans, installment loans and some
commercial loans.
•
FASB ASC Topic 450 loans are segmented into groups with similar characteristics and an allowance for credit losses is
allocated to each segment based on recent loss history and other relevant information.
• 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 impaired loans, estimated losses for each loan category based on historical loss experience by category using an eight
to twenty quarter average, and consideration of current 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. The loan portfolio represents
the largest asset category on our Consolidated Statements of Financial Condition.
Fair Values of Financial Instruments
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair value. In
accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair
value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value.
Level 1 valuations are obtained from readily available pricing sources for market transactions involving identical assets or
liabilities. Level 2 valuations are for instruments that trade in less active dealer or broker markets and incorporates values
obtained for identical or comparable instruments. Level 3 valuations are derived from other valuation methodologies, including
option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker
traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to
each instrument.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. Management
validates the market values provided by the third party service by having another recognized pricing service price 100% of
securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period
pricing and on a monthly basis evaluating pricing changes compared to expectations based on changes in the financial markets.
Level 3 investments include pooled trust preferred collateralized debt obligations. The fair values of these investments are
determined by a specialized third party valuation service. Management validates the fair value of the pooled trust preferred
collateralized debt obligations by monitoring the performance of the underlying collateral, discussing the discount rate, cash
flow assumptions and general market trends with the specialized third party and by confirming changes in the underlying
collateral to the trustee and underwriter reports. Management’s monitoring of the underlying collateral includes deferrals of
interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings or actions and
general news related to the underlying collateral. Management also evaluates fair value changes compared to expectations
based on changes in the interest rates used in determining the discount rate and general financial markets.
Methodologies and estimates used by management when determining the fair value for pooled trust preferred collateralized
debt obligations and testing those securities for other-than-temporary impairment are discussed in detail in Management’s
19
Discussion and Analysis of Financial Condition and Results of Operations and in Note 9 “Impairment of Investment Securities”
and Note 19 “Fair Values of Assets and Liabilities” of Notes to the Consolidated Financial Statements.
Goodwill and Other Intangible Assets
We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions or
judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As
a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of
operations.
The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or
provided by other third-party sources, when available. When third-party information was not available, estimates were made in
good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were
used in the cash flow modeling were subjective and are susceptible to significant changes.
Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually and written down
and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. Intangible
assets that have finite useful lives will continue to be amortized over their useful lives and are periodically evaluated for
impairment.
As of December 31, 2013, goodwill and other intangible assets were not considered impaired; however, changing economic
conditions that may adversely affect our performance and stock price could result in impairment, which could adversely affect
earnings in future periods. Our Step 1 goodwill impairment analysis as of November 30, 2013, determined that the fair value of
our goodwill exceeded its carrying value by approximately 30%. An assessment of qualitative factors was completed as of
December 31, 2013 and indicated that it is more likely than not that our fair value exceeded its carrying value.
Income Taxes
We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. On
a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount
and components of net income, tax credits and the applicable statutory tax rates expected for the full year.
Deferred income tax assets and liabilities are determined using the asset and liability method and are reported in the
Consolidated Statements of Financial Condition. Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax
assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to
be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Management assesses all available positive and negative evidence on a quarterly basis to estimate if sufficient future taxable
income will be generated to utilize the existing deferred tax assets. The amount of future taxable income used in management’s
valuation is based upon management approved forecasts, evaluation of historical earnings levels, proven ability to raise capital
to support growth or during times of economic stress and consideration of prudent and feasible potential tax strategies. If future
events differ from our current forecasts, a valuation allowance may be required, which could have a material impact on our
financial condition and results of operations.
Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other liabilities in the
Consolidated Statements of Financial Condition. Management evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information
and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued
taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by
taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect
deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to our operating
results.
(cid:53)es(cid:88)lts o(cid:73) (cid:50)(cid:83)erat(cid:76)ons(cid:178)(cid:21)(cid:19)(cid:20)(cid:22) (cid:38)o(cid:80)(cid:83)are(cid:71) to (cid:21)(cid:19)(cid:20)(cid:21)
Net Income
Net income for 2013 was $41.5 million, or $0.43 per diluted share, as compared to net income of $42.0 million, or $0.40 per
diluted share, in 2012. Net income in 2013 was positively impacted by improvements in the credit quality of our loan portfolio
as losses on the sale or write-down of assets decreased $6.3 million and collection and repossession expenses decreased $1.9
million. Additionally, operational losses decreased $3.3 million during 2013. Offsetting these positives were $2.6 million in
technology related conversion expenses, $1.2 million in net securities losses and a $4.3 million decrease in net interest income.
20
Our return on average equity was 5.7% and return on average assets was 0.68% for 2013, compared to 5.5% and 0.71%,
respectively, for 2012.
Average diluted shares for the year 2013 were 7% less than the comparable period in 2012 primarily due to the common stock
buyback programs that were authorized during 2013 and 2012.
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 pretaxable equivalent amounts based on the marginal corporate federal income tax rate of 35%. The
taxable equivalent adjustment to net interest income for 2013 was $4.1 million compared to $4.4 million in 2012. Net interest
income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at
75% and 74% for the years ended December 31, 2013 and 2012, respectively.
Net interest income, on a fully taxable equivalent basis, was $188.7 million for the year-ended December 31, 2013, a $4.6
million, or 2%, decrease compared to $193.3 million for the same period in 2012. The net interest margin, on a fully taxable
equivalent basis decreased 22 basis points, or 6%, to 3.39% in 2013 from 3.61% in 2012. 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 low interest rate environment and resulting decline in rates earned on interest-earning assets challenged the net interest
margin during the year-ended December 31, 2013. Yields and spreads on new loan volumes continued to experience
competitive pricing pressures in 2013, specifically home equity and indirect loans. Also contributing to lower yields on earning
assets is the runoff of existing assets which are earning higher interest rates than new volumes as well as growth in the
investment portfolio. Growth in earning assets has helped to offset the spread compression as average earning assets for the
year-ended December 31, 2013 increased $210.5 million, or 4%, compared to the comparable period in 2012. However,
approximately 58% of the growth in earning assets relates to the investment portfolio, which is earning approximately 180 basis
points less than the rate earned on growth in the loan portfolio. Investment portfolio purchases during 2013 have been
primarily in the mortgage-related assets with approximate durations of 36-48 months. The majority of these investments have
monthly principal payments which provide for reinvestment opportunities as interest rates rise. It is expected that the challenges
to the net interest margin will continue as $2.9 billion in interest-sensitive assets either reprice or mature over the next twelve
months.
The taxable equivalent yield on interest-earning assets was 3.79% for the year-ended December 31, 2013, a decrease of 39 basis
points from the 4.18% yield for the same period in 2012. This decline can be attributed to the repricing of our variable rate
assets in a declining interest rate environment as well as lower interest rates available on new investments and loans.
Reductions in the cost of interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets. The
cost of interest-bearing liabilities was 0.48% for the year-ended December 31, 2013, compared to 0.70% for the same period in
2012.
Comparing the year-ended December 31, 2013 with the same period in 2012, changes in interest rates negatively impacted net
interest income by $10.3 million. The lower yield on interest-earning assets adversely impacted net interest income by $20.4
million, while the decline in the cost of interest-bearing liabilities had a positive impact of $10.1 million. We have been able to
partially mitigate the impact of lower interest rates and the effect on net interest income through improving the mix of deposits
and borrowed funds, disciplined pricing strategies, loan growth and increasing our investment volumes within established
interest rate risk management guidelines. As part of these strategies, on April 1, 2013, the Company redeemed $32.5 million in
issued and outstanding 9.50% mandatorily redeemable capital securities issued by First Commonwealth Capital Trust I and
replaced these capital securities with lower cost funding alternatives.
While decreases in interest rates and yields compressed the net interest margin, increases in average interest-earning assets and
a lower cost of funds tempered the effect on net interest income. Changes in the volumes of interest-earning assets and interest-
bearing liabilities positively impacted net interest income by $5.7 million in the year-ended December 31, 2013 compared to the
same period in 2012. Higher levels of interest-earning assets resulted in an increase of $7.4 million in interest income, while
volume changes primarily attributed to short-term and long-term borrowings increased interest expense by $1.7 million.
Positively affecting net interest income was a $41.1 million increase in average net free funds at December 31, 2013 as
compared to December 31, 2012. 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
21
net free funds was a $66.1 million increase in average noninterest-bearing demand deposits as a result of marketing promotions
aimed at attracting new and retaining existing customers. Additionally, higher costing time deposits continue to mature and
reprice to lower costing certificates or other deposit alternatives. Average time deposits for the year-ended December 31, 2013
increased $16.9 million million, or 1%, compared to the comparable period in 2012, while the average rate paid on time
deposits decreased 42 basis points. The positive change in deposit mix is expected to continue as $750.7 million in certificates
of deposits either mature or reprice over the next twelve months.
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:
For the (cid:60)ears (cid:40)n(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Interest income per Consolidated Statements of Income
$
206,358
$
219,075
$
231,545
Adjustment to fully taxable equivalent basis
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
Interest expense
4,081
210,439
21,707
4,392
223,467
30,146
5,500
237,045
41,678
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
188,732
$
193,321
$
195,367
22
Loans, net of unearned
income (b)(c)
Total interest-earning assets
Noninterest-earning assets:
Cash
Allowance for credit losses
Other assets
Total noninterest-earning
assets
(cid:55)otal Assets
(cid:47)(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es an(cid:71) Sharehol(cid:71)ers(cid:182)
(cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
Interest-bearing liabilities:
Interest-bearing demand
deposits (d)
Savings deposits (d)
Time deposits
Short-term borrowings
Long-term debt
Total interest-bearing
liabilities
The following table provides information regarding the average balances and yields and rates on interest-earning assets and
interest-bearing liabilities for the periods ended December 31:
A(cid:89)erage (cid:37)alan(cid:70)e Sheets an(cid:71) (cid:49)et (cid:44)nterest Anal(cid:92)s(cid:76)s
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
A(cid:89)erage
(cid:37)alan(cid:70)e
(cid:44)n(cid:70)o(cid:80)e (cid:18)
(cid:40)(cid:91)(cid:83)ense (cid:11)a(cid:12)
(cid:60)(cid:76)el(cid:71)
or
(cid:53)ate
A(cid:89)erage
(cid:37)alan(cid:70)e
(cid:44)n(cid:70)o(cid:80)e (cid:18)
(cid:40)(cid:91)(cid:83)ense (cid:11)a(cid:12)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:60)(cid:76)el(cid:71)
or
(cid:53)ate
A(cid:89)erage
(cid:37)alan(cid:70)e
(cid:44)n(cid:70)o(cid:80)e (cid:18)
(cid:40)(cid:91)(cid:83)ense (cid:11)a(cid:12)
(cid:60)(cid:76)el(cid:71)
or
(cid:53)ate
Assets
Interest-earning assets:
Interest-bearing deposits with
banks
$
3,355
$
Tax-free investment securities (e)
83
7
6
Taxable investment securities
1,300,538
30,218
0.21% $
4,329
$
0.14% $
26,477
$
271
4,852
7.40
2.32
4.23
3.79
6
18
6.85
2.70
4.60
4.18
1,179,169
31,799
4,165,292
5,349,061
191,644
223,467
75,044
(65,279)
581,321
591,086
$ 5,940,147
64
328
0.24%
6.76
3.24
4.99
4.61
1,043,798
33,812
4,061,822
5,136,949
202,841
237,045
75,071
(76,814)
593,248
591,505
$ 5,728,454
4,255,593
5,559,569
180,208
210,439
71,930
(62,800)
563,283
572,413
$ 6,131,982
$
670,524
$
236
0.04% $
645,970
$
286
0.04% $
607,756
$
515
0.08%
1,942,323
1,154,984
478,388
233,483
2,962
12,398
1,262
4,849
0.15
1.07
0.26
2.08
1,921,417
1,138,112
402,196
202,598
4,233
16,935
1,070
7,622
0.22
1.49
0.27
3.76
1,877,321
1,343,281
182,864
184,185
7,252
25,729
728
7,454
0.39
1.92
0.40
4.05
4,479,702
21,707
0.48
4,310,293
30,146
0.70
4,195,407
41,678
0.99
Noninterest-bearing liabilities and
shareholders’ equity:
Noninterest-bearing demand
deposits (d)
Other liabilities
Shareholders’ equity
Total noninterest-bearing
funding sources
(cid:55)otal (cid:47)(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es an(cid:71)
Sharehol(cid:71)ers(cid:182) (cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:49)et (cid:44)nterest (cid:44)n(cid:70)o(cid:80)e an(cid:71) (cid:49)et (cid:60)(cid:76)el(cid:71)
on (cid:44)nterest(cid:16)(cid:40)arn(cid:76)ng Assets
876,111
48,335
727,834
1,652,280
$ 6,131,982
810,041
50,859
768,954
1,629,854
$ 5,940,147
720,005
49,163
763,879
1,533,047
$ 5,728,454
$
188,732
3.39%
$
193,321
3.61%
$
195,367
3.80%
Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
(a)
(b)
(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) Yield on tax-free investment securities calculated using fully taxable equivalent interest income of $6.18 thousand, $18.58 thousand and $328.01
thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
23
The following table sets forth certain information regarding changes in net interest income attributable to changes in the
volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated:
Anal(cid:92)s(cid:76)s o(cid:73) (cid:60)ear(cid:16)to(cid:16)(cid:60)ear (cid:38)hanges (cid:76)n (cid:49)et (cid:44)nterest (cid:44)n(cid:70)o(cid:80)e
(cid:21)(cid:19)(cid:20)(cid:22) (cid:38)hange (cid:73)ro(cid:80) (cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:21) (cid:38)hange (cid:73)ro(cid:80) (cid:21)(cid:19)(cid:20)(cid:20)
(cid:55)otal
(cid:38)hange
(cid:38)hange (cid:39)(cid:88)e
(cid:55)o (cid:57)ol(cid:88)(cid:80)e
(cid:38)hange (cid:39)(cid:88)e
(cid:55)o (cid:53)ate (cid:11)a(cid:12)
(cid:55)otal
(cid:38)hange
(cid:38)hange (cid:39)(cid:88)e
(cid:55)o (cid:57)ol(cid:88)(cid:80)e
(cid:38)hange (cid:39)(cid:88)e
(cid:55)o (cid:53)ate (cid:11)a(cid:12)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Interest-earning assets:
Interest-bearing deposits with
banks
Tax-free investment securities
Taxable investment securities
Loans
Total interest income (b)
Interest-bearing liabilities:
Interest-bearing demand
deposits
Savings deposits
Time deposits
Short-term borrowings
Long-term debt
Total interest expense
$
1
$
(12)
(1,581)
(11,436)
(13,028)
(50)
(1,271)
(4,537)
192
(2,773)
(8,439)
(1) $
(13)
3,277
4,154
7,417
2
$
1
(4,858)
(15,590)
(20,445)
(58) $
(310)
(2,013)
(11,197)
(13,578)
(53) $
(310)
4,386
5,163
9,186
(5)
—
(6,399)
(16,360)
(22,764)
10
46
251
206
1,161
1,674
(60)
(1,317)
(4,788)
(14)
(3,934)
(10,113)
(10,332) $
(229)
(3,019)
(8,794)
342
168
(11,532)
(2,046) $
31
172
(3,939)
877
746
(2,113)
11,299
$
(260)
(3,191)
(4,855)
(535)
(578)
(9,419)
(13,345)
Net interest income
$
(4,589) $
5,743
$
(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 35% 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 allowance for credit
losses needed to absorb probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries
for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.
The table below provides a breakout of the provision for credit losses by loan category for the years ended December 31:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Unallocated
Total
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:39)ollars
(cid:51)er(cid:70)entage
(cid:39)ollars
(cid:51)er(cid:70)entage
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
20,755
(2,056)
2,369
(286)
4,371
(5,926)
19,227
108% $
(11)
12
(1)
23
(31)
100% $
6,416
5,191
1,077
3,921
2,849
1,090
31%
26
5
19
14
5
20,544
100%
The provision for credit losses for the year 2013 totaled $19.2 million million, a decrease of $1.3 million, or 6.41%, compared
to the year 2012. The majority of the 2013 provision expense, or $13.5 million of the $19.2 million, related to two commercial
borrowers. Deterioration in the value of certain assets of a local real estate developer, for which net equity is the expected
repayment source, resulted in provision expense of $10.4 million and a related charge-off of $13.1 million. In addition, two
non-accrual commercial real estate loans which were sold in the first quarter of 2013, required a combined charge-off and
related provision expense of $3.1 million. These two non-accrual loans were to the same borrower and relate to a $15.5 million
loan secured by an apartment building in eastern Pennsylvania and a $1.7 million loan secured by mixed use property in eastern
Pennsylvania.
24
As evidenced by the table above, the current year provision is largely the result of the commercial, financial, agricultural and
other portion of the portfolio. The primary reason for this increase is a $13.1 million charge-off taken due to deterioration in
the value of certain assets of a local real estate developer, for which net equity is our expected repayment source. Also, an
additional $1.6 million in specific reserves were recorded on a $12.7 million commercial industrial loan relationship with a
local energy company that was moved into nonaccrual status during 2013.
The negative provision expense for real estate construction loans can be attributed to a decline in the historical loss percentage
used to determine the appropriate level of allowance for credit losses for that category.
The provision related to loans to individuals can be largely attributed to the addition of a $1.2 million specific reserve related to
$6.9 million of consumer loans in nonaccrual status as well as net charge-offs of $3.0 million.
The negative $5.9 million provision for credit losses related to the unallocated portion of the allowance is a result of it no longer
being treated as a separate component of the allowance but instead is now incorporated into the reserve provided for each loan
category. This portion of the allowance for credit losses reflects the qualitative or environmental factors that are likely to cause
estimated credit losses to differ from historical loss experience.
The allowance for credit losses was $54.2 million, or 1.27%, of total loans outstanding at December 31, 2013, compared to
$67.2 million, or 1.60%, at December 31, 2012. Nonperforming loans as a percentage of total loans decreased to 1.39% at
December 31, 2013 from 2.56% at December 31, 2012. The allowance to nonperforming loan ratio was 91% as of
December 31, 2013 and 62% at December 31, 2012.
Net credit losses were $32.2 million for the year-ended December 31, 2013 compared to $14.6 million for the same period in
2012. The most significant credit losses recognized during the year-ended December 31, 2013, were the aforementioned $13.1
million charge-off, a $2.3 million charge-off of a loan to a local energy company, a $2.8 million charge-off taken on a loan to a
western Pennsylvania non-profit healthcare facility which was moved to OREO in the fourth quarter of 2013, and a $3.1 million
charge-off on two commercial real estate loans which were sold during the first quarter of 2013. These loans relate to a $15.5
million loan secured by an apartment building in eastern Pennsylvania and a $1.7 million loan secured by mixed use property in
eastern Pennsylvania.
The provision is a result of management’s assessment of credit quality statistics and other factors that would have an impact on
probable losses in the loan portfolio and the methodology used for determination of the adequacy of the allowance for credit
losses. The change in the allowance for credit losses is consistent with the decrease in estimated losses within the loan portfolio
determined by factors including certain loss events, portfolio migration analysis, historical loss experience, delinquency trends,
deterioration in collateral values and volatility in economic indicators such as the housing market, consumer price index,
vacancy rates and unemployment levels. Management believes that the allowance for credit losses is at a level deemed
sufficient to absorb losses inherent in the loan portfolio at December 31, 2013.
25
A detailed analysis of our credit loss experience for the previous five years is shown below:
Loans outstanding at end of year
Average loans outstanding
Balance, beginning of year
Loans charged off:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans charged off
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total recoveries
Net credit losses
Provision charged to expense
Balance, end of year
Ratios:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:21)(cid:19)(cid:20)(cid:19)
(cid:21)(cid:19)(cid:19)(cid:28)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
$
4,283,833
4,255,593
67,187
$
$
$
4,204,704
4,165,292
61,234
$
$
$
4,057,055
4,061,822
71,229
$
$
$
4,218,083
4,467,338
81,639
$
$
$
4,636,501
4,557,227
52,759
18,399
773
1,814
10,513
3,679
35,178
455
501
1,264
136
633
2,989
32,189
19,227
54,225
$
5,207
3,601
3,828
851
3,482
16,969
443
582
422
410
521
2,378
14,591
20,544
67,187
$
7,114
28,886
4,107
24,861
3,325
68,293
473
955
132
349
573
2,482
65,811
55,816
61,234
$
22,293
41,483
5,226
2,466
3,841
75,309
2,409
—
252
163
523
3,347
71,962
61,552
71,229
20,536
36,892
4,604
7,302
4,378
73,712
448
—
81
914
580
2,023
71,689
100,569
81,639
$
$
Net credit losses as a percentage of average
loans outstanding
Allowance for credit losses as a percentage of
end-of-period loans outstanding
0.76%
1.27%
0.35%
1.60%
1.62%
1.51%
1.61%
1.69%
1.57%
1.76%
Noninterest Income
The components of noninterest income for each year in the three-year period ended December 31 are as follows:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:7) (cid:38)hange
(cid:8) (cid:38)hange
(cid:21)(cid:19)(cid:20)(cid:22) (cid:70)o(cid:80)(cid:83)are(cid:71) to (cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:49)on(cid:76)nterest (cid:44)n(cid:70)o(cid:80)e(cid:29)
Trust income
Service charges on deposit accounts
Insurance and retail brokerage commissions
Income from bank owned life insurance
Card related interchange income
Other income
Subtotal
Net securities (losses) gains
Gain on sale of assets
Derivatives mark to market
$
6,166
$
6,206
$
6,498
$
15,652
6,005
5,539
13,746
10,632
57,740
(1,158)
2,153
1,428
14,743
6,272
5,850
13,199
13,610
59,880
192
4,607
755
14,775
6,376
5,596
11,968
12,803
58,016
2,185
4,155
(6,687)
57,669
$
(40)
909
(267)
(311)
547
(2,978)
(2,140)
(1,350)
(2,454)
673
(5,271)
(1)%
6
(4)
(5)
4
(22)
(4)
(703)
(53)
89
(8)%
Total noninterest income
$
60,163
$
65,434
$
Noninterest income, excluding net securities (losses) gains, gains on sale of assets and the derivatives mark to market
adjustment decreased $2.1 million, or 3.57%, in 2013, largely due to a decline in the other income category. This decrease can
be attributed to a $1.9 million joint venture termination fee received in 2012 from the dissolution of a mortgage banking joint
26
venture with another financial institution. In 2014, the Company will reenter the mortgage banking business by establishing its
own residential mortgage division. Also contributing to the decline in other income category is a $1.0 million decrease in
income from other real estate owed due to rental income received in 2012 from a western Pennsylvania office complex
foreclosed on in 2011 and sold in March 2012. Increases in service charges on deposits and card related interchange income
can be attributed to growth in the number of deposit customers as well as continued increases in electronic payments by our
customers.
Total noninterest income decreased $5.3 million or 8% in comparison to the year ended 2012. The most notable change
includes a $2.5 million decrease in the gain on sale of assets. The higher level of gains in 2012 is primarily the result of a $2.9
million gain recognized on the sale of two commercial real estate loans compared to gains of $0.6 million recognized on the
sale of loans during 2013. Loans were sold in both years in an effort to decrease total nonperforming loans and criticized
assets.
Comparing the year 2013 to the year 2012, net securities (losses) gains decreased $1.4 million. This change is primarily the
result of a $1.3 million loss recognized on the early redemption of one of our pooled trust preferred securities. This security was
called when the senior note holders elected to liquidate all assets of the trust, resulting in losses for the mezzanine notes owned
by the Company.
Noninterest Expense
The components of noninterest expense for each year in the three-year period ended December 31 are as follows:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:7) (cid:38)hange
(cid:8) (cid:38)hange
(cid:21)(cid:19)(cid:20)(cid:22) (cid:38)o(cid:80)(cid:83)are(cid:71) to (cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:49)on(cid:76)nterest (cid:40)(cid:91)(cid:83)ense(cid:29)
Salaries and employee benefits
$
86,012
$
86,069
$
84,669
$
Net occupancy expense
Furniture and equipment expense
Data processing expense
Pennsylvania shares tax expense
Intangible amortization
Collection and repossession expense
Other professional fees and services
FDIC insurance
Other operating expenses
Subtotal
Loss on sale or write-down of assets
Operational losses
Loss on early redemption of
subordinated debt
Conversion related expenses
13,607
15,118
6,009
5,638
1,064
3,836
3,731
4,366
23,057
162,438
1,054
1,115
1,629
2,588
13,255
12,460
7,054
5,706
1,467
5,756
4,329
5,032
24,318
165,446
7,394
4,367
—
—
14,069
12,517
6,027
5,480
1,534
7,583
5,297
5,490
23,953
166,619
9,428
779
—
—
Total noninterest expense
$
168,824
$
177,207
$
176,826
$
(57)
352
2,658
(1,045)
(68)
(403)
(1,920)
(598)
(666)
(1,261)
(3,008)
(6,340)
(3,252)
1,629
2,588
(8,383)
— %
3
21
(15)
(1)
(27)
(33)
(14)
(13)
(5)
(2)
(86)
(74)
100
100
(5)%
Total noninterest expense for the year 2013 decreased $8.4 million in comparison to the year 2012, largely due to improvements
in the credit quality of our loan portfolio, cost saving initiatives and a decline in operational losses. Improvements in the level
of noninterest expenses in 2013 were partially offset by $4.6 million in technology conversion charges and a $1.6 million loss
on the early redemption of subordinated debt.
Salaries and employee benefit expense remained flat compared to 2012, despite a $1.8 million increase in hospitalization
expense, largely due to continued cost savings initiatives.
Collection and repossession expenses and loss on sale or write-down of assets declined $1.9 million and $6.3 million,
respectively. The decrease in both items is largely attributable to the resolution of several large credits during 2013 and
improvements in the credit quality of the loan portfolio.
Data processing expense decreased $1.0 million as a result of a 2013 change in vendors which provided savings of $0.9 million
in ATM/debit card related expenses.
27
Other operating expenses decreased during 2013 largely due to a $1.1 million decline in advertising expense resulting from cost
savings initiatives implemented during the year.
Operational losses decreased $3.3 million in 2013 due to a $3.5 million fraud loss recognized in 2012.
As a result of the April 1, 2013 early redemption of $32.5 million in redeemable capital securities issued by First
Commonwealth Capital Trust I, a loss of $1.6 million was recognized. This loss includes a $1.1 million prepayment penalty and
$0.5 million of unamortized deferred issuance costs.
On September 30, 2013, First Commonwealth executed a contract with Jack Henry and Associates to license the Jack Henry
and Associates SilverLake System core processing software and to outsource certain data processing services. A system
conversion is expected to occur during the third quarter of 2014. First Commonwealth will incur approximately $12.0 million
of costs related to accelerated depreciation for data processing hardware and software, early termination charges on existing
contracts and staffing and employee-related charges. The Company expects to achieve $6.0 to $8.0 million in lower annual
technology related expenses as well as employment and other operational expenses as a result of the conversion. Accelerated
depreciation for hardware and software to be replaced in the conversion is the primary cause of the $2.7 million increase in
furniture and equipment expense. Conversion related expenses of $2.6 million recognized in 2013 include early termination
charges on existing contracts and staffing and employment-related charges.
Income Tax
The provision for income taxes of $15.3 million in 2013 is comparable to the provision for income taxes of $14.7 million in
2012 mostly due to the consistent level of pretax income of $56.8 million and $56.6 million for 2013 and 2012, respectively.
The effective tax rate was 27% and 26% for tax expense in 2013 and 2012. We ordinarily generate an annual effective tax rate
that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank owned life
insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level
of pretax income. The consistent level of tax benefits that reduce our tax rate below the 35% statutory rate and the relatively
low level of annual pretax income produced a low effective tax rate for 2013 and 2012.
F(cid:76)nan(cid:70)(cid:76)al (cid:38)on(cid:71)(cid:76)t(cid:76)on
First Commonwealth’s total assets increased by $219.5 million in 2013. Loans increased $79.1 million, or 2%, and investments
increased $147.1 million, or 13%. Factors impacting loan growth include underwriting guidelines which limit geography and
size for commercial loans, our goal to manage down large credit relationships, generally weak borrower demand and expected
declines in the 1-4 family mortgage loan portfolio. Underwriting guidelines provide little flexibility on exceptions and robust
monitoring of loan to value, cash flow coverage, debt/equity and other credit quality measurement tools. Geographic limitations
include restricting consumer and small business loans to Pennsylvania counties in which First Commonwealth has a branch or
loan production office presence; commercial real estate and commercial loan markets were prescribed within a 250 mile radius
of First Commonwealth’s headquarters location in Indiana, Pennsylvania. Commercial and industrial loan syndications are
unlimited geographically in the United States for select, high quality industry segments in which we have expertise. First
Commonwealth has a $200 million limit for out of market syndications.
First Commonwealth implemented a strategic decision in 2005 to exit the residential mortgage business, satisfying customer
requests for these loans through a joint venture or home equity loans. As a result, the residential mortgage portfolio has declined
approximately $40 million in 2013 from regularly scheduled repayments and payoffs. In 2012, the mortgage banking joint
venture was terminated and in 2013 the Company announced plans to reenter the residential mortgage business. It is expected
that the mortgage banking division will begin accepting applications in the second half of 2014.
During 2013, approximately $356.7 million in investment securities were called or matured. These securities were higher
yielding securities and contributed to the decline in yield earned on the portfolio. As a result, $409.3 million in asset-backed
securities and $130.6 million in agency securities were purchased in 2013 to help increase earnings from the portfolio with a
reduced risk profile.
First Commonwealth’s total liabilities increased $253.8 million, or 5%, in 2013. Deposit growth of $46.0 million, or 1%, was
augmented by an increase in short-term borrowings of $270.4 million, or 76% and offset by a decrease in long-term debt of
$63.7 million million, or 23%.
We periodically utilize short-term and long-term borrowings to fund the origination of new loans as well as the purchase of
investments. In 2013, $32.5 million in 9.50% debt issued by First Commonwealth Capital Trust I was redeemed and replaced
28
with lower cost funding alternatives. The decrease in interest paid on borrowings as well as lower rates being paid on deposits
has helped to mitigate the contracting pressure on the net interest yield on interest-earning assets and interest-bearing liabilities.
Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:21)(cid:19)(cid:20)(cid:19)
(cid:21)(cid:19)(cid:19)(cid:28)
A(cid:80)o(cid:88)nt
(cid:8)
A(cid:80)o(cid:88)nt
(cid:8)
A(cid:80)o(cid:88)nt
(cid:8)
A(cid:80)o(cid:88)nt
(cid:8)
A(cid:80)o(cid:88)nt
(cid:8)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$ 1,021,056
24% $ 1,019,822
24% $
996,739
25% $
913,814
22% $ 1,127,320
25%
93,289
1,262,718
1,296,472
610,298
2
30
30
14
87,438
1,241,565
1,273,661
582,218
2
30
30
14
76,564
1,137,059
1,267,432
565,849
2
28
31
14
261,482
1,127,273
1,354,074
561,440
6
27
32
13
428,744
1,202,386
1,320,715
557,336
9
26
28
12
$ 4,283,833
100% $ 4,204,704
100% $ 4,043,643
100% $ 4,218,083
100% $ 4,636,501
100%
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans and
leases net of
unearned income
The loan portfolio totaled $4.3 billion as of December 31, 2013, reflecting growth of $79.1 million or 2% compared to
December 31, 2012. Loan growth was experienced in all categories, with the majority being recognized in the loans to
individuals category as a result of growth in indirect auto lending. Additionally, the residential real estate portfolio increased
due to the success of our installment home equity product. Increases in commercial, financial, agricultural and other portfolio
can be attributed to growth in direct middle market lending and syndications in Pennsylvania and contiguous states.
The majority of our loan portfolio is with borrowers located in Pennsylvania. During the fourth quarter of 2013, the Company
expanded into the Ohio market area with the opening of a loan production office in Cleveland, Ohio. As of December 31, 2013
and 2012, there were no concentrations of loans relating to any industry in excess of 10% of total loans.
The credit quality of loan portfolio continued to improve during 2013 with decreases in the level of criticized assets,
delinquency and nonaccrual loans. As of December 31, 2013, criticized loans or loans designated OAEM, substandard,
impaired or doubtful decreased $126.1 million, or 44%, from December 31, 2012. Criticized loans totaled $162.4 million at
December 31, 2013 and represented 4% of the total loan portfolio. Additionally, delinquency on accruing loans decreased $8.8
million, or 40%, at December 31, 2013 compared to December 31, 2012. As of December 31, 2013, nonaccrual loans
decreased $48.6 million, or 51%, compared to December 31, 2012.
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at
December 31, 2013 were as follows:
Commercial, financial, agricultural and other
Real estate construction (a)
Commercial real estate
Other
Totals
Loans at fixed interest rates
Loans at variable interest rates
Totals
$
$
(cid:58)(cid:76)th(cid:76)n
(cid:50)ne (cid:60)ear
(cid:50)ne to
(cid:24) (cid:60)ears
A(cid:73)ter
(cid:24) (cid:60)ears
75,131
$
3,105
90,613
19,781
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
641,181
$
206,617
31,045
89,522
5,169
59,139
1,116,337
73,177
$
(cid:55)otal
922,929
93,289
1,296,472
98,127
188,630
$
766,917
$
1,455,270
$
2,410,817
33,362
733,555
369,290
1,085,980
$
766,917
$
1,455,270
(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 regulatory established legal lending limit of $95.6 million to any one borrower or closely related
group of borrowers, but has established lower thresholds for credit risk management.
29
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. A loan is 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, except for consumer loans which are placed in nonaccrual status at 150 days past due. 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 probable
risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the
present value of projected future cash flows. Losses are recognized when a loss is probable and the amount is reasonably
estimable.
The following is a comparison of nonperforming and impaired assets and the effects on interest due to nonaccrual loans for the
period ended December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:21)(cid:19)(cid:20)(cid:19)
(cid:21)(cid:19)(cid:19)(cid:28)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Nonperforming Loans:
Loans on nonaccrual basis
$
28,908
$
43,539
$
Loans held for sale on nonaccrual basis
Troubled debt restructured loans on
nonaccrual basis
Troubled debt restructured loans on
accrual basis
Total nonperforming loans
Loans past due in excess of 90 days and
still accruing
Other real estate owned
$
$
$
—
16,980
13,495
59,383
2,505
11,728
$
$
$
—
50,979
13,037
107,555
2,447
11,262
$
$
$
33,635
13,412
44,841
20,276
112,164
11,015
30,035
$
84,741
$
147,937
—
31,410
1,336
117,487
13,203
24,700
$
$
$
—
—
619
148,556
15,154
24,287
$
$
$
Loans outstanding at end of period
$ 4,283,833
$ 4,204,704
$ 4,057,055
$ 4,218,083
$ 4,636,501
Average loans outstanding
$ 4,255,593
$ 4,165,292
$ 4,061,822
$ 4,467,338
$ 4,557,227
Nonperforming loans as a percentage of
total loans
Provision for credit losses
Allowance for credit losses
Net charge-offs
Net charge-offs as a percentage of
average loans outstanding
Provision for credit losses as a
percentage of net charge-offs
Allowance for credit losses as a
percentage of end-of-period loans
outstanding (a)
Allowance for credit losses as a
percentage of nonperforming loans (a)
Gross income that would have been
recorded at original rates
Interest that was reflected in income
Net reduction to interest income due to
nonaccrual
$
$
$
$
$
1.39%
2.56%
2.76%
2.79%
3.20%
19,227
54,225
32,189
$
$
$
20,544
67,187
14,591
$
$
$
55,816
61,234
65,811
$
$
$
61,552
71,229
71,962
$
$
$
100,569
81,639
71,689
0.76%
0.35%
1.62%
1.61%
1.57%
59.73%
140.80%
84.81%
85.53%
140.29%
1.27%
1.60%
1.51%
1.69%
1.76%
91.31%
62.47%
62.01%
60.63%
54.96%
7,920
679
7,241
$
$
15,036
369
14,667
$
$
14,872
1,393
13,479
$
$
13,142
30
13,112
$
$
7,645
13
7,632
(a) End of period loans and nonperforming loans exclude loans held for sale.
30
Nonperforming loans decreased $48.2 million to $59.4 million at December 31, 2013 compared to $107.6 million at
December 31, 2012. The nonperforming loans as a percentage of total loans decreased to 1.4% from 2.6% at December 31,
2013 compared to December 31, 2012. Other real estate owned totaled $11.7 million at December 31, 2013 compared to $11.3
million at December 31, 2012.
Also included in nonperforming loans are troubled debt restructured loans (“TDR’s”). TDR’s 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. The $33.5 million decrease in TDR’s during 2013 is primarily the result
of a $13.1 million charge-off on a loan relationship with a local real estate developer and the sale of $17.2 million of loans
secured by commercial real estate in eastern Pennsylvania. For additional information on TDR’s please refer to Note 10 “Loans
and Allowance for Credit Losses.”
Net credit losses were $32.2 million in 2013 compared to $14.6 million for the year 2012. The most significant credit losses
recognized during the year were a $13.1 million charge-off taken on a loan relationship with a local real estate developer, a $2.8
million charge-off taken on a loan to a western Pennsylvania non-profit healthcare facility that was moved to OREO in the
fourth quarter of 2013, a $2.5 million charge-off for a western Pennsylvania student housing project that paid off during the
third quarter of 2013, and a $2.3 million charge-off taken on a loan to a local energy company. 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" and "Allowance for Credit Losses."
Provision for credit losses as a percentage of net charge-offs decreased to 59.7% for the year ended December 31, 2013 from
140.8% for the year ended December 31, 2012, as a result of $13.0 million in charge-offs recorded in 2013 for four commercial
borrowers which were reserved for in prior periods.
Nonperforming Securities
The following is a comparison of nonperforming securities for the period ended December 31:
Nonperforming Securities:
Nonaccrual securities at market value
$
— $
— $
— $
15,823
$
3,258
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:22)
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:21)
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:19)
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:19)(cid:28)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Nonperforming securities at December 31, 2010 and 2009 were pooled trust preferred collateralied debt obligations. These
securities were returned to performing status in 2011 because of evidence supporting management’s estimate of future cash
flows indicating that all remaining principal and interest will be received. Support for these estimates include; no other-than-
temporary impairment charges since the third quarter of 2010, improvement in the underlying collateral of these bonds
evidenced by a reduced level of new interest payment deferrals and principal defaults as well as an increase in actual cures of
deferring collateral.
Allowance for Credit Losses
Following is a summary of the allocation of the allowance for credit losses at December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:21)(cid:19)(cid:20)(cid:19)
(cid:21)(cid:19)(cid:19)(cid:28)
Allowan(cid:70)e
A(cid:80)o(cid:88)nt
(cid:8)
(cid:11)a(cid:12)
Allowan(cid:70)e
A(cid:80)o(cid:88)nt
(cid:8)
(cid:11)a(cid:12)
Allowan(cid:70)e
A(cid:80)o(cid:88)nt
(cid:8)
(cid:11)a(cid:12)
Allowan(cid:70)e
A(cid:80)o(cid:88)nt
(cid:8)
(cid:11)a(cid:12)
Allowan(cid:70)e
A(cid:80)o(cid:88)nt
(cid:8)
(cid:11)a(cid:12)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$ 22,663
24% $ 19,852
24% $ 18,200
25% $ 21,700
22% $ 31,369
25%
6,600
7,727
11,778
5,457
2
30
30
14
— N/A
8,928
5,908
22,441
4,132
5,926
2
30
30
14
N/A
6,756
8,237
18,961
4,244
4,836
2
28
31
14
N/A
18,002
5,454
16,913
4,215
4,945
6
27
32
13
N/A
18,224
5,847
17,526
4,731
3,942
9
26
28
12
N/A
$ 54,225
$ 67,187
$ 61,234
$ 71,229
$ 81,639
1.27%
1.60%
1.51%
1.69%
1.76%
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Unallocated
(cid:55)otal
Allowance for credit losses
as percentage of end-of-
period loans outstanding
31
(a) Represents the ratio of loans in each category to total loans.
The allowance for credit losses decreased $13.0 million from December 31, 2012 to December 31, 2013 and the allowance for
credit losses as a percentage of end-of-period loans outstanding was 1.3% at December 31, 2013 compared to 1.6% at
December 31, 2012. The majority of the 2013 change in the allowance for credit losses, or $9.0 million of change, can be
attributed to specific reserves established for impaired loans. The allowance for credit losses includes both a general reserve for
performing loans and specific reserves for impaired loans. Comparing December 31, 2013 to December 31, 2012, the general
reserve for performing loans decreased from 1.19% to 1.05% of total performing loans. Specific reserves decreased from 16.5%
of nonperforming loans at December 31, 2012 to 14.9% of nonperforming loans at December 31, 2013. The decrease in specific
reserves held is a direct result of the $2.8 million decrease in specific reserves related to a commercial loan relationship with a
local real estate developer, a $2.4 million decrease due to the charge-off of a loan to a local energy company, a $2.8 million
decrease related to a western Pennsylvania non-profit health care facility which was moved to OREO in the fourth quarter of
2013 and a $2.5 million decrease related to a charge-off on a loan for a western Pennsylvania student housing project that paid
off in the third quarter of 2013. The allowance for credit losses as a percentage of nonperforming loans was 91% and 62% at
December 31, 2013 and 2012, respectively.
The allowance for credit losses represents management’s estimate of probable losses inherent in the loan portfolio at a specific
point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable 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 adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but
not limited to, assessment of historical loss experience, delinquency and nonaccrual trends, portfolio growth, net realizable
value of collateral and current economic conditions. 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.”
Management reviews local and national economic information and industry data, including the trends in the industries we
believe are indicative of higher risk to our portfolio. Factors reviewed by management include employment trends,
macroeconomic trends, commercial real estate trends and the overall lending environment. Based on this review, an allocation
is made to the allowance for credit and is reflected in the “unallocated” line of the previous table.
Investment Portfolio
Marketable securities that we hold in our investment portfolio, which are classified as “securities available for sale,” may be a
source of liquidity; however, we do not anticipate liquidating the investments prior to maturity. As indicated in Note 19 “Fair
Values of Assets and Liabilities,” $24.9 million of available for sale securities at December 31, 2013, are classified as Level 3
assets because of inactivity in the market.
Following is a detail schedule of the amortized cost of securities available for sale as of December 31:
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Corporate Securities
Pooled Trust Preferred Collateralized Debt Obligations
Total Debt Securities
Equities
Total Securities Available for Sale
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
22,639
$
27,883
$
32,139
1,009,519
104
267,971
80
6,693
42,040
839,102
148
241,970
82
6,703
51,866
771,196
193
267,807
444
11,811
54,762
1,349,046
1,167,754
1,138,352
1,420
1,859
1,860
$
1,350,466
$
1,169,613
$
1,140,212
As of December 31, 2013, securities available for sale had a fair value of $1.3 billion. Gross unrealized gains were $15.6
million and gross unrealized losses were $47.7 million.
32
The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2013.
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
(cid:56)(cid:17)S(cid:17)
(cid:42)o(cid:89)ern(cid:80)ent
Agen(cid:70)(cid:76)es an(cid:71)
(cid:38)or(cid:83)orat(cid:76)ons
$
33,051
$
259,837
82,702
924,643
$
1,300,233
$
States an(cid:71)
(cid:51)ol(cid:76)t(cid:76)(cid:70)al
S(cid:88)(cid:69)(cid:71)(cid:76)(cid:89)(cid:76)s(cid:76)ons
(cid:50)ther
Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
(cid:55)otal
A(cid:80)ort(cid:76)(cid:93)e(cid:71)
(cid:38)ost (cid:11)a(cid:12)
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:60)(cid:76)el(cid:71) (cid:11)(cid:69)(cid:12)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
80
—
—
—
80
$
$
— $
—
—
48,733
33,131
259,837
82,702
973,376
48,733
$
1,349,046
1.06%
1.21
3.28
2.31
2.13%
(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 thirteen years.
The amortized cost of the investment portfolio increased $180.9 million, or 15%, at December 31, 2013 compared to
December 31, 2012. All categories of investments decreased, except for Obligations of U.S. Government sponsored enterprises
which increased $196.4 million, or 18%. These securities were purchased in an effort to increase the earnings from investments
while keeping the risk of the portfolio at a lower level.
Our investment portfolio includes an amortized cost of $42.0 million in pooled trust preferred collateralized debt obligations at
December 31, 2013. The valuation of these securities involves evaluating relevant credit and structural aspects, determining
appropriate performance assumptions and performing a discounted cash flow analysis.
See Note 8 “Investment Securities,” Note 9 “Impairment of Investment Securities,” and Note 19 “Fair Values of Assets and
Liabilities” for additional information related to the investment portfolio.
Deposits
Total deposits increased $46.0 million, or 1%, in 2013, primarily due to growth in time deposits of $63.1 million. The change
in time deposits can be attributed to an increase of $180.9 million in deposits generated from the Certificate of Deposit Account
Registry Services program ("CDARS"), which provides a low cost alternative funding source.
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:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
A(cid:80)o(cid:88)nt
(cid:8)
A(cid:80)o(cid:88)nt
(cid:8)
A(cid:80)o(cid:88)nt
(cid:8)
3 months or less
$
234,295
51% $
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
103,102
32% $
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
85,573
60,739
84,077
18
13
18
58,680
31,863
128,798
18
10
40
76,356
43,299
50,296
151,213
24%
13
16
47
$
464,684
100% $
322,443
100% $
321,164
100%
Short-Term Borrowings and Long-Term Debt
Short-term borrowings increased $270.4 million, or 76%, from $356.2 million as of December 31, 2012 to $626.6 million at
December 31, 2013. Long-term debt decreased $63.7 million, or 23%, from $280.2 million at December 31, 2012 to $216.6
million at December 31, 2013. The change in both of these areas was to take advantage of attractive interest rates in the
wholesale funding markets as an alternative to certificates of deposit while paying off higher costing debt. For additional
information concerning our short-term borrowings, subordinated debentures and other long-term debt, please refer to Note 16
“Short-term Borrowings,” Note 17 “Subordinated Debentures” and Note 18 “Other Long-term Debt” of the Consolidated
Financial Statements.
33
Contractual Obligations and Off-Balance Sheet Arrangements
The table below sets forth our contractual obligations to make future payments as of December 31, 2013. For a more detailed
description of each category of obligation, refer to the note in our Consolidated Financial Statements indicated in the table
below.
FHLB advances
Subordinated debentures
Operating leases
Total contractual obligations
Footnote
(cid:49)(cid:88)(cid:80)(cid:69)er
(cid:53)e(cid:73)eren(cid:70)e
(cid:20) (cid:60)ear
or (cid:47)ess
A(cid:73)ter (cid:20)
(cid:37)(cid:88)t (cid:58)(cid:76)th(cid:76)n
(cid:22) (cid:60)ears
A(cid:73)ter (cid:22)
(cid:37)(cid:88)t (cid:58)(cid:76)th(cid:76)n
(cid:24) (cid:60)ears
A(cid:73)ter (cid:24)
(cid:60)ears
(cid:55)otal
18
17
13
$
$
57,892
$
—
3,409
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
80,360
$
833
$
5,300
$
144,385
—
6,019
—
5,167
72,167
14,916
72,167
29,511
61,301
$
86,379
$
6,000
$
92,383
$
246,063
The table above excludes unamortized premiums and discounts on FHLB advances because these premiums and discounts do
not represent future cash obligations. The table also excludes our cash obligations upon maturity of certificates of deposit,
which is set forth in Note 15 “Interest-Bearing Deposits” of the Consolidated Financial Statements.
In addition, see Note 12 “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, 2013. 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, 2013, a reserve for probable losses of $3.2 million was
recorded for unused commitments and letters of credit.
(cid:47)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)t(cid:92)
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 who monitors it by using such measures as liquidity coverage ratios, 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 $46.0 million, or 1%, during
2013, and comprised 84% of total liabilities at December 31, 2013, as compared to 87% at December 31, 2012. Proceeds from
the maturity and redemption of investment securities totaled $356.7 million during 2013 and provided liquidity to fund loans as
well as the purchase of additional investment securities.
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,
2013 our borrowing capacity at the Federal Reserve related to this program was $807.1 million and there were no amounts
outstanding. Additionally, as of December 31, 2013, 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 $622.4 million in outstanding
borrowings and $32.8 million in letter of credit commitments used for pledging public funds and other non-deposit purposes.
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, 2013, our maximum borrowing capacity under this program was
$931.5 million and as of that date there was $251.2 million outstanding. We also participate in a reciprocal program which
34
allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member
banks. As of December 31, 2013, our outstanding certificates of deposits from this program have an average weighted rate of
0.29% and an average original term of 207 days.
First Commonwealth has an unsecured $15.0 million line of credit with another financial institution. There are no amounts
outstanding on this line as of December 31, 2013. As of December 31, 2013, we are in compliance with all debt covenants
related to this agreement.
Refer to “Financial Condition” above for additional information concerning our deposits, loan portfolio, investment securities
and borrowings.
Mar(cid:78)et (cid:53)(cid:76)s(cid:78)
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 business. 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. 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 volumes equal run-offs. 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 0.71 and 0.76 at December 31, 2013 and 2012, respectively. A ratio of less than one indicates a higher
level of repricing liabilities over repricing assets over the next twelve months.
35
Following is the gap analysis as of December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:19)(cid:16)(cid:28)(cid:19) (cid:39)a(cid:92)s
(cid:28)(cid:20)(cid:16)(cid:20)(cid:27)(cid:19)
(cid:39)a(cid:92)s
(cid:20)(cid:27)(cid:20)(cid:16)(cid:22)(cid:25)(cid:24)
(cid:39)a(cid:92)s
(cid:38)(cid:88)(cid:80)(cid:88)lat(cid:76)(cid:89)e
(cid:19)(cid:16)(cid:22)(cid:25)(cid:24) (cid:39)a(cid:92)s
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:50)(cid:89)er (cid:20) (cid:60)ear
(cid:55)hro(cid:88)gh (cid:24)
(cid:60)ears
(cid:50)(cid:89)er (cid:24)
(cid:60)ears
$ 2,026,232
$
215,614
$
310,437
$ 2,552,283
$ 1,401,095
$
282,761
106,382
3,012
2,135,626
373,426
2,595,780
698,899
54,440
—
270,054
146,037
—
7,595
209,855
—
520,292
231,283
370,677
3,012
586,363
387,180
—
—
2,925,972
1,987,458
669,941
750,746
—
2,595,780
50,179
756,673
338,488
—
81,192
6,488
—
5,302
3,668,105
153,632
281,462
$(1,532,479)
$
116,422
$
238,830
0.58
24.66%
1.76
1.87%
1.85
3.84%
4,103,199
$(1,177,227)
0.71
18.94%
419,680
11,790
$ 1,567,778
$
658,151
4.74
25.23%
56.82
10.59%
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:19)(cid:16)(cid:28)(cid:19) (cid:39)a(cid:92)s
(cid:28)(cid:20)(cid:16)(cid:20)(cid:27)(cid:19)
(cid:39)a(cid:92)s
(cid:20)(cid:27)(cid:20)(cid:16)(cid:22)(cid:25)(cid:24)
(cid:39)a(cid:92)s
(cid:38)(cid:88)(cid:80)(cid:88)lat(cid:76)(cid:89)e
(cid:19)(cid:16)(cid:22)(cid:25)(cid:24) (cid:39)a(cid:92)s
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:50)(cid:89)er (cid:20) (cid:60)ear
(cid:55)hro(cid:88)gh (cid:24)
(cid:60)ears
(cid:50)(cid:89)er (cid:24)
(cid:60)ears
$ 1,950,002
$
222,705
$
297,530
$ 2,470,237
$ 1,436,472
$
203,477
61,914
4,258
2,016,174
208,096
2,641,953
428,545
78,904
—
301,609
176,556
—
29,703
142,411
—
439,941
126,490
—
230
283,229
4,258
579,320
328,546
—
—
2,757,724
2,015,792
532,023
511,142
2,641,953
458,478
512,040
—
138,652
9,477
—
39,318
3,278,594
206,259
126,720
$(1,262,420)
$
95,350
$
313,221
0.61
21.06%
1.46
1.59%
3.47
5.23%
3,611,573
$ (853,849)
0.76
14.24%
650,692
48,795
$ 1,365,100
$
483,228
3.10
22.77%
10.90
8.06%
Loans
Investments
Other interest-earning assets
Total interest-sensitive
assets (ISA)
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive
liabilities (ISL)
Gap
ISA/ISL
Gap/Total assets
Loans
Investments
Other interest-earning assets
Total interest-sensitive
assets (ISA)
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive
liabilities (ISL)
Gap
ISA/ISL
Gap/Total assets
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. Rate sensitive assets to rate sensitive liabilities repricing in one year would 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.
36
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 versus if rates remained unchanged utilizing a flat balance sheet.
December 31, 2013
December 31, 2012
(cid:49)et (cid:76)nterest (cid:76)n(cid:70)o(cid:80)e (cid:70)hange (cid:11)(cid:20)(cid:21) (cid:80)onths(cid:12)
(cid:16)(cid:21)(cid:19)(cid:19)
(cid:16)(cid:20)(cid:19)(cid:19)
(cid:14)(cid:20)(cid:19)(cid:19)
(cid:14)(cid:21)(cid:19)(cid:19)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
(8,878) $
(8,204)
(4,355) $
(4,767)
(833) $
459
(646)
2,153
The analysis and model used to quantify the sensitivity of our net interest income becomes less reliable in a decreasing 200
basis point scenario given the current unprecedented low interest rate environment. Results of the 100 and 200 basis point
decline in interest rate scenario is affected by the fact that many of our interest-bearing liabilities are at rates below 1% and
therefore cannot decline 100 or 200 basis points, yet our interest-sensitive assets are able to decline by these amounts. For the
years 2013 and 2012, the cost of our interest-bearing liabilities averaged 0.48% and 0.70%, respectively and the yield on our
average interest-earning assets, on a fully taxable equivalent basis, averaged 3.79% and 4.18%, 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 certain assumptions be made, such as prepayment rates on earning assets and pricing impact 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.
(cid:38)re(cid:71)(cid:76)t (cid:53)(cid:76)s(cid:78)
First Commonwealth maintains an allowance for credit losses at a level deemed sufficient to absorb losses inherent in the loan
portfolio at the date of each statement of financial condition. Management reviews the adequacy of the allowance on a quarterly
basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the
allowance at a level that is appropriate based on management’s assessment of probable estimated losses.
First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key
elements. These elements include an assessment of individual impaired loans with a balance greater than $0.1 million, loss
experience trends, delinquency 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 $3.2 million at December 31, 2013, and is classified in “Other liabilities” on the
Consolidated Statements of Financial Condition.
Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructured loans. 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 2013, 82 loans totaling $10.4
million were identified as troubled debt restructurings resulting in specific reserves of $1.1 million.
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 in nonaccrual status at 150 days past due.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable
risk of loss on these loans is evaluated by comparing the loan balance to the 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 $54.2 million at December 31, 2013 or 1.27% of loans outstanding compared to $67.2
million or 1.60% of loans outstanding at December 31, 2012. The decrease in the 2013 ratio compared to the 2012 ratio can be
primarily attributed to a $10.3 million charge-off of a commercial nonperforming loan that had a specific reserve. In addition,
as of December 31, 2013, several credit measures showed improvement compared to December 31, 2012. The level of
37
criticized loans decreased $126.1 million from $288.5 million at December 31, 2012 to $162.4 million at December 31, 2013
and delinquency on accruing loans for the same period declined $8.8 million, or 40%.
The allowance for credit losses as a percentage of nonperforming loans was 91% at December 31, 2013 and 62% as of
December 31, 2012. The allowance for credit losses includes specific allocations of $8.8 million related to nonperforming
loans covering 15% of the total nonperforming balance at December 31, 2013 and specific allocations of $17.8 million covering
17% of the total nonperforming balance at December 31, 2012. 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 losses inherent in the loan
portfolio at December 31, 2013.
The following table provides information on net charge-offs and nonperforming loans by loan category:
For the (cid:51)er(cid:76)o(cid:71) (cid:40)n(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:22)
As o(cid:73) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:22)
(cid:49)et
(cid:38)harge(cid:16)o(cid:73)(cid:73)s
$
17,944
272
550
10,377
3,046
(cid:8) o(cid:73)
(cid:55)otal (cid:49)et
(cid:38)harge(cid:16)
o(cid:73)(cid:73)s
(cid:49)et
(cid:38)harge(cid:16)o(cid:73)(cid:73)s
as a (cid:8)
o(cid:73) A(cid:89)erage
(cid:47)oans
(cid:49)on(cid:83)er(cid:73)or(cid:80)(cid:76)ng
(cid:47)oans
(cid:8) o(cid:73) (cid:55)otal
(cid:49)on(cid:83)er(cid:73)or(cid:80)(cid:76)ng
(cid:47)oans
(cid:49)on(cid:83)er(cid:73)or(cid:80)(cid:76)ng
(cid:47)oans as a (cid:8) o(cid:73)
(cid:55)otal (cid:47)oans
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
0.42% $
0.01
0.01
0.25
0.07
28,234
3,900
12,866
14,094
289
55.75%
0.84
1.71
32.24
9.46
47.55%
6.57
21.67
23.72
0.49
0.66%
0.09
0.30
0.33
0.01
$
32,189
100.00%
0.76% $
59,383
100.00%
1.39%
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans, net of
unearned income
As the above table illustrates, commercial real estate and commercial financial, agricultural and other loan categories were the
most significant portions of the nonperforming loans as of December 31, 2013. See discussions related to the provision for
credit losses and loans for more information.
(cid:53)es(cid:88)lts o(cid:73) (cid:50)(cid:83)erat(cid:76)ons(cid:178)(cid:21)(cid:19)(cid:20)(cid:21) (cid:38)o(cid:80)(cid:83)are(cid:71) to (cid:21)(cid:19)(cid:20)(cid:20)
Summary of 2012 Results
Net income for 2012 was $42.0 million, or $0.40 per diluted share, as compared to a net income of $15.3 million, or $0.15 per
diluted share, in 2011. The improvement in performance in 2012 was primarily the result of a $35.3 million decrease in
provision expenses, a decrease of $2.0 million related to loss on sale or write-down of assets, and a $7.4 million decrease in
credit risk recognized on interest rate swaps. Partially offsetting the aforementioned items are a $0.9 million decrease in net
interest income, a $2.0 million decrease in net securities gains and a $3.6 million increase in operational losses.
Our return on average equity was 5.5% and return on average assets was 0.71% for 2012, compared to 2.0% and 0.27%,
respectively, for 2011.
Average diluted shares for the year 2012 were 1% less than the comparable period in 2011 primarily due to the common stock
buyback program authorized during 2012.
Net interest income, on a fully taxable equivalent basis, for 2012 was $2.1 million, or 1%, lower than 2011, primarily due to a
$114.9 million, or 3%, increase in average interest bearing liabilities and a 19 basis point decrease in the net interest margin.
Positively affecting net interest income in 2012 was a $97.2 million increase in average net free funds. Average net free funds
are the excess of demand deposits, other noninterest-bearing liabilities and shareholders’ equity over nonearning assets. Net
interest margin, on a fully taxable equivalent basis was 3.61% in 2012 compared to 3.80% in 2011.
During the year-ended December 31, 2012, the net interest margin was challenged by the continuing low interest rate
environment and decreasing rates earned on interest-earning assets. Despite a disciplined approach to pricing, runoff of
existing assets earning higher interest rates continued to provide for lower yields on earning assets. Growth in earning assets
helped offset the impact of runoff as average interest-earning assets increased $212.1 million, or 4%, compared to the
comparable period in 2011.
38
The taxable equivalent yield on interest-earning assets was 4.18% for the year-ended December 31, 2012, a decrease of 43 basis
points from the 4.61% yield for the same period in 2011. This decline was attributed to the repricing of our variable rate assets
in a low rate environment as well as lower interest rates available on new investments and loans. Reductions in the cost of
interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets. The cost of interest-bearing
liabilities was 0.70% for the year-ended December 31, 2012, compared to 0.99% for the same period in 2011.
Comparing the year-ended December 31, 2012 with the same period in 2011, changes in interest rates negatively impacted net
interest income by $13.3 million. The lower yield on interest-earning assets adversely impacted net interest income by $22.7
million, while the decline in the cost of interest-bearing liabilities positively impacted net interest income by $9.4 million. We
were able to partially mitigate the impact of lower interest rates and the effect on net interest income through improving the mix
of deposits and borrowed funds, disciplined pricing strategies, loan growth and increasing our investment volumes within
established interest rate risk management guidelines.
While decreases in interest rates and yields compressed the net interest margin, increases in average earning assets and low cost
average interest-bearing liabilities neutralized the effect on net interest income. Changes in volumes of interest-earning assets
and interest-bearing liabilities positively impacted net interest income by $11.3 million in the year-ended December 31, 2012
compared to the same period in 2011. Higher levels of interest-earning assets resulted in an increase of $9.2 million in interest
income, while volume changes primarily attributed to the mix of deposits reduced interest expense by $2.1 million.
(cid:44)(cid:55)(cid:40)M (cid:26)A(cid:17)
(cid:52)(cid:88)ant(cid:76)tat(cid:76)(cid:89)e an(cid:71) (cid:52)(cid:88)al(cid:76)tat(cid:76)(cid:89)e (cid:39)(cid:76)s(cid:70)los(cid:88)res A(cid:69)o(cid:88)t Mar(cid:78)et (cid:53)(cid:76)s(cid:78)
Information appearing in Item 7 of this report under the caption “Market Risk” is incorporated herein by reference in response
to this item.
39
(cid:44)(cid:55)(cid:40)M (cid:27)(cid:17)
F(cid:76)nan(cid:70)(cid:76)al State(cid:80)ents an(cid:71) S(cid:88)(cid:83)(cid:83)le(cid:80)entar(cid:92) (cid:39)ata
MA(cid:49)A(cid:42)(cid:40)M(cid:40)(cid:49)(cid:55)(cid:182)S (cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55) (cid:50)(cid:49) (cid:44)(cid:49)(cid:55)(cid:40)(cid:53)(cid:49)A(cid:47) (cid:38)(cid:50)(cid:49)(cid:55)(cid:53)(cid:50)(cid:47) (cid:50)(cid:57)(cid:40)(cid:53) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:44)(cid:49)(cid:42)
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. 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 (1992) 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 (1992)
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, 2013. The effectiveness of First Commonwealth’s
internal control over financial reporting as of December 31, 2013 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their attestation report which is included herein.
First Commonwealth Financial Corporation
Indiana, Pennsylvania
March 3, 2014
/S/ T. Michael Price
(cid:55)(cid:17) M(cid:76)(cid:70)hael (cid:51)r(cid:76)(cid:70)e
(cid:51)res(cid:76)(cid:71)ent an(cid:71) (cid:38)h(cid:76)e(cid:73) (cid:40)(cid:91)e(cid:70)(cid:88)t(cid:76)(cid:89)e (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)er
/S/ Robert E. Rout
(cid:53)o(cid:69)ert (cid:40)(cid:17) (cid:53)o(cid:88)t
(cid:40)(cid:91)e(cid:70)(cid:88)t(cid:76)(cid:89)e (cid:57)(cid:76)(cid:70)e (cid:51)res(cid:76)(cid:71)ent(cid:15) (cid:38)h(cid:76)e(cid:73) F(cid:76)nan(cid:70)(cid:76)al (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)er
40
(cid:53)e(cid:83)ort o(cid:73) (cid:44)n(cid:71)e(cid:83)en(cid:71)ent (cid:53)eg(cid:76)stere(cid:71) (cid:51)(cid:88)(cid:69)l(cid:76)(cid:70) A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng F(cid:76)r(cid:80)
The Board of Directors and Stockholders
First Commonwealth Financial Corporation:
We have audited First Commonwealth Financial Corporation’s (the Company) internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). First Commonwealth Financial Corporation’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 report on internal control. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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 material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
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.
In our opinion, First Commonwealth Financial Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. (COSO)
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of First Commonwealth Financial Corporation and subsidiaries as of
December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report
dated March 3, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 3, 2014
41
(cid:53)e(cid:83)ort o(cid:73) (cid:44)n(cid:71)e(cid:83)en(cid:71)ent (cid:53)eg(cid:76)stere(cid:71) (cid:51)(cid:88)(cid:69)l(cid:76)(cid:70) A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng F(cid:76)r(cid:80)
The Board of Directors and Stockholders
First Commonwealth Financial Corporation:
We have audited the accompanying consolidated statements of financial condition of First Commonwealth Financial
Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of
income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2013. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of First Commonwealth Financial Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
First Commonwealth Financial Corporation’s internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 3, 2014 expressed an unqualified opinion on the effectiveness of
First Commonwealth Financial Corporation’s internal control over financial reporting.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 3, 2014
42
F(cid:44)(cid:53)S(cid:55) (cid:38)(cid:50)MM(cid:50)(cid:49)(cid:58)(cid:40)A(cid:47)(cid:55)(cid:43) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)A(cid:55)(cid:44)(cid:50)(cid:49) A(cid:49)(cid:39) S(cid:56)(cid:37)S(cid:44)(cid:39)(cid:44)A(cid:53)(cid:44)(cid:40)S
(cid:38)(cid:50)(cid:49)S(cid:50)(cid:47)(cid:44)(cid:39)A(cid:55)(cid:40)(cid:39) S(cid:55)A(cid:55)(cid:40)M(cid:40)(cid:49)(cid:55)S (cid:50)F F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:49)(cid:39)(cid:44)(cid:55)(cid:44)(cid:50)(cid:49)
Assets
Cash and due from banks
Interest-bearing bank deposits
Securities available for sale, at fair value
Other investments
Loans:
Portfolio loans
Allowance for credit losses
(cid:49)et loans
Premises and equipment, net
Other real estate owned
Goodwill
Amortizing intangibles, net
Bank owned life insurance
Other assets
(cid:55)otal assets
(cid:47)(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es
Deposits (all domestic):
Noninterest-bearing
Interest-bearing
(cid:55)otal (cid:71)e(cid:83)os(cid:76)ts
Short-term borrowings
Subordinated debentures
Other long-term debt
(cid:55)otal long(cid:16)ter(cid:80) (cid:71)e(cid:69)t
Other liabilities
(cid:55)otal l(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es
Sharehol(cid:71)ers(cid:182) (cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t
share (cid:71)ata(cid:12)
$
74,427
$
3,012
98,724
4,258
1,318,365
1,171,303
35,444
28,228
4,283,833
(54,225)
4,229,608
4,204,704
(67,187)
4,137,517
67,940
11,728
159,956
1,311
174,372
138,698
68,970
11,262
159,956
2,375
170,925
141,872
$
6,214,861
$
5,995,390
$
912,361
$
883,269
3,691,502
4,603,863
626,615
72,167
144,385
216,552
56,134
3,674,612
4,557,881
356,227
105,750
174,471
280,221
55,054
5,503,164
5,249,383
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
—
—
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares
issued as of December 31, 2013 and 2012; and 95,245,215 shares and 99,629,494 shares
outstanding at December 31, 2013 and 2012, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net
Treasury stock (10,318,240 and 5,933,961 shares at December 31, 2013 and 2012,
respectively)
(cid:55)otal sharehol(cid:71)ers(cid:182) e(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:55)otal l(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es an(cid:71) sharehol(cid:71)ers(cid:182) e(cid:84)(cid:88)(cid:76)t(cid:92)
105,563
365,333
334,748
(20,588)
(73,359)
711,697
105,563
365,354
315,608
1,259
(41,777)
746,007
$
6,214,861
$
5,995,390
The accompanying notes are an integral part of these Consolidated Financial Statements
43
F(cid:44)(cid:53)S(cid:55) (cid:38)(cid:50)MM(cid:50)(cid:49)(cid:58)(cid:40)A(cid:47)(cid:55)(cid:43) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)A(cid:55)(cid:44)(cid:50)(cid:49) A(cid:49)(cid:39) S(cid:56)(cid:37)S(cid:44)(cid:39)(cid:44)A(cid:53)(cid:44)(cid:40)S
(cid:38)(cid:50)(cid:49)S(cid:50)(cid:47)(cid:44)(cid:39)A(cid:55)(cid:40)(cid:39) S(cid:55)A(cid:55)(cid:40)M(cid:40)(cid:49)(cid:55)S (cid:50)F (cid:44)(cid:49)(cid:38)(cid:50)M(cid:40)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:60)ears (cid:40)n(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t share (cid:71)ata(cid:12)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:44)nterest (cid:44)n(cid:70)o(cid:80)e
Interest and fees on loans
Interest and dividends on investments:
Taxable interest
Interest exempt from federal income taxes
Dividends
Interest on bank deposits
Total interest income
(cid:44)nterest (cid:40)(cid:91)(cid:83)ense
Interest on deposits
Interest on short-term borrowings
Interest on subordinated debentures
Interest on other long-term debt
Total interest expense
(cid:49)et (cid:44)nterest (cid:44)n(cid:70)o(cid:80)e
Provision for credit losses
(cid:49)et (cid:44)nterest (cid:44)n(cid:70)o(cid:80)e a(cid:73)ter (cid:51)ro(cid:89)(cid:76)s(cid:76)on (cid:73)or (cid:38)re(cid:71)(cid:76)t (cid:47)osses
(cid:49)on(cid:76)nterest (cid:44)n(cid:70)o(cid:80)e
Changes in fair value on impaired securities
Noncredit related (gains) losses on securities not expected to be sold (recognized in other
comprehensive income)
Net impairment losses
Net securities (losses) gains
Trust income
Service charges on deposit accounts
Insurance and retail brokerage commissions
Income from bank owned life insurance
Gain on sale of assets
Card related interchange income
Derivative mark to market
Other income
Total noninterest income
(cid:49)on(cid:76)nterest (cid:40)(cid:91)(cid:83)ense
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Data processing expense
Pennsylvania shares tax expense
Intangible amortization
Collection and repossession expense
Other professional fees and services
FDIC insurance
Loss on sale or write-down of assets
Operational losses
Loss on early redemption of subordinated debt
Conversion related expenses
Other operating expenses
Total noninterest expense
(cid:44)n(cid:70)o(cid:80)e (cid:69)e(cid:73)ore (cid:76)n(cid:70)o(cid:80)e ta(cid:91)es
Income tax provision (benefit)
(cid:49)et (cid:44)n(cid:70)o(cid:80)e
Average Shares Outstanding
Average Shares Outstanding Assuming Dilution
(cid:51)er Share (cid:39)ata(cid:29)
Basic Earnings Per Share
Diluted Earnings Per Share
(cid:38)ash (cid:39)(cid:76)(cid:89)(cid:76)(cid:71)en(cid:71)s (cid:39)e(cid:70)lare(cid:71) (cid:83)er (cid:38)o(cid:80)(cid:80)on Share
$
176,129
$
187,258
$
197,456
29,916
4
302
7
206,358
15,596
1,262
3,128
1,721
21,707
184,651
19,227
165,424
9,792
(9,792)
—
(1,158)
6,166
15,652
6,005
5,539
2,153
13,746
1,428
10,632
60,163
31,695
12
104
6
219,075
21,454
1,070
5,684
1,938
30,146
188,929
20,544
168,385
2,193
(2,193)
—
192
6,206
14,743
6,272
5,850
4,607
13,199
755
13,610
65,434
33,763
213
49
64
231,545
33,496
728
5,568
1,886
41,678
189,867
55,816
134,051
(425)
425
—
2,185
6,498
14,775
6,376
5,596
4,155
11,968
(6,687)
12,803
57,669
86,012
13,607
15,118
6,009
5,638
1,064
3,836
3,731
4,366
1,054
1,115
1,629
2,588
23,057
168,824
56,763
15,281
41,482
97,028,157
97,029,832
0.43
0.43
0.23
$
$
$
$
86,069
13,255
12,460
7,054
5,706
1,467
5,756
4,329
5,032
7,394
4,367
—
—
24,318
177,207
56,612
14,658
41,954
103,885,396
103,885,663
0.40
0.40
0.18
$
$
$
$
84,669
14,069
12,517
6,027
5,480
1,534
7,583
5,297
5,490
9,428
779
—
—
23,953
176,826
14,894
(380)
15,274
104,700,227
104,700,393
0.15
0.15
0.12
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements
44
F(cid:44)(cid:53)S(cid:55) (cid:38)(cid:50)MM(cid:50)(cid:49)(cid:58)(cid:40)A(cid:47)(cid:55)(cid:43) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)A(cid:55)(cid:44)(cid:50)(cid:49) A(cid:49)(cid:39) S(cid:56)(cid:37)S(cid:44)(cid:39)(cid:44)A(cid:53)(cid:44)(cid:40)S
(cid:38)(cid:50)(cid:49)S(cid:50)(cid:47)(cid:44)(cid:39)A(cid:55)(cid:40)(cid:39) S(cid:55)A(cid:55)(cid:40)M(cid:40)(cid:49)(cid:55)S (cid:50)F (cid:38)(cid:50)M(cid:51)(cid:53)(cid:40)(cid:43)(cid:40)(cid:49)S(cid:44)(cid:57)(cid:40) (cid:44)(cid:49)(cid:38)(cid:50)M(cid:40)
(cid:49)et (cid:44)n(cid:70)o(cid:80)e
Other comprehensive (loss) income, before tax (benefit) expense:
Unrealized holding (losses) gains on securities arising during the
period
Non-credit related gains (losses) on securities not expected to be sold
Less: reclassification adjustment for losses (gains) on securities
included in net income
Unrealized gains (losses) for postretirement obligations:
Transition obligation
Net gain (loss)
Total other comprehensive (loss) income, before tax (benefit)
expense
Income tax (benefit) expense related to items of other comprehensive (loss)
income
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e (cid:44)n(cid:70)o(cid:80)e
(cid:60)ears (cid:40)n(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
41,482
$
41,954
$
15,274
(44,767)
9,792
(2,854)
2,193
9,727
(425)
1,158
(192)
(2,185)
—
219
2
(300)
2
(260)
(33,598)
(1,151)
6,859
(11,751)
19,635
$
$
(409)
41,212
$
2,400
19,733
The accompanying notes are an integral part of these Consolidated Financial Statements
45
F(cid:44)(cid:53)S(cid:55) (cid:38)(cid:50)MM(cid:50)(cid:49)(cid:58)(cid:40)A(cid:47)(cid:55)(cid:43) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)A(cid:55)(cid:44)(cid:50)(cid:49) A(cid:49)(cid:39) S(cid:56)(cid:37)S(cid:44)(cid:39)(cid:44)A(cid:53)(cid:44)(cid:40)S
(cid:38)(cid:50)(cid:49)S(cid:50)(cid:47)(cid:44)(cid:39)A(cid:55)(cid:40)(cid:39) S(cid:55)A(cid:55)(cid:40)M(cid:40)(cid:49)(cid:55)S (cid:50)F (cid:38)(cid:43)A(cid:49)(cid:42)(cid:40)S (cid:44)(cid:49) S(cid:43)A(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)S(cid:182) (cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
Shares
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:38)o(cid:80)(cid:80)on
Sto(cid:70)(cid:78)
A(cid:71)(cid:71)(cid:76)t(cid:76)onal
(cid:51)a(cid:76)(cid:71)(cid:16)(cid:76)n(cid:16)
(cid:38)a(cid:83)(cid:76)tal
(cid:53)eta(cid:76)ne(cid:71)
(cid:40)arn(cid:76)ngs
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
(cid:50)ther
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e
(cid:44)n(cid:70)o(cid:80)e (cid:11)(cid:47)oss(cid:12)(cid:15)
net
(cid:55)reas(cid:88)r(cid:92)
Sto(cid:70)(cid:78)
(cid:56)nearne(cid:71)
(cid:40)S(cid:50)(cid:51)
Shares
(cid:55)otal
Sharehol(cid:71)ers(cid:182)
(cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t (cid:83)er share (cid:71)ata(cid:12)
(cid:37)alan(cid:70)e at (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:21)
99,629,494
$ 105,563
$
365,354
$ 315,608
$
1,259
$ (41,777) $
— $
746,007
Net income
Total other comprehensive loss
Cash dividends declared ($0.23 per share)
Discount on dividend reinvestment plan
purchases
Treasury stock acquired
Treasury stock reissued
Restricted stock
(4,462,638)
25,359
53,000
—
41,482
(22,344)
—
2
(112)
—
91
(21,847)
(32,217)
176
459
41,482
(21,847)
(22,344)
(112)
(32,217)
176
552
(cid:37)alan(cid:70)e at (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:22)
95,245,215
$ 105,563
$
365,333
$ 334,748
$
(20,588) $ (73,359) $
— $
711,697
Shares
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:38)o(cid:80)(cid:80)on
Sto(cid:70)(cid:78)
A(cid:71)(cid:71)(cid:76)t(cid:76)onal
(cid:51)a(cid:76)(cid:71)(cid:16)(cid:76)n(cid:16)
(cid:38)a(cid:83)(cid:76)tal
(cid:53)eta(cid:76)ne(cid:71)
(cid:40)arn(cid:76)ngs
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
(cid:50)ther
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e
(cid:44)n(cid:70)o(cid:80)e (cid:11)(cid:47)oss(cid:12)(cid:15)
net
(cid:55)reas(cid:88)r(cid:92)
Sto(cid:70)(cid:78)
(cid:56)nearne(cid:71)
(cid:40)S(cid:50)(cid:51)
Shares
(cid:55)otal
Sharehol(cid:71)ers(cid:182)
(cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t (cid:83)er share (cid:71)ata(cid:12)
(cid:37)alan(cid:70)e at (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:20)
104,916,994
$ 105,563
$
365,868
$ 294,056
$
2,001
$ (7,345) $
(1,600) $
758,543
Net income
Total other comprehensive loss
Cash dividends declared ($0.18 per share)
Net decrease in unearned ESOP shares
ESOP market value adjustment ($729, net
of $255 tax benefit)
Discount on dividend reinvestment plan
purchases
Tax benefit of stock options exercised
Treasury stock acquired
Treasury stock reissued
Restricted stock
41,954
(18,759)
(742)
1,600
(474)
(92)
1
(5,662,700)
155,200
220,000
—
—
51
(379)
(1,264)
(37,464)
1,407
1,625
41,954
(742)
(18,759)
1,600
(474)
(92)
1
(37,464)
1,028
412
(cid:37)alan(cid:70)e at (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:21)
99,629,494
$ 105,563
$
365,354
$ 315,608
$
1,259
$ (41,777) $
— $
746,007
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
Shares
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:38)o(cid:80)(cid:80)on
Sto(cid:70)(cid:78)
A(cid:71)(cid:71)(cid:76)t(cid:76)onal
(cid:51)a(cid:76)(cid:71)(cid:16)(cid:76)n(cid:16)
(cid:38)a(cid:83)(cid:76)tal
(cid:53)eta(cid:76)ne(cid:71)
(cid:40)arn(cid:76)ngs
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
(cid:50)ther
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e
(cid:44)n(cid:70)o(cid:80)e (cid:11)(cid:47)oss(cid:12)(cid:15)
net
(cid:55)reas(cid:88)r(cid:92)
Sto(cid:70)(cid:78)
(cid:56)nearne(cid:71)
(cid:40)S(cid:50)(cid:51)
Shares
(cid:55)otal
Sharehol(cid:71)ers(cid:182)
(cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t (cid:83)er share (cid:71)ata(cid:12)
(cid:37)alan(cid:70)e at (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:19)
104,846,194
$ 105,515
$
366,488
$ 291,492
$
(2,458) $ (7,660) $
(3,600) $
749,777
Net income
Total other comprehensive income
Cash dividends declared ($0.12 per share)
Net decrease in unearned ESOP shares
ESOP market value adjustment ($1,053,
net of $368 tax benefit)
Discount on dividend reinvestment plan
purchases
Tax benefit of stock options exercised
Treasury stock acquired
Treasury stock reissued
Restricted stock
Common stock issued
15,274
(12,558)
4,459
2,000
(685)
(63)
6
—
1
121
(83)
(69)
—
(1,336)
13,760
35,000
23,376
25
23
(9)
155
169
15,274
4,459
(12,558)
2,000
(685)
(63)
6
(9)
72
126
144
(cid:37)alan(cid:70)e at (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:20)
104,916,994
$ 105,563
$
365,868
$ 294,056
$
2,001
$ (7,345) $
(1,600) $
758,543
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
F(cid:44)(cid:53)S(cid:55) (cid:38)(cid:50)MM(cid:50)(cid:49)(cid:58)(cid:40)A(cid:47)(cid:55)(cid:43) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) (cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)A(cid:55)(cid:44)(cid:50)(cid:49) A(cid:49)(cid:39) S(cid:56)(cid:37)S(cid:44)(cid:39)(cid:44)A(cid:53)(cid:44)(cid:40)S
(cid:38)(cid:50)(cid:49)S(cid:50)(cid:47)(cid:44)(cid:39)A(cid:55)(cid:40)(cid:39) S(cid:55)A(cid:55)(cid:40)M(cid:40)(cid:49)(cid:55)S (cid:50)F (cid:38)AS(cid:43) F(cid:47)(cid:50)(cid:58)S
(cid:50)(cid:83)erat(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Deferred tax expense (benefit)
Depreciation and amortization
Net losses on securities and other assets
Net amortization of premiums and discounts on securities
Net amortization of premiums and discounts on long-term debt
Income from increase in cash surrender value of bank owned life insurance
Decrease in interest receivable
Decrease in interest payable
Decrease in prepaid FDIC insurance
(Decrease) increase in income taxes payable
Other—net
Net cash provided by operating activities
(cid:44)n(cid:89)est(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
Transactions with securities available for sale:
Proceeds from sales
Proceeds from maturities and redemptions
Purchases
Purchases of FHLB stock
Proceeds from the redemption of FHLB stock
Proceeds from bank owned life insurance
Proceeds from the sale of loans
Proceeds from sales of other assets
Net (increase) decrease in loans
Purchases of premises and equipment
Net cash used in investing activities
F(cid:76)nan(cid:70)(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
Net (decrease) increase in federal funds purchased
Net increase in other short-term borrowings
Net increase (decrease) in deposits
Repayments of other long-term debt
Proceeds from issuance of long-term debt
Repayments of subordinated debentures
Proceeds from issuance of common stock
Discount on dividend reinvestment plan purchases
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
Stock option tax benefit
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
(cid:60)ears (cid:40)n(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
41,482
$
41,954
$
15,274
19,227
12,704
11,090
431
543
(117)
(5,539)
921
(1,172)
9,205
(615)
(2,426)
85,734
671
356,667
(539,894)
(18,120)
10,904
2,092
20,760
12,713
(143,438)
(9,635)
(307,280)
(18,000)
288,387
46,006
(29,969)
—
(34,702)
—
(112)
(22,344)
176
(33,439)
—
196,003
(25,543)
102,982
20,544
2,551
7,912
1,838
1,381
(113)
(5,850)
2,689
(1,280)
4,693
6,484
(4,079)
78,724
—
574,846
(605,435)
—
11,568
2,501
15,981
17,660
(178,321)
(10,182)
(171,382)
(41,300)
84,750
53,256
(25,480)
100,000
—
—
(92)
(18,759)
1,028
(36,242)
1
117,162
24,504
78,478
$
77,439
$
102,982
$
55,816
(1,192)
9,026
9,776
721
(124)
(5,596)
1,276
(1,423)
5,124
(5,362)
803
84,119
76,914
480,250
(723,805)
—
9,063
238
5,766
23,756
56,181
(8,320)
(79,957)
62,500
62,417
(113,090)
(24,561)
29,600
—
144
(63)
(12,558)
72
(9)
6
4,458
8,620
69,858
78,478
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
(cid:49)(cid:50)(cid:55)(cid:40)S (cid:55)(cid:50) (cid:55)(cid:43)(cid:40) (cid:38)(cid:50)(cid:49)S(cid:50)(cid:47)(cid:44)(cid:39)A(cid:55)(cid:40)(cid:39) F(cid:44)(cid:49)A(cid:49)(cid:38)(cid:44)A(cid:47) S(cid:55)A(cid:55)(cid:40)M(cid:40)(cid:49)(cid:55)S
(cid:49)ote (cid:20)(cid:178)State(cid:80)ent o(cid:73) A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng (cid:51)ol(cid:76)(cid:70)(cid:76)es
(cid:42)eneral
The following summary of accounting and reporting policies is presented to aid the reader in obtaining a better understanding
of the consolidated financial statements of First Commonwealth Financial Corporation and its subsidiaries (“First
Commonwealth”) contained in this report.
The financial information is presented in accordance with generally accepted accounting principles and general practice for
financial institutions in the United States of America. In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in
the financial statements and as such, actual results could differ from those estimates.
Through its subsidiaries, which include one commercial bank, an insurance agency and a financial advisor, First
Commonwealth provides a full range of loan, deposit, trust, insurance and personal financial planning services primarily to
individuals and small to middle market businesses in fifteen counties in central and western Pennsylvania. First Commonwealth
determined it has one business segment.
First Commonwealth is subject to regulations of certain state and federal agencies. These regulatory agencies periodically
examine First Commonwealth for adherence to laws and regulations.
(cid:37)as(cid:76)s o(cid:73) (cid:51)resentat(cid:76)on
The accompanying Consolidated Financial Statements include the accounts of First Commonwealth previously defined above.
All material intercompany transactions have been eliminated in consolidation.
Equity investments of less than a majority but at least 20% ownership are accounted for by the equity method and classified as
“Other assets.” Earnings on these investments are reflected in “Other income” on the Consolidated Statements of Income, as
appropriate, in the period earned.
First Commonwealth’s variable interest entities (“VIEs”) are evaluated under the guidance included in ASU 2009-17. These
VIEs include qualified affordable housing projects that First Commonwealth has invested in as part of its community
reinvestment initiatives. We periodically assess whether or not our variable interests in these VIEs, based on qualitative
analysis, provide us with a controlling interest in the VIE. The analysis includes an assessment of the characteristics of the VIE.
We do not have a controlling financial interest in the VIE, which would require consolidation of the VIE, as we do not have the
following characteristics: (1) the power to direct the activities that most significantly impact the VIE’s economic performance;
and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the
VIE.
Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
Debt securities that First Commonwealth has the positive intent and ability to hold to maturity are classified as securities held to
maturity and are reported at amortized cost adjusted for amortization of premium and accretion of discount on a level yield
basis. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity securities or trading securities are classified as securities available for sale
and are reported at fair value, with unrealized gains and losses that are not related to impairment excluded from earnings and
reported as a component of other comprehensive income, which is included in shareholders’ equity, net of deferred taxes.
First Commonwealth has securities classified as either held to maturity or available for sale and does not engage in trading
activities. First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities
and the average cost method to determine the net gain or loss on the equity securities.
First Commonwealth conducts a comprehensive review of the investment portfolio on a quarterly basis to determine whether
other-than-temporary impairment has occurred. Issuer-specific securities whose market values have fallen below their book
values are initially selected for more in-depth analysis based on the percentage decline in value and duration of the decline.
Issuer-specific securities include obligations of U.S. Government agencies and sponsored enterprises, single issue trust
preferred securities, corporate debentures and obligations of states and political subdivisions. Further analysis of these securities
includes a review of research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, impact of
interest rate changes and any other relevant information pertaining to the affected security. Pooled trust preferred collateralized
debt obligations are measured by evaluating all relevant credit and structural aspects, determining appropriate performance
49
assumptions and performing a discounted cash flow analysis. This evaluation includes detailed credit, performance and
structural evaluations for each piece of collateral. Other factors in the pooled trust preferred collateralized debt obligations
valuation include terms of the structure, the cash flow waterfall (for both interest and principal), the over collateralization and
interest coverage tests and events of default/liquidation. Based on this review, a determination is made on a case by case basis
as to a potential impairment. Declines in the fair value of individual securities below their cost that are not expected to be
recovered will result in write-downs of the individual securities to their fair value. The related write-downs are included in
earnings as impairment losses.
(cid:47)oans
Loans are carried at the principal amount outstanding. Unearned income on installment loans and leases is taken into income on
a declining basis, which results in an approximate level rate of return over the life of the loan or the lease. Interest is accrued as
earned. Loans held for sale are carried at the lower of cost or fair value determined on an individual basis.
First Commonwealth considers a loan to be past due and still accruing interest when payment of interest or principal is
contractually past due but the loan is both well secured and in the process of collection. For installment, mortgage, term and
other loans with amortizing payments that are scheduled monthly, 90 days past due is reached when four monthly payments are
due and unpaid. For demand, time and other multi-payment obligations with payments scheduled other than monthly,
delinquency status is calculated using number of days instead of number of payments. Revolving credit loans, including
personal credit lines and home equity lines, are considered to be 90 days past due when the borrower has not made the
minimum payment for four monthly cycles.
A loan is placed in nonaccrual status when, based on current information and events, it is probable that First Commonwealth
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. When a determination is made to place a loan in nonaccrual status, all accrued and unpaid interest is
reversed. Nonaccrual loans are restored to accrual status when, based on a sustained period of repayment by the borrower in
accordance with the contractual terms of the loan, First Commonwealth expects repayment of the remaining contractual
principal and interest or when the loan otherwise becomes well-secured and in the process of collection.
First Commonwealth considers a loan to be a troubled debt restructured loan when the loan terms have been renegotiated to
provide a reduction or deferral of principal or interest as a result of the financial difficulties experienced by the borrower, who
could not obtain comparable terms from alternate financing sources.
A loan is considered to be impaired when, based on current information and events, it is probable that First Commonwealth will
be unable to collect principal or interest that is due in accordance with contractual terms of the loan. Impaired loans include
nonaccrual loans and troubled debt restructured loans. Loan impairment is measured based on the present value of expected
cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the
fair value of the collateral if the loan is collateral dependent.
For loans other than those that First Commonwealth expects repayment through liquidation of the collateral, when the
remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income
is applied as a reduction to loan principal rather than interest income.
Loans deemed uncollectible are charged off through the allowance for credit losses. Factors considered in assessing ultimate
collectibility include past due status, financial condition of the borrower, collateral values, and debt covenants including
secondary sources of repayment by guarantors. Payments received on previously charged off loans are recorded as recoveries in
the allowance for credit losses.
(cid:47)oan Fees
Loan origination and commitment fees, net of associated direct costs, are deferred and the net amount is amortized as an
adjustment to the related loan yield on the interest method, generally over the contractual life of the related loans or
commitments.
(cid:50)ther (cid:53)eal (cid:40)state (cid:50)wne(cid:71)
Real estate, other than bank premises, is recorded at fair value less estimated selling costs at the time of acquisition. After that
time, other real estate is carried at the lower of cost or fair value less estimated costs to sell. Fair value is determined based on
an independent appraisal. Expenses related to holding the property and rental income earned on the property are generally
reflected in earnings in the current period. Depreciation is not recorded on the other real estate owned properties.
50
Allowan(cid:70)e (cid:73)or (cid:38)re(cid:71)(cid:76)t (cid:47)osses
First Commonwealth maintains an allowance for credit losses at a level deemed sufficient to absorb losses that are inherent in
the loan portfolio. First Commonwealth’s management determines and reviews with the Board of Directors the adequacy of the
allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount
necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated
losses. First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of
several key elements. These elements include an assessment of individual problem loans, delinquency and loss experience
trends, and other relevant factors, all of which may be susceptible to significant changes.
The major loan classifications used in the allowance for credit losses calculation include pass, other assets especially mentioned
(“OAEM”), substandard and doubtful. Additional information related to these credit quality categories is provided in Note 10
"Loans and Allowance for Credit Losses".
First Commonwealth consistently applies the following comprehensive methodology and procedure for determining the
allowance for credit losses.
All impaired credits in excess of $100 thousand are individually reviewed quarterly. A specific reserve is established for
impaired loans that is equal to the total amount of probable unconfirmed losses for the impaired loans that are reviewed. Based
on this reserve as a percentage of reviewed loan balances, a reserve is also established for the impaired loan balances that are
not individually reviewed.
The allowance calculation uses historical charge-off trends to estimate probable unconfirmed losses for each loan category. A
multiplier known as the emergence factor is applied to the historical loss rates for non-criticized loans. The emergence factor is
calculated by loan category and represents the average time period from when a loan becomes delinquent until it is charged off.
Before applying the adjusted historical loss experience percentages, loan balances are reduced by the portion of the loan
balances which are subject to guarantee by a government agency.
An additional allowance is made by management based on a qualitative analysis of certain factors related to portfolio risks and
economic conditions. Factors considered by management include employment trends, macroeconomic trends, commercial real
estate trends and the overall lending environment. Portfolio risks include unusual changes or recent trends in specific portfolios
such as unexpected changes in the trends or levels of delinquency. No matter how detailed an analysis of potential credit losses
is performed, these estimates are not precise. Management must make estimates using assumptions and information that is often
subjective and changes rapidly.
Allowan(cid:70)e (cid:73)or (cid:50)(cid:73)(cid:73)(cid:16)(cid:37)alan(cid:70)e Sheet (cid:38)re(cid:71)(cid:76)t (cid:40)(cid:91)(cid:83)os(cid:88)res
First Commonwealth maintains an allowance for off-balance sheet credit exposure at a level deemed sufficient to absorb losses
that are inherent to off-balance sheet credit risk. Management determines the adequacy of the allowance on a quarterly basis
charging the provision against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on
management’s assessment of probable estimated losses. The Company’s methodology for assessing the appropriateness of the
allowance for off-balance sheet credit exposure consists of analysis of historical usage trends as well as loss history and
probability of default rates related to the off-balance sheet category. The calculation begins with historical usage trends related
to lines of credit as well as letters of credit and then utilizes those figures to determine the probable usage of available lines.
These values are then adjusted by a determined probability of default as well as a loss given default. This amount is adjusted
quarterly and reported as part of other operating expenses on the Consolidated Statements of Income.
(cid:37)an(cid:78) (cid:50)wne(cid:71) (cid:47)(cid:76)(cid:73)e (cid:44)ns(cid:88)ran(cid:70)e
First Commonwealth purchased insurance on the lives of certain groups of employees. The policies accumulate asset values to
meet future liabilities including the payment of employee benefits such as health care. Increases in the cash surrender value are
recorded in the Consolidated Statements of Income. Under some of these policies, the beneficiaries receive a portion of the
death benefit. The net present value of the future death benefits scheduled to be paid to the beneficiaries was $3.6 million and
$3.8 million as of December 31, 2013 and 2012, respectively, and is reflected in "Other Liabilities" on the Consolidated
Statements of Financial Condition.
(cid:51)re(cid:80)(cid:76)ses an(cid:71) (cid:40)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)ent
Premises and equipment are carried at cost less accumulated depreciation on First Commonwealth’s Consolidated Statements of
Financial Condition. Depreciation is computed on the straight-line and accelerated methods over the estimated useful life of the
asset. A straight-line depreciation method was used for substantially all furniture and equipment. The straight-line depreciation
method was used for buildings and improvements. Charges for maintenance and repairs are expensed as incurred. Leasehold
improvements are expensed over the term of the lease or the estimated useful life of the improvement, whichever is shorter.
51
When developing software, First Commonwealth expenses costs that are incurred during the preliminary project stage and
capitalizes certain costs that are incurred during the application development stage. Once software is in operation, maintenance
costs are expensed over the maintenance period while upgrades that result in additional functionality or enhancements are
capitalized. Training and data conversion costs are expensed as incurred. Capitalized software development costs and purchased
software are amortized on a straight-line basis over a period not to exceed seven years, except for one software license that is
being amortized over ten years.
(cid:42)oo(cid:71)w(cid:76)ll
Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and other intangible
assets (see “Other Intangible Assets” section below). Goodwill is not amortized and is subject to at least annual assessments for
impairment by applying a fair value based test. First Commonwealth reviews goodwill annually and again at any quarter-end if
a material event occurs during the quarter that may affect goodwill. If goodwill testing is required, an assessment of qualitative
factors can be completed before performing the two step goodwill impairment test. If an assessment of qualitative factors
determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step
goodwill impairment test is not required. Goodwill is evaluated for potential impairment by determining if our fair value has
fallen below carrying value.
(cid:50)ther (cid:44)ntang(cid:76)(cid:69)le Assets
Other intangible assets consist of core deposits obtained through acquisitions and are amortized over their estimated lives using
the present value of the benefit of the core deposits and straight-line methods of amortization. Core deposit intangibles are
evaluated for impairment on an annual basis and when events or changes in circumstances indicate that the carrying amount
may not be recoverable.
A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng (cid:73)or the (cid:44)(cid:80)(cid:83)a(cid:76)r(cid:80)ent o(cid:73) (cid:47)ong(cid:16)(cid:47)(cid:76)(cid:89)e(cid:71) Assets
First Commonwealth reviews long-lived assets, such as premises and equipment and intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These changes in
circumstances may include a significant decrease in the market value of an asset or the extent or manner in which an asset is
used. If there is an indication that the carrying amount of an asset may not be recoverable, future undiscounted cash flows
expected to result from the use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of
the asset, a loss is recognized for the difference between the carrying value and fair value of the asset. Long-lived assets
classified as held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Depreciation or
amortization is discontinued on long-lived assets classified as held for sale.
(cid:44)n(cid:70)o(cid:80)e (cid:55)a(cid:91)es
First Commonwealth records taxes in accordance with the asset and liability method of FASB ASC Topic 740, “Income Taxes,”
whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the
enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are more likely than not
expected to be realized based upon available evidence. In accordance with FASB ASC Topic 740, interest or penalties incurred
for taxes will be recorded as a component of noninterest expense.
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e (cid:44)n(cid:70)o(cid:80)e (cid:39)(cid:76)s(cid:70)los(cid:88)res
“Other Comprehensive Income” (comprehensive income, excluding net income) includes the after tax effect of changes in
unrealized holding gains and losses on available-for-sale securities and changes in the funded status of defined benefit
postretirement plans. Comprehensive income is reported in the accompanying Consolidated Statements of Comprehensive
Income, net of tax.
(cid:38)ash an(cid:71) (cid:38)ash (cid:40)(cid:84)(cid:88)(cid:76)(cid:89)alents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds
sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.
(cid:40)(cid:80)(cid:83)lo(cid:92)ee Sto(cid:70)(cid:78) (cid:50)wnersh(cid:76)(cid:83) (cid:51)lan
Accounting treatment for First Commonwealth’s Employee Stock Ownership Plan (“ESOP”) described in Note 22 “Unearned
ESOP Shares” follows FASB ASC Topic 718, “Compensation—Stock Compensation” for ESOP shares acquired after
December 31, 1992 (“new shares”). First Commonwealth’s ESOP borrowed funds are guaranteed by First Commonwealth. The
ESOP shares purchased subject to the debt guaranteed by First Commonwealth are recorded as a reduction of common
52
shareholders’ equity by recording unearned ESOP shares. Shares are committed to be released to the ESOP Trust for allocation
to plan participants through loan payments. As the shares are committed to be released, the unearned ESOP shares account is
credited for the average cost of the shares collateralizing the ESOP borrowed funds. Compensation cost is recognized for these
shares in accordance with the provisions of FASB ASC Topic 718 and is based upon the fair market value of the shares that are
committed to be released. Additional paid-in capital is charged or credited for the difference between the fair value of the shares
committed to be released and the cost of those shares to the ESOP. The borrowed funds related to the unearned ESOP shares
were paid off in November 2012.
Dividends on unallocated ESOP shares were used for debt service and are reported as a reduction of debt and accrued interest
payable. Dividends on allocated ESOP shares were charged to retained earnings and allocated or paid to the plan participants.
The average number of common shares outstanding used in calculating earnings per share excludes all unallocated ESOP
shares.
(cid:39)er(cid:76)(cid:89)at(cid:76)(cid:89)es an(cid:71) (cid:43)e(cid:71)g(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
First Commonwealth accounts for derivative instruments and hedging activities in accordance with FASB ASC Topic 815,
“Derivatives and Hedging.” All derivatives are evaluated at inception as to whether or not they are hedging or non-hedging
activities, and appropriate documentation is maintained to support the final determination. First Commonwealth recognizes all
derivatives as either assets or liabilities on the Consolidated Statements of Financial Condition and measures those instruments
at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item
related to the hedged risk are recognized in earnings. Any hedge ineffectiveness would be recognized in the income statement
line item pertaining to the hedged item.
When First Commonwealth purchases a portion of a commercial loan that has an existing interest rate swap, it enters a Risk
Participation Agreement with the counterparty and assumes the credit risk of the loan customer related to the swap. Any fee
paid to First Commonwealth as a result of the risk participation agreement is offset by credit risk of the counterparties and is
recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk
rating, probability of default and loss of given default of the counterparties.
Management periodically reviews contracts from various functional areas of First Commonwealth to identify potential
derivatives embedded within selected contracts. As of December 31, 2013, First Commonwealth has interest derivative
positions that are not designated as hedging instruments. See Note 7 “Derivatives” for a description of these instruments.
(cid:40)arn(cid:76)ngs (cid:51)er (cid:38)o(cid:80)(cid:80)on Share
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period less any unallocated ESOP shares.
Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of
the entity. For all periods presented, the dilutive effect on average shares outstanding is the result of compensatory stock options
outstanding and unvested restricted stock grants.
Fa(cid:76)r (cid:57)al(cid:88)e Meas(cid:88)re(cid:80)ents
In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” First Commonwealth groups financial
assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value. These levels are:
• Level 1—Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
Valuations are obtained from readily available pricing sources for market transactions involving identical assets or
liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using
quoted market prices.
• Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for
identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency.
Level 2 securities include U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of
States and Political Subdivisions, certain corporate securities, FHLB stock, interest rate derivatives that include interest
rate swaps, risk participation agreements and foreign currency contracts, certain other real estate owned and certain
impaired loans.
• Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including option
pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or
broker traded transactions. If the inputs used to provide the evaluation are unobservable and/or there is very little, if any,
53
market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3
valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or
liabilities. The assets included in Level 3 are select Obligations of States and Political Subdivisions, corporate securities,
pooled trust preferred collateralized debt obligations, nonmarketable equity investments, certain other real estate owned,
certain impaired loans and loans held for sale.
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon pricing models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied consistently over time. See Note 19 “Fair Values of
Assets and Liabilities” for additional information.
(cid:49)ote (cid:21)(cid:178)(cid:49)ew A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng (cid:51)rono(cid:88)n(cid:70)e(cid:80)ents
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income.” This amendment addresses the previously deferred portions of ASU
2011-05 related to reclassifications out of accumulated other comprehensive income. This amendment requires an entity to
provide information about amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In
addition, an entity is required to report the effect of significant reclassifications out of AOCI on the respective line items in net
income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other
amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-
reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of this
ASU did not have a material impact on First Commonwealth’s financial condition or results of operations.
54
(cid:49)ote (cid:22)(cid:178)S(cid:88)(cid:83)(cid:83)le(cid:80)ental (cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e (cid:44)n(cid:70)o(cid:80)e (cid:39)(cid:76)s(cid:70)los(cid:88)res
The following table identifies the related tax effects allocated to each component of other comprehensive income in the
Consolidated Statements of Comprehensive Income as of December 31. Reclassification adjustments related to securities
available for sale are included in the "Net securities gains" line in the Consolidated Statements of Income. The non-credit
related (losses) gains on securities not expected to be sold are included in the "Noninterest Income" section of the Consolidated
Statements of Income.
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:51)reta(cid:91)
A(cid:80)o(cid:88)nt
(cid:55)a(cid:91)
(cid:11)(cid:40)(cid:91)(cid:83)ense(cid:12)
(cid:37)ene(cid:73)(cid:76)t
(cid:49)et o(cid:73)
(cid:55)a(cid:91)
A(cid:80)o(cid:88)nt
(cid:51)reta(cid:91)
A(cid:80)o(cid:88)nt
(cid:55)a(cid:91)
(cid:11)(cid:40)(cid:91)(cid:83)ense(cid:12)
(cid:37)ene(cid:73)(cid:76)t
(cid:49)et o(cid:73)
(cid:55)a(cid:91)
A(cid:80)o(cid:88)nt
(cid:51)reta(cid:91)
A(cid:80)o(cid:88)nt
(cid:55)a(cid:91)
(cid:11)(cid:40)(cid:91)(cid:83)ense(cid:12)
(cid:37)ene(cid:73)(cid:76)t
(cid:49)et o(cid:73)
(cid:55)a(cid:91)
A(cid:80)o(cid:88)nt
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Unrealized gains (losses) on
securities:
Unrealized holding (losses)
gains on securities arising
during the period
Non-credit related gains
(losses) on securities not
expected to be sold
Reclassification adjustment
for losses (gains) on
securities included in net
income
Total unrealized (losses)
gains on securities
Unrealized gains (losses) for
postretirement obligations:
Transition obligation
Net gain (loss)
Total unrealized gains
(losses) for
postretirement
obligations
Total other
comprehensive
(loss) income
$ (44,767) $ 15,660
$ (29,107) $ (2,854) $
1,006
$ (1,848) $
9,727
$ (3,404) $
6,323
9,792
(3,427)
6,365
2,193
(768)
1,425
(425)
149
(276)
1,158
(405)
753
(192)
(33,817)
11,828
(21,989)
(853)
—
219
—
(77)
—
142
2
(300)
67
305
(1)
105
(125)
(2,185)
765
(1,420)
(548)
7,117
(2,490)
4,627
1
2
(195)
(260)
(1)
91
1
(169)
219
(77)
142
(298)
104
(194)
(258)
90
(168)
$ (33,598) $ 11,751
$ (21,847) $ (1,151) $
409
$
(742) $
6,859
$ (2,400) $
4,459
The following table details the change in components of OCI for the year-ended December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
A(cid:89)a(cid:76)la(cid:69)le
(cid:73)or Sale
(cid:51)ost(cid:16)
(cid:53)et(cid:76)re(cid:80)ent
(cid:50)(cid:69)l(cid:76)gat(cid:76)on
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
(cid:50)ther
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e
(cid:44)n(cid:70)o(cid:80)e
Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
A(cid:89)a(cid:76)la(cid:69)le
(cid:73)or Sale
(cid:51)ost(cid:16)
(cid:53)et(cid:76)re(cid:80)ent
(cid:50)(cid:69)l(cid:76)gat(cid:76)on
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
(cid:50)ther
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e
(cid:44)n(cid:70)o(cid:80)e
Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
A(cid:89)a(cid:76)la(cid:69)le
(cid:73)or Sale
(cid:51)ost(cid:16)
(cid:53)et(cid:76)re(cid:80)ent
(cid:50)(cid:69)l(cid:76)gat(cid:76)on
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
(cid:50)ther
(cid:38)o(cid:80)(cid:83)rehens(cid:76)(cid:89)e
(cid:44)n(cid:70)o(cid:80)e
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Balance at January 1
$ 1,121
$
138
$
1,259
$ 1,669
$
332
$
2,001
$ (2,958) $
500
$
(2,458)
Other comprehensive
loss before
reclassification
adjustment
Amounts reclassified
from accumulated
other comprehensive
income (loss)
Transition obligation
Net gain
Net other
comprehensive loss
during the period
Balance at December 31
55
(22,742)
(22,742)
(423)
(423)
6,047
6,047
753
—
142
753
—
142
(125)
(125)
(1,420)
1
(195)
1
(195)
1
(169)
(1,420)
1
(169)
(21,989)
142
(21,847)
(548)
(194)
(742)
4,627
(168)
4,459
$(20,868) $
280
$
(20,588) $ 1,121
$
138
$
1,259
$ 1,669
$
332
$
2,001
(cid:49)ote (cid:23)(cid:178)S(cid:88)(cid:83)(cid:83)le(cid:80)ental (cid:38)ash Flow (cid:39)(cid:76)s(cid:70)los(cid:88)res
The following table presents information related to cash paid during the year for interest and income taxes as well as detail on
non-cash investing and financing activities for the years ended December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(dollars in thousands)
(cid:21)(cid:19)(cid:20)(cid:20)
Cash paid during the period for:
Interest
Income taxes
Non-cash investing and financing activities:
ESOP loan reductions
$
$
23,022
$
31,597
$
3,080
11,641
— $
1,600
$
Loans transferred to other real estate owned and repossessed assets
Other real estate owned sold and settled out of period
Fair value of loans transferred from held to maturity to available for sale
Gross (decrease) increase in market value adjustment to securities
available for sale
Unsettled treasury stock repurchases
12,326
348
20,135
(33,792)
—
4,979
—
—
(874)
1,222
43,303
5,900
2,000
34,269
—
14,235
7,107
—
(cid:49)ote (cid:24)(cid:178)(cid:40)arn(cid:76)ngs (cid:83)er Share
The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and
diluted earnings per share computation for the years ending December 31:
Weighted average common shares issued
Average treasury shares
Averaged unearned ESOP shares
Average unearned nonvested shares
Weighted average common shares and common stock equivalents used
to calculate basic earnings per share
Additional common stock equivalents (nonvested stock) used to calculate
diluted earnings per share
Additional common stock equivalents (stock options) used to calculate
diluted earnings per share
Weighted average common shares and common stock equivalents used
to calculate diluted earnings per share
(cid:21)(cid:19)(cid:20)(cid:22)
105,563,455
(8,363,083)
—
(172,215)
(cid:21)(cid:19)(cid:20)(cid:21)
105,563,455
(1,456,953)
(38,393)
(182,713)
(cid:21)(cid:19)(cid:20)(cid:20)
105,550,310
(657,633)
(165,010)
(27,440)
97,028,157
103,885,396
104,700,227
1,675
—
171
96
119
47
97,029,832
103,885,663
104,700,393
The following table shows the number of shares and the price per share related to common stock equivalents that were not
included in the computation of diluted earnings per share for the years ended December 31, because to do so would have been
anti-dilutive.
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:22)
(cid:51)r(cid:76)(cid:70)e (cid:53)ange
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:21)
(cid:51)r(cid:76)(cid:70)e (cid:53)ange
Stock Options
Restricted Stock
Shares
27,000
81,770
Fro(cid:80)
$ 14.41
(cid:55)o
$ 14.55
Shares
268,630
$
4.41
7.57
163,509
Fro(cid:80)
6.90
5.26
(cid:55)o
$ 14.55
Shares
496,863
$
6.82
22,502
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)
(cid:51)r(cid:76)(cid:70)e (cid:53)ange
Fro(cid:80)
6.36
5.70
(cid:55)o
$ 14.55
6.82
(cid:49)ote (cid:25)(cid:178)(cid:38)ash an(cid:71) (cid:39)(cid:88)e (cid:73)ro(cid:80) (cid:37)an(cid:78)s
Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository
institutions with transaction accounts, such as checking accounts and NOW accounts. Reserves are maintained in the form of
vault cash or balances held with the Federal Reserve Bank. First Commonwealth Bank maintained average balances of $2.9
million during 2013 and $3.6 million during 2012 with the Federal Reserve Bank.
56
(cid:49)ote (cid:26)(cid:178)(cid:39)er(cid:76)(cid:89)at(cid:76)(cid:89)es
First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives
relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate
loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives
interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into
with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays
the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the
customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The
changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by
taking into consideration the risk rating, probability of default and loss of given default for all counterparties.
We have twelve risk participation agreements with financial institution counterparties for interest rate swaps related to loans in
which we are a participant. The risk participation agreements provide credit protection to the financial institution should the
borrower fail to perform on its interest rate derivative contract with the financial institution. We have two risk participation
agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The
risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative
contract with us.
First Commonwealth is also party to interest rate caps that are not designated as hedging instruments. These derivatives relate
to contracts that First Commonwealth enters into with loan customers providing a maximum interest rate on their variable rate
loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting
interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap
contracts are identical.
The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.
The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as
well as the notional amount of risk participation agreements participated to other banks at December 31:
Credit value adjustment
Notional Amount:
Interest rate derivatives
Interest rate caps
Risk participation agreements
Sold credit protection on risk participation agreements
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
77
$
(2,207)
274,718
7,500
82,197
(19,161)
223,448
—
71,390
—
The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities
attributable to credit risk included in “Other income” on the Consolidated Statements of Income for the years ended
December 31:
Non-hedging interest rate derivatives:
Increase (decrease) in other income
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
1,428
$
755
$
(6,687)
The 2013 increase in other income can be attributed to an improvement in the credit curves in the overall market. The fair
value of our derivatives is included in a table in Note 19 “Fair Values of Assets and Liabilities,” in the line items “Other assets”
and “Other liabilities.”
57
(cid:49)ote (cid:27)(cid:178)(cid:44)n(cid:89)est(cid:80)ent Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
Below is an analysis of the amortized cost and fair values of securities available for sale at December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
A(cid:80)ort(cid:76)(cid:93)e(cid:71)
(cid:38)ost
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:42)a(cid:76)ns
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
A(cid:80)ort(cid:76)(cid:93)e(cid:71)
(cid:38)ost
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:42)a(cid:76)ns
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
Obligations of U.S.
Government Agencies:
Mortgage-Backed
Securities –
Residential
Obligations of U.S.
Government-
Sponsored Enterprises:
Mortgage-Backed
Securities –
Residential
Mortgage-Backed
Securities –
Commercial
Other
Government-
Sponsored
Enterprises
Obligations of States
and Political
Subdivisions
Corporate Securities
Pooled Trust Preferred
Collateralized Debt
Obligations
Total Debt
Securities
$
22,639
$
2,624
$
(59) $
25,204
$
27,883
$
3,781
$
— $
31,664
1,009,519
12,531
(27,163)
994,887
839,102
25,691
(392)
864,401
104
1
—
105
148
1
—
149
267,971
81
(1,927)
266,125
241,970
766
(72)
242,664
80
6,693
—
328
—
—
80
7,021
82
6,703
4
288
—
—
86
6,991
42,040
—
(18,517)
23,523
51,866
3
(28,496)
23,373
Equities
1,420
—
—
1,420
1,859
116
1,349,046
15,565
(47,666)
1,316,945
1,167,754
30,534
(28,960)
—
1,169,328
1,975
Total
Securities
Available for
Sale
$1,350,466
$ 15,565
$ (47,666) $1,318,365
$1,169,613
$ 30,650
$ (28,960) $1,171,303
Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and obligations of U.S.
Government-sponsored enterprises. These obligations have contractual maturities ranging from less than one year to
approximately 30 years with lower anticipated lives to maturity due to prepayments. All mortgage backed securities contain a
certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct
impact upon prepayment speeds, therefore First Commonwealth uses computer simulation models to test the average life and
yield volatility of all mortgage backed securities under various interest rate scenarios to monitor the potential impact on
earnings and interest rate risk positions.
Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with
or without call or prepayment penalties. Other fixed income securities within the portfolio also contain prepayment risk.
During 2013, a loss of $1.3 million was recognized on the early redemption of a pooled trust preferred security with a book
value of $6.6 million. Senior note holders elected to liquidate all assets of the trust, resulting in losses for the mezzanine notes
owned by First Commonwealth.
In 2012, $5.1 million in single issue trust preferred securities and $0.2 million in pooled trust preferred securities were called by
their issuers, providing security gains of $0.2 million.
58
The amortized cost and fair value of debt securities at December 31, 2013, by contractual maturity, are shown below:
A(cid:80)ort(cid:76)(cid:93)e(cid:71)
(cid:38)ost
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
$
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
33,080
$
33,141
234,971
233,065
—
48,733
316,784
—
30,543
296,749
Mortgage-Backed Securities (a)
Total Debt Securities
1,020,196
1,316,945
(a) Mortgage Backed Securities include an amortized cost of $22.6 million and a fair value of $25.2 million for Obligations
1,349,046
1,032,262
$
$
of U.S. Government agencies issued by Ginnie Mae and Obligations of U.S. Government-sponsored enterprises issued
by Fannie Mae and Freddie Mac which had an amortized cost of $1,009.6 million and a fair value of $995.0 million.
Proceeds from sale, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to
securities available for sale were as follows for the years ended December 31:
Proceeds from sales
Gross (losses) gains realized:
Sales Transactions:
Gross gains
Gross losses
Maturities and impairment
Gross gains
Gross losses
Other-than-temporary impairment
Net gains and impairment
$
$
$
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
671
$
— $
76,914
233
$
— $
—
233
4
(1,395)
—
(1,391)
(1,158) $
—
—
192
—
—
192
192
2,368
(258)
2,110
75
—
—
75
$
2,185
Securities available for sale with an approximate fair value of $594.9 million and $631.0 million were pledged as of
December 31, 2013 and 2012, respectively, to secure public deposits and for other purposes required or permitted by law.
(cid:49)ote (cid:28)(cid:178)(cid:44)(cid:80)(cid:83)a(cid:76)r(cid:80)ent o(cid:73) (cid:44)n(cid:89)est(cid:80)ent Se(cid:70)(cid:88)r(cid:76)t(cid:76)es
Securities Available for Sale
As required by FASB ASC Topic 320, “Investments—Debt and Equity Securities,” credit related other-than-temporary
impairment on debt securities is recognized in earnings while non-credit related other-than-temporary impairment on debt
securities not expected to be sold is recognized in other comprehensive income (“OCI”). During the years ended December 31,
2013, 2012 and 2011 no other-than-temporary impairment charges were recognized. For the years ended December 31, 2013
and 2012, $9.8 million and $2.2 million in noncredit related gains on our trust preferred collateralized debt obligations that
were determined to be impaired in previous periods was recorded in OCI. For the year ended December 31, 2011, $0.4 million
in noncredit related losses for the same pool of securities was recorded in OCI. All of the securities for which other-than-
temporary impairment was previously recorded were classified as available-for-sale securities.
First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the
average cost method to determine the net gain or loss on equity securities.
In the Consolidated Statements of Income, the “Changes in fair value on impaired securities” line represents the change in fair
value of securities impaired in the current or previous periods. The change in fair value includes both non-credit and credit
59
related gains or losses. Credit related losses occur when the entire amortized cost of the security will not be recovered. The
“Noncredit related (gains) losses on securities not expected to be sold (recognized in other comprehensive income)” line
represents the gains and losses on the securities resulting from factors other than credit. The noncredit related gain or loss is
disclosed in the Consolidated Statements of Income and recognized through other comprehensive income. The “Net impairment
losses” line represents the credit related losses recognized in total noninterest income for the related period.
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the
length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term
prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more
likely than not to sell the security. We evaluate whether we are more likely than not to sell debt securities based upon our
investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy, tax position
and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional
bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust
preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in
securitized financial assets within the scope of FASB ASC Topic 325, “Investments—Other,” and are therefore evaluated for
other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows
determine it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be
recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary
impairment charges in the future. See Note 19 “Fair Values of Assets and Liabilities” for additional information.
The following table presents the gross unrealized losses and estimated fair values at December 31, 2013 by investment category
and time frame for which the securities have been in a continuous unrealized loss position:
(cid:47)ess (cid:55)han (cid:20)(cid:21) Months
(cid:20)(cid:21) Months or More
(cid:55)otal
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential $
2,035
$
(59) $
— $
— $
2,035
$
(59)
Obligations of U.S. Government-Sponsored
Enterprises:
Mortgage-Backed Securities – Residential
Other Government-Sponsored Enterprises
632,231
183,542
(22,844)
(1,448)
65,324
24,501
(4,319)
(479)
697,555
208,043
(27,163)
(1,927)
Pooled Trust Preferred Collateralized Debt
Obligations
Total Securities Available for Sale
2,401
$ 820,209
(237)
21,122
$ (24,588) $ 110,947
(18,280)
$ (23,078)
23,523
$ 931,156
(18,517)
$ (47,666)
At December 31, 2013, pooled trust preferred collateralized debt obligations accounted for 39% of unrealized losses, while
fixed income securities issued by U.S. Government-sponsored enterprises comprised 61% of total unrealized losses.
60
The following table presents the gross unrealized losses and estimated fair value at December 31, 2012 for available-for-sale
and securities by investment category and time frame for which the securities had been in a continuous unrealized loss position:
(cid:47)ess (cid:55)han (cid:20)(cid:21) Months
(cid:20)(cid:21) Months or More
(cid:55)otal
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:42)ross
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:47)osses
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential
$
— $
— $
13
$
— (a) $
13
$
—
Obligations of U.S. Government-Sponsored
Enterprises:
Mortgage-Backed Securities – Residential
Other Government-Sponsored Enterprises
Pooled Trust Preferred Collateralized Debt
Obligations
76,296
59,303
—
Total Securities Available for Sale
$ 135,599
$
(392)
(72)
21
—
— (a)
—
—
(464) $
23,316
23,350
(28,496)
$ (28,496)
76,317
59,303
23,316
$ 158,949
(392)
(72)
(28,496)
$ (28,960)
(a) Gross unrealized losses related to these types of securities are less than $1 thousand.
As of December 31, 2013 and 2012, our corporate securities had an amortized cost and estimated fair value of $6.7 million and
$7.0 million, respectively, and were comprised of single issue trust preferred securities issued primarily by money center and
large regional banks. There were no corporate securities in an unrealized loss position as of December 31, 2013 and 2012.
When unrealized losses exist, management reviews each of the issuer’s asset quality, earnings trend and capital position, to
determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the
corporate securities are being made as contractually required.
As of December 31, 2013, the book value of our pooled trust preferred collateralized debt obligations totaled $42.0 million with
an estimated fair value of $23.5 million, which includes securities comprised of 288 banks and other financial institutions. All
of our pooled securities are mezzanine tranches, four of which have no senior class remaining in the issue. The credit ratings on
all of the issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from
approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security
consisted of a security issued by any one institution. As of December 31, 2013, after taking into account management’s best
estimates of future interest deferrals and defaults, five of our securities had no excess subordination in the tranches we own and
five of our securities had excess subordination which ranged from 3% to 59% of the current performing collateral.
The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of
December 31, 2013:
(cid:38)lass
(cid:37)oo(cid:78)
(cid:57)al(cid:88)e
(cid:40)st(cid:76)(cid:80)ate(cid:71)
Fa(cid:76)r
(cid:57)al(cid:88)e
(cid:56)nreal(cid:76)(cid:93)e(cid:71)
(cid:42)a(cid:76)n
(cid:11)(cid:47)oss(cid:12)
Moo(cid:71)(cid:92)(cid:182)s(cid:18)
F(cid:76)t(cid:70)h
(cid:53)at(cid:76)ngs
(cid:49)(cid:88)(cid:80)(cid:69)er
o(cid:73)
(cid:37)an(cid:78)s
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:39)e(cid:73)errals
an(cid:71)
(cid:39)e(cid:73)a(cid:88)lts
as a (cid:8) o(cid:73)
(cid:38)(cid:88)rrent
(cid:38)ollateral
(cid:40)(cid:91)(cid:70)ess
S(cid:88)(cid:69)or(cid:71)(cid:76)nat(cid:76)on
as a (cid:8) o(cid:73)
(cid:38)(cid:88)rrent
(cid:51)er(cid:73)or(cid:80)(cid:76)ng
(cid:38)ollateral
Mezzanine
$
1,830
$
1,264
$
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
57
2,581
1,956
2,304
1,388
5,374
12,452
13,653
445
34
2,367
1,100
1,173
1,291
2,852
6,862
6,234
346
(566)
(23)
(214)
(856)
(1,131)
(97)
(2,522)
(5,590)
(7,419)
(99)
B1/B
C/-
Ca/C
C/C
Caa1/C
Caa3/C
Caa3/C
Caa3/C
Ca/C
Ca/C
$
42,040
$
23,523
$
(18,517)
6
3
14
30
42
46
68
61
59
11
18.05%
100.00
54.14
58.01
30.29
35.07
30.26
31.09
37.00
58.76
58.54%
0.00
0.00
0.00
3.36
0.00
0.00
16.78
42.17
10.41
(cid:39)eal
Pre TSL IV
Pre TSL V
Pre TSL VII
Pre TSL VIII
Pre TSL IX
Pre TSL X
Pre TSL XII
Pre TSL XIII
Pre TSL XIV
MMCap I
Total
Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and market
uncertainties related to the financial industry are factors contributing to the impairment on these securities.
61
All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies
and therefore are not considered covered funds under the Volcker Rule.
On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. For the year ended December 31,
2013, there were no credit related other-than-temporary impairment charges recognized on our pooled trust preferred
collateralized debt obligations. When evaluating these investments we determine a credit related portion and a non-credit
related portion of other-than-temporary impairment. The credit related portion is recognized in earnings and represents the
difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI
and represents the difference between the fair value of the security and the amount of credit related impairment. A discounted
cash flow analysis provides the best estimate of credit related other-than-temporary impairment for these securities.
As of December 31, 2013, 2012 and 2011 none of the pooled trust preferred collateralized debt obligations were considered to
be nonperforming securities.
Additional information related to the discounted cash flow analysis follows:
Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of
FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred.
Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected
involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows
estimated at December 31, 2013. We consider the discounted cash flow analysis to be our primary evidence when determining
whether credit related other-than-temporary impairment exists.
Results of a discounted cash flow test are significantly affected by other variables such as the estimate of future cash flows,
credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following
provides additional information for each of these variables:
• Estimate of Future Cash Flows—Cash flows are constructed in an INTEX cash flow model which includes each deal’s
structural features. Projected cash flows include prepayment assumptions which are dependent on the issuers asset size
and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a
100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a
prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15
billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the
coupon is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption
incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and
interest payments of our investments will be returned.
• Credit Analysis—A quarterly credit evaluation is performed for each of the 288 banks comprising the collateral across
the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the
nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations,
deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on
profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital
adequacy and liquidity.
•
Probability of Default—A probability of default is determined for each bank and is used to calculate the expected
impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a
probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability
of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on
their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks
currently in deferral we assume the bank continues to defer and will eventually default and therefore a 100% probability
of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest
or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is
assigned. The probability of default is updated quarterly. As of December 31, 2013, default probabilities for performing
collateral ranged from 0.33% to 75%.
Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying piece of collateral.
Using the results of the credit evaluation, the next step of the process is to look at pricing of senior debt or credit default swaps
for the issuer (or where such information is unavailable, for companies having similar credit profiles as the issuer). The pricing
of these market indicators provides the information necessary to determine appropriate default probabilities for each bank.
In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of
excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the
level of defaults which results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate
excess subordination levels for each pooled trust preferred security. The results of the stress test allows management to identify
62
those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely
for potential deterioration of credit quality.
Our cash flow analysis as of December 31, 2013, indicates that no credit related other-than-temporary impairment has occurred
on our pooled trust preferred securities during the year ended December 31, 2013. Based upon the analysis performed by
management, it is probable that five of our pooled trust preferred securities are expected to experience contractual principal and
interest shortfalls and therefore appropriate other-than-temporary impairment charges were recorded in prior periods. These
securities are identified in the table on page 61 with 0% “Excess Subordination as a % of Current Performing Collateral.” For
the remaining securities in the table, our analysis as of December 31, 2013 indicates it is probable that we will collect all
contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL XIII, PreTSL XIV and MMCap I,
other-than-temporary impairment charges were recorded in prior periods, however, due to improvement in the expected cash
flows of these securities, it is now probable that all contractual payments will be received.
During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred
securities, except for PreTSL IV. Our cash flow analysis as of December 31, 2013, for all of these impaired securities indicates
that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary
impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these
securities and has resulted in our current book value being below the present value of estimated future principal and interest
payments. The excess for each bond of the present value of future cash flows over our current book value ranges from 22% to
163% and will be recognized as an adjustment to yield over the remaining life of these securities.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not
intended to be sold for the years ended December 31:
Balance, beginning (a)
Credit losses on debt securities for which other-than-temporary impairment
was not previously recognized
Additional credit losses on debt securities for which other-than-temporary
impairment was previously recognized
Increases in cash flows expected to be collected, recognized over the
remaining life of the security (b)
Reduction for debt securities called during the period
Balance, ending
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
43,274
$
44,736
$
44,850
—
—
(2,375)
(13,356)
27,543
$
—
—
(1,462)
—
—
—
(114)
—
$
43,274
$
44,736
(a) The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized
on debt securities in prior periods.
(b) Represents the increase in cash flows recognized either as principal payments or interest income during the period.
For the years ended December 31, 2013, 2012 and 2011, there was no impairment recognized on equity securities. On a
quarterly basis, management evaluates equity securities for other-than-temporary impairment. As part of this evaluation we
review the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating
changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. There
were no equity securities in an unrealized loss position as of December 31, 2013 and 2012.
In the table above, the $13.4 million reduction in cumulative credit losses related to debt securities being called is a result of
the early redemption of MMComm IX. The Senior note holders of this bond elected to liquidate all assets of the trust, resulting
in losses for the mezzanine notes owned by First Commonwealth. Our book value before redemption was $6.6 million and at
the time of redemption a loss of $1.3 million was recognized.
Other Investments
As a member of the FHLB, First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and
borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage
related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to
another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike
other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB
membership rules and not by market participants. As of December 31, 2013 and 2012, our FHLB stock totaled $35.4 million
and $28.2 million, respectively and is included in “Other investments” on the Consolidated Statements of Financial Condition.
Beginning in July 2013, the FHLB began repurchasing 100% of a members excess stock on a monthly basis. In the months
prior to that in 2013 and 2012, the FHLB repurchased the lessor of 5% of the members’ total capital stock outstanding or its
63
total excess capital stock on a quarterly basis. As a result, during the twelve months ended December 31, 2013 and 2012, $10.9
million and $11.6 million, respectively, of the stock owned by First Commonwealth was repurchased. The FHLB repurchased
stock and paid dividends in 2013 and 2012, however, decisions regarding any future repurchase of excess capital stock and
dividend payments will be made by the FHLB on an ongoing basis. Management reviewed the FHLB’s Form 10-Q for the
period ended September 30, 2013 filed with the SEC on November 7, 2013.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value.
First Commonwealth evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that
reflects our view of the FHLB’s long-term performance, which includes factors such as the following:
•
•
•
•
•
its operating performance;
the severity and duration of declines in the fair value of its net assets related to its capital stock amount;
its commitment to make payments required by law or regulation and the level of such payments in relation to its
operating performance;
the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and
its liquidity and funding position.
After evaluating all of these considerations, First Commonwealth concluded that the par value of its investment in FHLB stock
will be recovered. Accordingly, no impairment charge was recorded on these securities for the year ended December 31, 2013.
Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB
stock.
(cid:49)ote (cid:20)(cid:19)(cid:178)(cid:47)oans an(cid:71) Allowan(cid:70)e (cid:73)or (cid:38)re(cid:71)(cid:76)t (cid:47)osses
The following table provides outstanding balances related to each of our loan types as of December 31:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans and leases net of unearned income
Credit Quality Information
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
1,021,056
$
1,019,822
93,289
1,262,718
1,296,472
610,298
87,438
1,241,565
1,273,661
582,218
$
4,283,833
$
4,204,704
As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are
used in grading our loans:
Pass
Acceptable levels of risk exist in the relationship. Includes all loans not adversely classified as
OAEM, substandard or doubtful.
Other Assets Especially Mentioned (OAEM)
Substandard
Potential weaknesses that deserve management’s close attention. The potential weaknesses may
result in deterioration of the repayment prospects or weaken the Bank’s credit position at some
future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the
circumstances surrounding the specific credit. No loss of principal or interest is expected.
Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be
classified as substandard as a result of deterioration of the borrower’s financial condition and
repayment capacity. Loans for which repayment plans have not been met or collateral equity margins
do not protect the Company may also be classified as substandard.
Doubtful
Loans with the characteristics of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of
credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on
an evaluation of the borrower’s cash flow and collateral. Movements between these rating categories provide a predictive
measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings
are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related
64
to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas,
loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan
balances.
The following tables represent our credit risk profile by creditworthiness category for the years ended December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al(cid:15)
(cid:73)(cid:76)nan(cid:70)(cid:76)al(cid:15)
agr(cid:76)(cid:70)(cid:88)lt(cid:88)ral
an(cid:71) other
(cid:53)eal estate
(cid:70)onstr(cid:88)(cid:70)t(cid:76)on
(cid:53)es(cid:76)(cid:71)ent(cid:76)al real
estate
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al
real estate
(cid:47)oans to
(cid:76)n(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)als
(cid:55)otal
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
943,107
$
79,679
$ 1,245,422
$ 1,243,170
$
610,094
$ 4,121,472
35,429
42,520
—
77,949
9,710
3,900
—
13,610
5,161
12,135
—
17,296
28,823
24,479
—
53,302
1
203
—
204
79,124
83,237
—
162,361
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
$ 1,021,056
$
93,289
$ 1,262,718
$ 1,296,472
$
610,298
$ 4,283,833
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al(cid:15)
(cid:73)(cid:76)nan(cid:70)(cid:76)al(cid:15)
agr(cid:76)(cid:70)(cid:88)lt(cid:88)ral
an(cid:71) other
(cid:53)eal estate
(cid:70)onstr(cid:88)(cid:70)t(cid:76)on
(cid:53)es(cid:76)(cid:71)ent(cid:76)al real
estate
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al
real estate
(cid:47)oans to
(cid:76)n(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)als
(cid:55)otal
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
925,868
$
64,353
$ 1,224,849
$ 1,119,093
$
582,039
$ 3,916,202
31,049
62,905
—
93,954
925
18,638
3,522
23,085
5,647
11,069
—
16,716
82,581
71,987
—
154,568
3
176
—
179
120,205
164,775
3,522
288,502
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
$ 1,019,822
$
87,438
$ 1,241,565
$ 1,273,661
$
582,218
$ 4,204,704
Portfolio Risks
The credit quality of our loan portfolio represents significant risk to our earnings, capital, regulatory agency relationships,
investment community and shareholder returns. First Commonwealth devotes a substantial amount of resources managing this
risk primarily through our credit administration department that develops and administers policies and procedures for
underwriting, maintaining, monitoring and collecting activities. Credit administration is independent of lending departments
and oversight is provided by the credit committee of the First Commonwealth Board of Directors.
Total gross charge-offs for the year ended December 31, 2013 and 2012 were $35.2 million and $17.0 million, respectively.
Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe
is adequate to absorb losses inherent to the portfolio as of December 31, 2013. However, changes in economic conditions,
interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could
significantly change those judgmental estimates.
Risk factors associated with commercial real estate and construction related loans are monitored closely since this is an area
that represents a significant portion of the loan portfolio and has experienced the most stress during the economic downturn.
Age Analysis of Past Due Loans by Segment
The following tables delineate the aging analysis of the recorded investments in past due loans as of December 31. Also
included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the
process of collection.
65
(cid:22)(cid:19) (cid:16) (cid:24)(cid:28)
(cid:71)a(cid:92)s
(cid:83)ast (cid:71)(cid:88)e
(cid:25)(cid:19) (cid:16) (cid:27)(cid:28)
(cid:71)a(cid:92)s
(cid:83)ast
(cid:71)(cid:88)e
(cid:28)(cid:19) (cid:71)a(cid:92)s
an(cid:71)
greater
an(cid:71) st(cid:76)ll
a(cid:70)(cid:70)r(cid:88)(cid:76)ng
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:55)otal (cid:83)ast
(cid:71)(cid:88)e an(cid:71)
nona(cid:70)(cid:70)r(cid:88)al
(cid:49)ona(cid:70)(cid:70)r(cid:88)al
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:38)(cid:88)rrent
(cid:55)otal
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
$
594
$
319
$
185
$
23,631
$
24,729
$
996,327
$ 1,021,056
—
4,002
1,199
2,895
—
524
23
990
—
1,041
13
1,266
2,567
10,520
8,966
204
2,567
16,087
10,201
5,355
90,722
93,289
1,246,631
1,262,718
1,286,271
1,296,472
604,943
610,298
Total
$
8,690
$
1,856
$
2,505
$
45,888
$
58,939
$ 4,224,894
$ 4,283,833
(cid:22)(cid:19) (cid:16) (cid:24)(cid:28)
(cid:71)a(cid:92)s
(cid:83)ast (cid:71)(cid:88)e
(cid:25)(cid:19) (cid:16) (cid:27)(cid:28)
(cid:71)a(cid:92)s
(cid:83)ast
(cid:71)(cid:88)e
(cid:28)(cid:19) (cid:71)a(cid:92)s
an(cid:71)
greater
an(cid:71) st(cid:76)ll
a(cid:70)(cid:70)r(cid:88)(cid:76)ng
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:55)otal (cid:83)ast
(cid:71)(cid:88)e an(cid:71)
nona(cid:70)(cid:70)r(cid:88)al
(cid:49)ona(cid:70)(cid:70)r(cid:88)al
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:38)(cid:88)rrent
(cid:55)otal
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
$
991
$
620
$
288
$
29,258
$
31,157
$
988,665
$ 1,019,822
2
6,597
3,339
3,140
19
2,357
1,389
934
15
730
195
1,219
9,778
9,283
46,023
176
9,814
18,967
50,946
5,469
77,624
87,438
1,222,598
1,241,565
1,222,715
1,273,661
576,749
582,218
Total
$
14,069
$
5,319
$
2,447
$
94,518
$
116,353
$ 4,088,351
$ 4,204,704
Nonaccrual Loans
The previous table summarizes nonaccrual loans by loan segment. The company generally places loans on nonaccrual status
when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been
charged off and no restructuring has occurred or the loans reach a certain number of days past due. Generally loans 90 days or
more past due are placed on nonaccrual status, except for consumer loans which are placed in nonaccrual status at 150 days past
due.
When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future
payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all
delinquent interest and principal become current under the terms of the loan agreement or (b) the loan is both well-secured and
in the process of collection and collectability is no longer doubtful.
Impaired Loans
Management considers loans to be impaired when, based on current information and events, it is determined that the Company
will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination
of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is
measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when
the sole source or repayment for the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the
appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the
recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance.
Troubled debt restructured loans on accrual status are considered to be impaired loans.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all
payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an
impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when
received, under the cash basis method.
66
Nonperforming loans decreased $48.2 million to $59.4 million at December 31, 2013 compared to $107.6 million at
December 31, 2012. Contributing to this decrease was the sale of $17.2 million of loans related to a real estate developer in
eastern Pennsylvania as well as a $2.5 million commercial real estate loan in Nevada and a $3.5 million construction loan for a
Florida condominium project. Also, a $3.8 million hotel resort syndication loan in the state of Washington, a $2.1 million
specialty plastics molding company in western Pennsylvania and a $2.3 million commercial loan to a western Pennsylvania
excavation company were returned to accrual status during 2013. Additionally, $21.2 million in charge-offs were recognized on
four commercial loan relationships during 2013, including $2.8 million for a commercial real estate loan to a western
Pennsylvania non-profit healthcare facility which was foreclosed on during 2013, $3.0 million for a commercial real estate loan
to a western Pennsylvania student housing project which paid off during the third quarter of 2013, $2.3 million for a
commercial industrial loan to a local energy company and $13.1 million for an unsecured commercial loan to a western
Pennsylvania real estate developer.
A total of $42.2 million of loans were moved into nonaccrual status during the year-ended December 31, 2013. Five
commercial loan relationships comprise $32.8 million of this total. These relationships include:
•
•
•
•
•
$12.7 million in commercial industrial loans to a local energy company,
a $7.7 million commercial real estate loan to a real estate management company in western Pennsylvania. The total balance
of this loan was subsequently paid off during 2013.
a $5.7 million commercial real estate relationship to a western Pennsylvania commercial real estate developer, of which
$0.5 million was charged-off and $4.8 million was moved to OREO, all during the year-ended December 31, 2013,
a $3.6 million commercial relationship to a specialty metal processor in western Pennsylvania, and
a $3.1 million commercial relationship with a western Pennsylvania glass manufacturer.
In addition to this, $3.7 million in consumer loans which were 150 days or more past due were moved to nonaccrual status.
Beginning in the third quarter of 2012, consumer loans are moved to nonaccrual status once they reach 150 days past due,
however, in prior periods, these loans were not placed in nonaccrual status if they were well secured and in the process of
collection.
The specific allowance for nonperforming loans decreased by $9.0 million at December 31, 2013 compared to 2012, primarily
due to charge-offs of amounts reserved for in prior periods as well as the payoff of certain nonaccrual loans previously
discussed. Unfunded commitments related to nonperforming loans were $0.5 million at December 31, 2013 and after
consideration of available collateral related to these commitments, an off balance sheet reserve of $0.1 million was established.
There were no loans held for sale at December 31, 2013 and 2012; however, sales of loans during the years-ended
December 31, 2013 and 2012 resulted in gains of $0.6 million and $2.9 million, respectively.
Significant nonaccrual loans as of December 31, 2013, include the following:
$12.3 million of commercial industrial loans to a local energy company. These loans were originated from 2008 to 2011
and were placed in nonaccrual status during the third quarter of 2013. One of these loans, totaling $3.3 million, was
modified resulting in TDR classification in the second quarter of 2012. An updated valuation of the collateral was
completed during the third quarter of 2013.
$3.3 million commercial industrial loan to a specialty metals processor in western Pennsylvania. This loan was originated
in 2003 and was placed on nonaccrual status in the second quarter of 2013. The assets collateralizing this relationship as
well as the appraisal for the real estate collateral were valued in the second quarter of 2013.
$2.4 million, the remaining portion net of reserves, of a $44.1 million unsecured loan to a western Pennsylvania real estate
developer. This loan was originated in 2004 and was placed on nonaccrual status in the fourth quarter of 2009. Charge-offs
of $28.5 million have been recorded on this loan, of which $13.1 million occurred in the second quarter of 2013.
$3.1 million commercial real estate loan relationship with a non-profit organization in western Pennsylvania. This loan
was originated in 2008 and was placed on nonaccrual status in the second quarter of 2012. The appraisals for the real
estate collateral were valued in the first and fourth quarters of 2013.
•
•
•
•
67
The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated
allowance amount, if applicable, as of December 31, 2013 and 2012. Also presented are the average recorded investment in
impaired loans and the related amount of interest recognized while the loan was considered impaired for the years ended
December 31, 2013, 2012 and 2011. Average balances are calculated based on month-end balances of the loans for the period
reported and are included in the table below based on its period end allowance position.
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:76)n(cid:89)est(cid:80)ent
(cid:56)n(cid:83)a(cid:76)(cid:71)
(cid:83)r(cid:76)n(cid:70)(cid:76)(cid:83)al
(cid:69)alan(cid:70)e
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:53)elate(cid:71)
allowan(cid:70)e
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
A(cid:89)erage
re(cid:70)or(cid:71)e(cid:71)
(cid:76)n(cid:89)est(cid:80)ent
(cid:44)nterest
(cid:44)n(cid:70)o(cid:80)e
(cid:53)e(cid:70)ogn(cid:76)(cid:93)e(cid:71)
With no related allowance recorded:
Commercial, financial, agricultural and other
$
6,752
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With an allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
3,486
9,333
13,606
289
33,466
21,482
414
3,533
488
—
7,649
6,664
9,952
14,719
307
39,291
22,082
$
737
3,585
612
—
7,364
94
1,282
84
—
$
14,454
$
5,923
9,280
27,881
255
57,793
16,479
515
3,200
188
—
73
47
211
250
3
584
64
—
31
—
—
95
25,917
27,016
8,824
20,382
$
59,383
$
66,307
$
8,824
$
78,175
$
679
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:76)n(cid:89)est(cid:80)ent
(cid:56)n(cid:83)a(cid:76)(cid:71)
(cid:83)r(cid:76)n(cid:70)(cid:76)(cid:83)al
(cid:69)alan(cid:70)e
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:53)elate(cid:71)
allowan(cid:70)e
A(cid:89)erage
re(cid:70)or(cid:71)e(cid:71)
(cid:76)n(cid:89)est(cid:80)ent
(cid:44)nterest
(cid:44)n(cid:70)o(cid:80)e
(cid:53)e(cid:70)ogn(cid:76)(cid:93)e(cid:71)
With no related allowance recorded:
Commercial, financial, agricultural and other
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With an allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
$
8,080
8,491
7,928
33,259
256
58,014
26,532
2,756
2,695
17,558
—
49,541
107,555
$
$
8,983
35,555
8,401
35,401
256
88,596
27,412
3,087
2,696
17,896
—
51,091
139,687
$
$
10,331
300
780
6,367
—
17,778
17,778
$
$
9,217
11,912
8,114
28,574
103
57,920
21,979
1,457
1,599
5,024
—
30,059
87,979
$
$
173
—
72
66
2
313
9
—
15
32
—
56
369
68
With no related allowance recorded:
Commercial, financial, agricultural and other
$
3,887
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With an allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
(cid:21)(cid:19)(cid:20)(cid:20)
A(cid:89)erage
re(cid:70)or(cid:71)e(cid:71)
(cid:76)n(cid:89)est(cid:80)ent
(cid:44)nterest
(cid:44)n(cid:70)o(cid:80)e
(cid:53)e(cid:70)ogn(cid:76)(cid:93)e(cid:71)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
23,254
2,702
35,817
10
65,670
30,456
14,465
615
28,716
—
74,252
20
10
9
799
—
838
152
—
7
396
—
555
$
139,922
$
1,393
Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of
principal or interest as a result of the financial difficulties experienced by the borrower, who could not obtain comparable terms
from alternate financing sources.
As a result of adopting the amendments in ASU 2011-2, all restructurings that occurred on or after January 1, 2011 were
assessed for identification as troubled debt restructurings considering the new guidance. No additional troubled debt
restructurings were identified for loans for which the allowance for credit losses would have previously been measured under a
general allowance for credit losses methodology.
The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on
troubled debt restructured loans as of December 31:
Troubled debt restructured loans
Accrual status
Nonaccrual status
Total
Commitments
Letters of credit
Unused lines of credit
Total
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
$
$
13,495
16,980
30,475
$
$
— $
452
452
$
13,037
50,979
64,016
1,574
—
1,574
$
$
$
$
20,276
44,841
65,117
12,580
42
12,622
At December 31, 2013, troubled debt restructured loans decreased $33.5 million compared to December 31, 2012 and
commitments related to troubled debt restructured loans decreased $1.1 million for the same period. This decrease in loans is
primarily a result of the sale of a $17.2 million loan for a commercial real estate developer in eastern Pennsylvania and the
charge-off of $13.1 million related to an unsecured loan to a western Pennsylvania real estate developer. The decrease in
commitments is due to the payoff of a loan with a $0.8 million unfunded commitment. The outstanding commitments as of
December 31, 2011 were primarily committed to one loan relationship that paid off in full in January 2012.
During 2013, all decreases in balances between the pre-modification and post-modification balance are due to customer
payments.
69
During 2012, a $2.8 million nonaccrual loan to a water treatment plant and a $3.7 million accruing loan to a gas well servicing
operation were each restructured with a twelve month principal forbearance. At December 31, 2012, the nonaccrual loan was
fully reserved for while the the loan that was on accruing status was secured by company assets. During 2013, the accruing
loan was placed in nonaccrual status. These loans are part of a $17.0 million commercial loan relationship with a shallow gas
well operator whose business has been impacted by the sharp decline in natural gas prices due to the success of Marcellus deep
well drilling. In addition to these two loans, other loans in this relationship include loans to a related exploration and production
company and loans to the principal which are secured by real estate and investment securities. Also, in 2012 a $3.3 million
commercial real estate loan was restructured with a six month maturity extension. This loan has remained on accruing status
and the collateral shortfall is fully reserved. The remainder of changes in loan balances for 2012 between the pre-modification
balance and the post-modification balance is due to customer payments.
During 2011, a $2.7 million charge-off was recorded in relation to the transfer to held for sale of one of the loans included in
commercial real estate in the table below. The sale of this loan was completed in 2012. Three commercial real estate loans,
totaling $10.2 million, were classified as troubled debt restructured loans during 2011 and subsequently paid off prior to
December 31, 2011. In addition, $5.6 million was charged-off in the restructuring of one relationship modified during the fourth
quarter of 2011. The loans in this relationship were sold during 2013. The remainder of changes in loan balances for 2011
between the pre-modification balance and the post-modification balance is due to customer payments.
The following tables provide detail, including specific reserve and reasons for modification, related to loans identified as
troubled debt restructurings during the years ending December 31:
(cid:55)(cid:92)(cid:83)e o(cid:73) Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:49)(cid:88)(cid:80)(cid:69)er
o(cid:73)
(cid:38)ontra(cid:70)ts
(cid:40)(cid:91)ten(cid:71)
Mat(cid:88)r(cid:76)t(cid:92)
Mo(cid:71)(cid:76)(cid:73)(cid:92)
(cid:53)ate
Mo(cid:71)(cid:76)(cid:73)(cid:92)
(cid:51)a(cid:92)(cid:80)ents
(cid:50)ther
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:55)otal
(cid:51)re(cid:16)
Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:44)n(cid:89)est(cid:80)ent
(cid:51)ost(cid:16)
Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:44)n(cid:89)est(cid:80)ent
S(cid:83)e(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)
(cid:53)eser(cid:89)e
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
14
46
5
17
82
$
3,462
$
— $
1,677
$
— $
5,139
$
3,104
$
347
571
10
418
1,499
101
2,116
145
33
—
—
—
2,881
2,215
144
2,316
2,184
109
906
161
34
—
$
4,390
$
2,018
$
3,971
$
— $
10,379
$
7,713
$
1,101
(cid:55)(cid:92)(cid:83)e o(cid:73) Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:49)(cid:88)(cid:80)(cid:69)er
o(cid:73)
(cid:38)ontra(cid:70)ts
(cid:40)(cid:91)ten(cid:71)
Mat(cid:88)r(cid:76)t(cid:92)
Mo(cid:71)(cid:76)(cid:73)(cid:92)
(cid:53)ate
Mo(cid:71)(cid:76)(cid:73)(cid:92)
(cid:51)a(cid:92)(cid:80)ents
(cid:50)ther
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:55)otal
(cid:51)re(cid:16)
Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:44)n(cid:89)est(cid:80)ent
(cid:51)ost(cid:16)
Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:44)n(cid:89)est(cid:80)ent
S(cid:83)e(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)
(cid:53)eser(cid:89)e
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
12
2
25
4
17
60
$
1,599
$
187
$
9,476
$
— $
11,262
$
11,335
$
4,237
1,697
200
3,280
—
—
132
4,308
97
—
697
71
88
$
6,776
$
4,724
$ 10,332
$
—
48
—
6
54
1,697
1,077
7,659
191
2,133
973
7,607
173
200
69
409
—
$
21,886
$
22,221
$
4,915
70
(cid:55)(cid:92)(cid:83)e o(cid:73) Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:49)(cid:88)(cid:80)(cid:69)er
o(cid:73)
(cid:38)ontra(cid:70)ts
(cid:40)(cid:91)ten(cid:71)
Mat(cid:88)r(cid:76)t(cid:92)
Mo(cid:71)(cid:76)(cid:73)(cid:92)
(cid:53)ate
Mo(cid:71)(cid:76)(cid:73)(cid:92)
(cid:51)a(cid:92)(cid:80)ents
(cid:50)ther
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:55)otal
(cid:51)re(cid:16)
Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:44)n(cid:89)est(cid:80)ent
(cid:51)ost(cid:16)
Mo(cid:71)(cid:76)(cid:73)(cid:76)(cid:70)at(cid:76)on
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:53)e(cid:70)or(cid:71)e(cid:71)
(cid:44)n(cid:89)est(cid:80)ent
S(cid:83)e(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)
(cid:53)eser(cid:89)e
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Total
13
6
10
22
51
$
100
$
475
$
2,218
$
— $
2,793
$
2,749
$
2,554
—
86
515
—
601
17,202
24,226
2,311
—
—
—
2,640
1,116
43,739
2,852
1,100
25,292
743
—
65
507
$ 19,856
$ 25,302
$
5,130
$
— $
50,288
$
31,993
$
1,315
The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in
this footnote. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as
a reamortization of the principal and an extension of the maturity. For the years ended December 31, 2013, 2012 and 2011, $2.0
million, $4.7 million and $25.2 million, respectively, of total rate modifications represent loans with modifications to the rate as
well as payment due to reamortization.
A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. As of
December 31, 2013, one residential real estate loan totaling $19 thousand, restructured during 2013 was considered to be in
default. At December 31, 2012, there were no loans restructured within the preceding twelve months which were considered to
be in default. As of December 31, 2011, one commercial real estate loan totaling $4.1 million, restructured during the first
quarter of 2011 was considered to be in default. This loan was transferred to held for sale as of December 31, 2011 and the sale
was completed in 2012.
The following tables provide detail related to the allowance for credit losses for the years ended December 31. During 2013,
the negative $5.9 million provision for credit losses related to the unallocated portion of the allowance is a result of it no longer
being treated as a separate component of the allowance but instead is now incorporated into the reserve provided for each loan
category. This portion of the allowance for credit losses reflects the qualitative or environmental factors that are likely to cause
estimated credit losses to differ from historical loss experience.
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al(cid:15)
(cid:73)(cid:76)nan(cid:70)(cid:76)al(cid:15)
agr(cid:76)(cid:70)(cid:88)lt(cid:88)ral
an(cid:71) other
(cid:53)eal estate
(cid:70)onstr(cid:88)(cid:70)t(cid:76)on
(cid:53)es(cid:76)(cid:71)ent(cid:76)al
real estate
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al
real estate
(cid:47)oans to
(cid:76)n(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)als
(cid:56)nallo(cid:70)ate(cid:71)
(cid:55)otal
(cid:21)(cid:19)(cid:20)(cid:22)
Allowance for credit
losses:
Beginning Balance
$
19,852
$
8,928
$
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
5,908
(1,814)
1,264
2,369
7,727
1,282
$
$
$
22,441
(10,513)
136
(286)
11,778
84
$
$
$
4,132
(3,679)
633
4,371
$
5,926
$
—
—
(5,926)
5,457
$
— $
67,187
(35,178)
2,989
19,227
54,225
— $
— $
8,824
(18,399)
455
20,755
22,663
7,364
$
$
(773)
501
(2,056)
6,600
94
$
$
15,299
6,506
6,445
11,694
5,457
—
45,401
1,021,056
93,289
1,262,718
1,296,472
610,298
4,283,833
27,251
3,844
9,349
12,151
—
52,595
993,805
89,445
1,253,369
1,284,321
610,298
4,231,238
Charge-offs
Recoveries
Provision (credit)
$
$
Ending Balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Loans:
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
71
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al(cid:15)
(cid:73)(cid:76)nan(cid:70)(cid:76)al(cid:15)
agr(cid:76)(cid:70)(cid:88)lt(cid:88)ral
an(cid:71) other
(cid:53)eal estate
(cid:70)onstr(cid:88)(cid:70)t(cid:76)on
(cid:53)es(cid:76)(cid:71)ent(cid:76)al
real estate
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al
real estate
(cid:47)oans to
(cid:76)n(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)als
(cid:56)nallo(cid:70)ate(cid:71)
(cid:55)otal
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:21)(cid:19)(cid:20)(cid:21)
Allowance for credit
losses:
Beginning Balance
Charge-offs
Recoveries
Provision
Ending Balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Loans:
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
$
$
$
18,200
(5,207)
443
6,416
19,852
10,331
$
$
$
6,756
(3,601)
582
5,191
8,928
300
$
$
$
8,237
(3,828)
422
1,077
5,908
780
$
$
$
18,961
(851)
410
3,921
22,441
6,367
$
$
$
$
4,244
(3,482)
521
2,849
$
4,836
—
—
1,090
4,132
$
5,926
$
61,234
(16,969)
2,378
20,544
67,187
— $
— $
17,778
9,521
8,628
5,128
16,074
4,132
5,926
49,409
1,019,822
87,438
1,241,565
1,273,661
582,218
4,204,704
33,443
11,177
6,444
49,123
—
100,187
986,379
76,261
1,235,121
1,224,538
582,218
4,104,517
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al(cid:15)
(cid:73)(cid:76)nan(cid:70)(cid:76)al(cid:15)
agr(cid:76)(cid:70)(cid:88)lt(cid:88)ral
an(cid:71) other
(cid:53)eal estate
(cid:70)onstr(cid:88)(cid:70)t(cid:76)on
(cid:53)es(cid:76)(cid:71)ent(cid:76)al
real estate
(cid:38)o(cid:80)(cid:80)er(cid:70)(cid:76)al
real estate
(cid:47)oans to
(cid:76)n(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)als
(cid:56)nallo(cid:70)ate(cid:71)
(cid:55)otal
(cid:21)(cid:19)(cid:20)(cid:20)
Allowance for credit
losses:
Beginning Balance
$
21,700
$
18,002
$
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
5,454
(4,107)
132
6,758
8,237
93
$
$
$
16,913
(24,861)
349
26,560
18,961
1,114
$
$
$
4,215
(3,325)
573
2,781
4,244
$
$
4,945
$
—
—
(109)
4,836
$
71,229
(68,293)
2,482
55,816
61,234
— $
— $
13,236
(7,114)
(28,886)
473
3,141
18,200
9,069
$
$
955
16,685
6,756
2,960
$
$
9,131
3,796
8,144
17,847
4,244
4,836
47,998
996,739
76,564
1,137,059
1,267,432
565,849
4,043,643
37,639
14,667
2,606
39,832
—
94,744
959,100
61,897
1,134,453
1,227,600
565,849
3,948,899
Charge-offs
Recoveries
Provision (credit)
$
$
Ending Balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Loans:
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
(cid:49)ote (cid:20)(cid:20)(cid:178)(cid:57)ar(cid:76)a(cid:69)le (cid:44)nterest (cid:40)nt(cid:76)t(cid:76)es
As defined by FASB ASC 810-10, “Consolidation,” a Variable Interest Entity (“VIE”) is a corporation, partnership, trust or any
other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to support its activities. Under ASC 810-10, an entity
that holds a variable interest in a VIE is required to consolidate the VIE if the entity is deemed to be the primary beneficiary,
72
which generally means it is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of
the entity’s residual returns, or both.
First Commonwealth’s VIEs are evaluated under the guidance included in ASU 2009-17. These VIEs include qualified
affordable housing projects that First Commonwealth has invested in as part of its community reinvestment initiatives. We
periodically assess whether or not our variable interests in these VIEs, based on qualitative analysis, provide us with a
controlling interest in the VIE. The analysis includes an assessment of the characteristics of the VIE. We do not have a
controlling financial interest in the VIE, which would require consolidation of the VIE, as we do not have the following
characteristics: (1) the power to direct the activities that most significantly impact the VIE’s economic performance; and (2) the
obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
First Commonwealth’s maximum potential exposure is equal to its carrying value and is summarized in the table below as of
December 31:
Low Income Housing Limited Partnership Investments
(cid:49)ote (cid:20)(cid:21)(cid:178)(cid:38)o(cid:80)(cid:80)(cid:76)t(cid:80)ents an(cid:71) (cid:47)etters o(cid:73) (cid:38)re(cid:71)(cid:76)t
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(dollars in thousands)
$
207
$
347
First Commonwealth is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financial needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and
commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the Consolidated Statements of Financial Condition. First Commonwealth’s exposure to credit loss in
the event of nonperformance by the other party of the financial instrument for commitments to extend credit, standby letters of
credit and commercial letters of credit is represented by the contract or notional amount of those instruments. First
Commonwealth uses the same credit policies for underwriting all loans, including these commitments and conditional
obligations.
As of December 31, 2013 and 2012, First Commonwealth did not own or trade other financial instruments with significant off-
balance sheet risk including derivatives such as futures, forwards, option contracts and the like, although such instruments may
be appropriate to use in the future to manage interest rate risk. See Note 7 “Derivatives” for a description of interest rate swaps
provided to customers.
The following table identifies the notional amount of those instruments at December 31:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Financial standby letters of credit
Performance standby letters of credit
Commercial letters of credit
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(dollars in thousands)
$
1,571,987
$
1,506,618
38,121
32,441
—
47,185
69,240
685
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. First Commonwealth evaluates each customer’s creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by First Commonwealth upon extension of credit, is based
on management’s credit evaluation of the counterparty. Collateral that is held varies but may include accounts receivable,
inventory, property, plant and equipment, and residential and income-producing commercial properties.
Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to
guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the
maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a
total default by the guaranteed parties, without consideration for possible recoveries under recourse provisions or from
collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon;
therefore, the total commitment amounts do not necessarily represent future cash requirements.
The notional amounts outstanding at December 31, 2013 include amounts issued in 2013 of $0.7 million in financial standby
letters of credit and $1.3 million in performance standby letters of credit. There were no commercial letters of credit issued
73
during 2013. A liability of $0.1 million and $0.2 million has been recorded as of December 31, 2013 and 2012, respectively,
which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the
unrecognized portion of fees received at the time the commitment was issued.
Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the
borrower or guaranteed parties. Management’s evaluation of the credit risk in these commitments resulted in the recording of a
liability of $3.2 million and $2.4 million as of December 31, 2013 and 2012, respectively. The credit risk evaluation
incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan
category and the letters of credit.
(cid:49)ote (cid:20)(cid:22)(cid:178)(cid:51)re(cid:80)(cid:76)ses an(cid:71) (cid:40)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)ent
Premises and equipment are described as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Software
Subtotal
Less accumulated depreciation and amortization
Total premises and equipment
(cid:40)st(cid:76)(cid:80)ate(cid:71)
(cid:56)se(cid:73)(cid:88)l (cid:47)(cid:76)(cid:73)e
(cid:21)(cid:19)(cid:20)(cid:22)
(dollars in thousands)
$
12,431
$
Indefinite
10-50 years
5-40 years
3-10 years
3-10 years
81,829
14,354
80,131
46,133
234,878
166,938
$
67,940
$
(cid:21)(cid:19)(cid:20)(cid:21)
12,503
81,328
14,617
79,181
40,199
227,828
158,858
68,970
Depreciation related to premises and equipment included in noninterest expense for the years ended December 31, 2013, 2012
and 2011 amounted to $10.4 million, $7.9 million and $8.3 million, respectively.
As a result of the Company's core processing system conversion, which is expected to be completed in the third quarter of
2014, the estimated average useful life on $13.9 million in software included in the table above was reduced from an average
life of 6 years to 3 years and the average useful life on $0.7 million of equipment was reduced from an average life of 5 years to
4 years.
First Commonwealth leases various premises and assorted equipment under non-cancellable agreements. Total future minimal
rental commitments at December 31, 2013, were as follows:
2014
2015
2016
2017
2018
Thereafter
Total
(cid:51)re(cid:80)(cid:76)ses
(cid:40)(cid:84)(cid:88)(cid:76)(cid:83)(cid:80)ent
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
3,327
$
3,113
2,904
2,653
2,514
14,916
$
29,427
$
82
2
—
—
—
—
84
Included in the lease commitments above is $376 thousand in lease payments to be paid under a sale-leaseback arrangement.
The sale-leaseback transaction occurred in 2005 and resulted in a gain of $297 thousand on the sale of a branch that is being
recognized over the 15 year lease term through 2020.
Increases in utilities and taxes that may be passed on to the lessee under the terms of various lease agreements are not reflected
in the above table. However, certain lease agreements provide for increases in rental payments based upon historical increases
in the consumer price index or the lessor’s cost of operating the facility, and are included in the minimum lease commitments.
Additionally, the table above includes rent expense that is recognized for rent holidays and during construction periods. Total
lease expense amounted to $4.2 million, $4.3 million and $4.4 million in 2013, 2012 and 2011, respectively.
74
(cid:49)ote (cid:20)(cid:23)(cid:178)(cid:42)oo(cid:71)w(cid:76)ll an(cid:71) (cid:50)ther A(cid:80)ort(cid:76)(cid:93)(cid:76)ng (cid:44)ntang(cid:76)(cid:69)le Assets
FASB ASC Topic 350-20, “Intangibles—Goodwill and Other” requires an annual valuation of the fair value of a reporting unit
that has goodwill and a comparison of the fair value to the book value of equity to determine whether the goodwill has been
impaired. Goodwill is also required to be tested on an interim basis if an event or circumstance indicates that it is more likely
than not that an impairment loss has been incurred. When triggering events or circumstances indicate goodwill testing is
required, an assessment of qualitative factors can be completed before performing the two step goodwill impairment test. ASU
2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting
unit exceeds its carrying amount, then the two step goodwill impairment test is not required.
We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of December 31, 2013 and 2012
was $159.9 million. No impairment charges on goodwill or other intangible assets were incurred in 2013, 2012 or 2011.
We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur
during a quarter that may affect goodwill.
An assessment of qualitative factors was completed as of December 31, 2013 and indicated that it is more likely than not that
the fair value of First Commonwealth exceeds its carrying amount, therefore the two step goodwill impairment test was not
considered necessary. The assessment of qualitative factors incorporated the results of the Step 1 goodwill impairment test
completed as of November 30, 2013 as well as macroeconomic factors, industry and market considerations, the company’s
overall financial performance, and other company specific events occurring since the completion of the November 30, 2013
test.
Our annual goodwill test was completed as of November 30, 2013. The first step compares the estimated fair value of First
Commonwealth with its carrying amount, including goodwill. If the estimated fair value exceeds its carrying amount, goodwill
is not considered impaired. However, if the carrying amount exceeds its estimated fair value, a second step would be performed
that would compare the implied fair value to the carrying amount of goodwill. An impairment loss would be recorded to the
extent that the carrying amount of goodwill exceeds its implied fair value.
Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow
analysis and other variables. Our Step 1 test for potential goodwill impairment incorporates both income and market based
analyses. The income analysis used in our Step 1 incorporates estimated cash flows which extend five years into the future and,
by their nature, are difficult to estimate over such an extended time-frame. Factors that may significantly affect the estimates
used in our Step 1 income analysis include, but are not limited to, balance sheet growth assumptions, credit losses in our
investment and loan portfolios, competitive pressures in our market area, changes in customer base and customer product
preferences, changes in revenue growth trends, cost structure, changes in discount rates, conditions in the banking sector and
general economic variables.
The market approach used in the Step 1 test calculates the change of control price a market participant would pay by adding a
change of control premium to the current trading value of the Company.
As of November 30, 2013, our Step 1 goodwill analysis indicated that our fair value was approximately 30% above book value.
Therefore in accordance with ASC Topic 350-20-35-8, a Step 2 analysis was not necessary and goodwill was not considered
impaired.
As of December 31, 2013, goodwill was not considered impaired; however, changing economic conditions that may adversely
affect our performance, fair value of our assets and liabilities, or stock price could result in impairment, which could adversely
affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.
FASB ASC Topic 350, “Intangibles—Other” also requires that an acquired intangible asset be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer’s intent to do so.
The following table summarizes other intangible assets, which for each year includes only core deposit intangibles:
December 31, 2013
December 31, 2012
75
(cid:42)ross
(cid:44)ntang(cid:76)(cid:69)le
Assets
A(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)late(cid:71)
A(cid:80)ort(cid:76)(cid:93)at(cid:76)on
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:49)et
(cid:44)ntang(cid:76)(cid:69)le
Assets
$
$
22,470
22,470
$
$
(21,159) $
(20,095) $
1,311
2,375
Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits and straight-line
methods of amortization. The core deposits have a remaining amortization period of six years and a weighted average
amortization period of approximately two years. First Commonwealth recognized amortization expense on other intangible
assets of $1.1 million, $1.5 million, and $1.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The following presents the estimated amortization expense of core deposit intangibles:
2014
2015
2016
2017
2018
Thereafter
Total
(cid:49)ote (cid:20)(cid:24)(cid:178)(cid:44)nterest(cid:16)(cid:37)ear(cid:76)ng (cid:39)e(cid:83)os(cid:76)ts
Components of interest-bearing deposits at December 31 were as follows:
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
$
(cid:38)ore
(cid:39)e(cid:83)os(cid:76)t
(cid:44)ntang(cid:76)(cid:69)les
(cid:11)(cid:71)ollars (cid:76)n
tho(cid:88)san(cid:71)s(cid:12)
615
338
177
62
62
57
$
1,311
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
89,149
$
97,963
$
2,506,631
1,095,722
2,543,990
1,032,659
$
3,691,502
$
3,674,612
Interest-bearing deposits at December 31, 2013 and 2012, include allocations from interest-bearing demand deposit accounts of
$556.7 million and $581.5 million, respectively, into savings which includes money market accounts. These reallocations are
based on a formula and have been made to reduce First Commonwealth’s reserve requirement in compliance with regulatory
guidelines.
Included in time deposits at December 31, 2013 and 2012, were certificates of deposit in denominations of $100 thousand or
more of $464.7 million and $322.4 million, respectively.
Interest expense related to certificates of deposit $100 thousand or greater amounted to $4.7 million in 2013, $5.3 million in
2012 and $7.4 million in 2011.
Included in time deposits at December 31, 2013, were certificates of deposit with the following scheduled maturities (dollars in
thousands):
2014
2015
2016
2017
2018
Total
76
$
746,850
200,927
89,812
28,303
29,830
$
1,095,722
(cid:49)ote (cid:20)(cid:25)(cid:178)Short(cid:16)ter(cid:80) (cid:37)orrow(cid:76)ngs
Short-term borrowings at December 31 were as follows:
(cid:40)n(cid:71)(cid:76)ng
(cid:37)alan(cid:70)e
(cid:21)(cid:19)(cid:20)(cid:22)
A(cid:89)erage
(cid:37)alan(cid:70)e
A(cid:89)erage
(cid:53)ate
(cid:40)n(cid:71)(cid:76)ng
(cid:37)alan(cid:70)e
(cid:21)(cid:19)(cid:20)(cid:21)
A(cid:89)erage
(cid:37)alan(cid:70)e
A(cid:89)erage
(cid:53)ate
(cid:40)n(cid:71)(cid:76)ng
(cid:37)alan(cid:70)e
(cid:21)(cid:19)(cid:20)(cid:20)
A(cid:89)erage
(cid:37)alan(cid:70)e
A(cid:89)erage
(cid:53)ate
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Federal funds purchased
$
16,000
$
11,982
0.36% $
34,000
$
47,727
0.27% $
75,300
$
15,642
Borrowings from FHLB
478,100
335,449
0.27
178,100
214,703
0.25
84,000
7,537
Securities sold under
agreements to
repurchase
Treasury, tax and loan
note option
132,515
130,957
0.25
144,127
139,766
0.28
153,477
155,551
—
—
—
—
—
—
—
4,134
Total
$ 626,615
$ 478,388
0.26
$ 356,227
$ 402,196
0.27
$ 312,777
$ 182,864
Maximum total at any
month-end
Weighted average rate at
year-end
$ 626,615
$ 486,144
$ 312,777
0.27%
0.25%
0.26%
0.21
0.43
—
0.40
0.28%
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
Federal funds purchased
Borrowings from FHLB
Securities sold under agreements to repurchase
Total interest on short-term borrowings
(cid:49)ote (cid:20)(cid:26)(cid:178)S(cid:88)(cid:69)or(cid:71)(cid:76)nate(cid:71) (cid:39)e(cid:69)ent(cid:88)res
Subordinated Debentures outstanding at December 31 are as follows:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
43
$
893
326
$
128
545
397
1,262
$
1,070
$
41
16
671
728
(cid:39)(cid:88)e
A(cid:80)o(cid:88)nt
(cid:53)ate
A(cid:80)o(cid:88)nt
(cid:53)ate
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Owed to:
First Commonwealth Capital Trust I
2029
$
First Commonwealth Capital Trust II
First Commonwealth Capital Trust III
2034
2034
Total
$
—
30,929
41,238
72,167
LIBOR + 2.85
LIBOR + 2.85
$
$
33,583
30,929
41,238
105,750
9.50%
LIBOR + 2.85
LIBOR + 2.85
First Commonwealth has established three trusts, First Commonwealth Capital Trust I, First Commonwealth Capital Trust II,
and First Commonwealth Capital Trust III, of which 100% of the common equity is owned by First Commonwealth. The trusts
were formed for the purpose of issuing company obligated mandatorily redeemable capital securities to third-party investors
and investing the proceeds from the sale of the capital securities solely in junior subordinated debt securities (“subordinated
debentures”) of First Commonwealth. The subordinated debentures held by each trust are the sole assets of the trust.
Interest on the debentures issued to First Commonwealth Capital Trust III is paid quarterly at a floating rate of LIBOR + 2.85%
which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at
its option on any interest payment date at a redemption price equal to 100% of the principal amount of the debentures, plus
accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $630 thousand are being amortized on a
straight-line basis over the term of the securities.
Interest on the debentures issued to First Commonwealth Capital Trust II is paid quarterly at a floating rate of LIBOR + 2.85%,
which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at
its option at a redemption price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest to the
77
date of the redemption. Deferred issuance costs of $471 thousand are being amortized on a straight-line basis over the term of
the securities.
On January 29, 2013, the Company’s Board of Directors authorized the redemption of 100% of First Commonwealth Capital
Trust I as of April 1, 2013, at a redemption price of 103.325% of the principal amount, plus accrued and unpaid interest. At the
time of redemption, a $1.1 million redemption premium was paid and $0.5 million in unamortized deferred issuance costs were
recognized. Interest on debentures issued to First Commonwealth Capital Trust I was paid semiannually at a fixed rate of 9.50%
and deferred issuance costs of $996 thousand were being amortized on a straight line basis over the term of the securities.
(cid:49)ote (cid:20)(cid:27)(cid:178)(cid:50)ther (cid:47)ong(cid:16)ter(cid:80) (cid:39)e(cid:69)t
Other long-term debt at December 31 follows:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:38)ontra(cid:70)t(cid:88)al
(cid:53)ate
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:73)(cid:73)e(cid:70)t(cid:76)(cid:89)e
(cid:53)ate
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:38)ontra(cid:70)t(cid:88)al
(cid:53)ate
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:73)(cid:73)e(cid:70)t(cid:76)(cid:89)e
(cid:53)ate
A(cid:80)o(cid:88)nt
A(cid:80)o(cid:88)nt
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
1.13%
1.13%
0.82
4.64
4.64
4.64
4.66
0.82
4.64
4.64
4.64
4.66
$
30,085
57,890
79,970
387
405
5,734
$
174,471
$
57,892
79,971
389
407
426
5,300
$
144,385
2.32%
2.32%
1.13
0.82
4.64
4.64
4.66
1.13
0.82
4.64
4.64
4.66
Borrowings from FHLB due:
2013
2014
2015
2016
2017
2018
Thereafter
Total
The weighted average contractual rate reflects the rate due to creditors. The weighted average effective rate of long-term debt in
the schedule above includes the effect of purchase accounting valuation adjustments that were recorded in connection with prior
business combinations.
All of First Commonwealth’s Federal Home Loan Bank stock, along with an interest in mortgage loans and mortgage backed
securities—residential has been pledged as collateral with the Federal Home Loan Bank of Pittsburgh.
Capital securities included in total long-term debt on the Consolidated Statements of Financial Condition are excluded from the
above, but are described in Note 17 “Subordinated Debentures.”
Scheduled loan payments for other long-term debt are summarized below:
(cid:21)(cid:19)(cid:20)(cid:23)
(cid:21)(cid:19)(cid:20)(cid:24)
(cid:21)(cid:19)(cid:20)(cid:25)
(cid:21)(cid:19)(cid:20)(cid:26)
(cid:21)(cid:19)(cid:20)(cid:27)
(cid:55)herea(cid:73)ter
(cid:55)otal
Long-term debt payments
Purchase valuation amortization
Total
$
$
57,854
38
57,892
$
$
79,971
—
79,971
$
$
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
407
$
389
—
—
389
$
407
$
426
—
426
$
$
5,300
$ 144,347
—
38
5,300
$ 144,385
The amounts on the purchase valuation amortization row in the table above include fair market adjustments from prior business
combinations.
(cid:49)ote (cid:20)(cid:28)(cid:178)Fa(cid:76)r (cid:57)al(cid:88)es o(cid:73) Assets an(cid:71) (cid:47)(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” requires disclosures for non-financial assets and non-
financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). All non-financial assets are included either as a separate line item on the Consolidated Statements of
Financial Condition or in the “Other assets” category of the Consolidated Statements of Financial Condition. Currently, First
Commonwealth does not have any non-financial liabilities to disclose.
78
FASB ASC Topic 825, “Financial Instruments” permits entities to irrevocably elect to measure select financial instruments and
certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period
for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial
instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select
financial instruments.
In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair
value in three levels, based on the principal markets in which the assets and liabilities are transacted and the observability of the
data points used to determine fair value. These levels are:
• Level 1—Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange
(“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical
assets or liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were
priced using quoted market prices.
• Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for
identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency.
Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations
of States and Political Subdivisions, certain corporate securities, FHLB stock, interest rate derivatives that include
interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by
the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow
information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses
available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix
pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop
prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/
dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market
research publications.
Management validates the market values provided by the third party service by having another recognized pricing service price
100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances
from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the
financial markets.
Other Investments are comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on
FHLB stock is provided in Note 9 “Impairment of Investment Securities.”
Interest rate derivatives are reported at estimated fair value utilizing Level 2 inputs and are included in Other assets and Other
liabilities and consist of interest rate swaps where there is no significant deterioration in the counterparties (loan customers)
credit risk since origination of the interest rate swap as well as interest rate caps and risk participation agreements. First
Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an
appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash
LIBOR rates, Eurodollar futures contracts and swap rates. These yield curves determine the valuations of interest rate swaps.
Interest rate derivatives are further described in Note 7 “Derivatives.”
For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its
counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default,
expected loss given default, net exposures and remaining contractual life, among other things, in determining if any estimated
fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary,
appropriate adjustments are made to reflect the exposure.
We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2013, we have not realized any
losses due to a counterparties inability to pay any net uncollateralized position.
The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market based
appraisal less estimated costs to sell or an executed sales agreement.
• Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including option
pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or
broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any,
market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3
valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or
79
liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable
equity investments, loans held for sale, certain interest rate derivatives, certain impaired loans and certain other real
estate.
Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks,
thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities since 2009; therefore
it was more appropriate to determine estimated fair value using a discounted cash flow analysis. Detail on the process for
determining appropriate cash flows for this analysis is provided in Note 9 “Impairment of Investment Securities.” The discount
rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured
credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact
that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market
yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the
pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.
Management validates the estimated fair value of the pooled trust preferred collateralized debt obligations by understanding the
pricing methodology utilized by third party pricing services and monitoring the performance of the underlying collateral,
discussing the discount rate, cash flow assumptions and general market trends with the specialized third party and by
confirming changes in the underlying collateral to the trustee reports. Management’s monitoring of the underlying collateral
includes deferrals of interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings
or actions and general news related to the underlying collateral. Management also evaluates fair value changes compared to
expectations based on changes in the interest rates used in determining the discount rate and general financial markets.
The estimated fair value of the non-marketable equity investments included in level 3 is based on par value.
Loans held for sale are carried at the lower of cost or fair value with the fair value being the expected sales price of the loan.
The estimated fair value of the loans held for sale was determined by calculating the discounted expected future cash flows of
the loan. The discount rate applied to the future cash flows was determined based on a risk based expected return and capital
structure of potential buyers. If a sales agreement has been executed, the fair value is equal to the sales price.
For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood
of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).
In 2013, we experienced a $0.9 million credit loss as a result of a counterparty's inability to pay the net uncollaterlized position
on an interest rate swap. The full amount of this credit loss was provided for in prior periods. Additionally, as the result of
deterioration in other counterparties' (loan customers) credit quality for certain interest rate derivatives, future amounts
previously believed to be collectible under the terms of the interest rate derivative have now been deemed to be uncollectible.
In accordance with ASU 2011-4, the following table provides information related to quantitative inputs and assumptions used in
Level 3 fair value measurements.
Fa(cid:76)r (cid:57)al(cid:88)e
(cid:11)(cid:71)ollars (cid:76)n
tho(cid:88)san(cid:71)s(cid:12)
(cid:57)al(cid:88)at(cid:76)on (cid:55)e(cid:70)hn(cid:76)(cid:84)(cid:88)e
(cid:56)no(cid:69)ser(cid:89)a(cid:69)le (cid:44)n(cid:83)(cid:88)ts
(cid:53)ange (cid:18) (cid:11)we(cid:76)ghte(cid:71)
a(cid:89)erage(cid:12)
Pooled Trust Preferred Securities
$
23,523
Discounted Cash Flow
Probability of default
0% - 100% (19.08%)
Equities
Interest Rate Swaps
Impaired Loans
Prepayment rates
0% - 74.35% (7.50%)
Discount rates
5.75% - 15.50% (a)
1,420
0
Par Value
N/A
N/A
Option model
Counterparty credit risk
7.89% - 8.92% (b)
6,868 (c)
Gas Reserve study
Discount rate
Gas per MCF
Oil per BBL/d
NGL per gallon
10.00%
$3.56 - $7.60 (d)
$79.27 - $106.00 (d)
$1.54 (d)
N/A
Other Real Estate Owned
172
Internal Valuation
N/A
(a) incorporates spread over risk free rate related primarily to credit quality and illiquidity of securities.
(b) represents the range of the credit spread curve used in valuation.
(c) the remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those
loans are based on bankruptcy agreement documentation.
(d) unobservable inputs are defined as follows: MCF—million cubic feet; BBL/d—barrels per day; NGL—natural gas
liquid.
80
The significant unobservable inputs used in the fair value measurement of pooled trust preferred securities are the probability of
default, discount rates and prepayment rates. Significant increases in the probability of default or discount rate used would
result in a decrease in the estimated fair value of these securities while decreases in these variables would result in higher fair
value measurements. In general, a change in the assumption of probability of default is accompanied by a directionally similar
change in the discount rate. In most cases, increases in the prepayment rate assumptions would result in a higher estimated fair
value for these securities while decreases would provide for a lower value. The direction of this change is somewhat dependent
on the structure of the investment and the amount of the investment tranches senior to our position.
The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant
increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result
in a higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil
and natural gas prices and increases in these rates would result in an increase in the estimated fair value of the loans, while a
decrease in these prices would result in a lower fair value measurement.
The significant unobservable input used in the fair value measurement of interest rate swaps classified as Level 3 is
counterparty credit risk and the resulting range of the credit spread curve used in the valuation. Higher credit risk would result
in an increased credit spread, which would reduce the fair value of the interest rate swap.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis at December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:47)e(cid:89)el (cid:20)
(cid:47)e(cid:89)el (cid:21)
(cid:47)e(cid:89)el (cid:22)
(cid:55)otal
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
$
— $
25,204
$
— $
25,204
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Corporate Securities
Pooled Trust Preferred Collateralized Debt Obligations
Total Debt Securities
Equities
Total Securities Available for Sale
Other Investments
Loans Held for Sale
Other Assets (a)
Total Assets
Other Liabilities (a)
Total Liabilities
(a) Non-hedging interest rate derivatives
—
—
—
—
—
—
—
—
—
—
—
—
994,887
105
266,125
80
7,021
—
1,293,422
—
1,293,422
35,444
—
14,358
—
—
—
—
—
23,523
23,523
1,420
24,943
—
—
—
994,887
105
266,125
80
7,021
23,523
1,316,945
1,420
1,318,365
35,444
—
14,358
$
$
$
— $
— $
— $
1,343,224
14,318
14,318
$
$
$
24,943
$
1,368,167
— $
— $
14,318
14,318
81
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
$
— $
31,664
$
— $
31,664
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:47)e(cid:89)el (cid:20)
(cid:47)e(cid:89)el (cid:21)
(cid:47)e(cid:89)el (cid:22)
(cid:55)otal
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Corporate Securities
Pooled Trust Preferred Collateralized Debt Obligations
Total Debt Securities
Equities
Total Securities Available for Sale
Other Investments
Loans Held for Sale
Other Assets (a)
Total Assets
Other Liabilities (a)
Total Liabilities
(a) Non-hedging interest rate derivatives
$
$
$
—
—
—
—
—
—
—
555
555
—
—
—
555
$
— $
— $
864,401
149
242,664
86
6,991
—
1,145,955
—
1,145,955
28,228
—
16,480
1,190,663
18,726
18,726
$
$
$
—
—
—
—
—
23,373
23,373
1,420
24,793
—
—
—
24,793
$
— $
— $
864,401
149
242,664
86
6,991
23,373
1,169,328
1,975
1,171,303
28,228
—
16,480
1,216,011
18,726
18,726
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the year
ended December 31, 2013:
Balance, beginning of year
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, and settlements
Purchases
Issuances
Sales
Settlements
Transfers from Level 3
Transfers into Level 3
Balance, end of year
(cid:51)oole(cid:71) (cid:55)r(cid:88)st
(cid:51)re(cid:73)erre(cid:71)
(cid:38)ollateral(cid:76)(cid:93)e(cid:71)
(cid:39)e(cid:69)t
(cid:50)(cid:69)l(cid:76)gat(cid:76)ons
(cid:40)(cid:84)(cid:88)(cid:76)t(cid:76)es
(cid:47)oans
(cid:43)el(cid:71) (cid:73)or
Sale
(cid:50)ther
Assets
(cid:55)otal
$
23,373
$
1,420
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
— $
$
— $
24,793
(1,395)
12,338
—
—
—
(10,793)
—
—
—
—
—
—
—
—
—
—
625
—
—
—
(20,760)
—
—
20,135
—
—
—
—
—
—
—
—
$
23,523
$
1,420
$
— $
— $
(770)
12,338
—
—
(20,760)
(10,793)
—
20,135
24,943
There are no gains or losses included in earnings for the period that are attributable to the change in realized gains (losses)
relating to assets held at December 31, 2013.
During the year ended December 31, 2013, there were no transfers between fair value Levels 1 and 2. However, $20.1 million
of loans were transferred into Level 3 from Level 2 due to the loans being transferred to a held for sale status. The loans
transferred and subsequently sold related to three nonperforming relationships for which this was determined to be an
appropriate exit strategy. Completion of the loan sales resulted in a $0.6 million gain for the period.
82
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the year
ended December 31, 2012:
Balance, beginning of year
Total gains or losses
Included in earnings
Included in other comprehensive income
Purchases, issuances, sales, and settlements
Purchases
Issuances
Sales
Settlements
Transfers from Level 3
Transfers into Level 3
Balance, end of year
(cid:51)oole(cid:71) (cid:55)r(cid:88)st
(cid:51)re(cid:73)erre(cid:71)
(cid:38)ollateral(cid:76)(cid:93)e(cid:71)
(cid:39)e(cid:69)t
(cid:50)(cid:69)l(cid:76)gat(cid:76)ons
(cid:40)(cid:84)(cid:88)(cid:76)t(cid:76)es
(cid:47)oans
(cid:43)el(cid:71) (cid:73)or
Sale
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
(cid:50)ther
Assets
(cid:55)otal
$
22,980
$
1,420
$
13,412
$
— $
37,812
—
5,490
—
—
—
(5,097)
—
—
—
—
—
—
—
—
—
—
$
23,373
$
1,420
$
2,870
—
—
—
(15,981)
(301)
—
—
— $
(461)
—
—
—
—
—
—
461
2,409
5,490
—
—
(15,981)
(5,398)
—
461
— $
24,793
There are no gains or losses included in earnings for the period that are attributable to the change in realized gains (losses)
relating to assets held at December 31, 2012.
During 2012, there were no transfers between Levels 1 and 2. However, $0.5 million of interest rate swaps were transferred
from Level 2 to Level 3 due to deterioration of the counterparty’s credit risk. Because the credit quality of the underlying
counterparty declined below investment grade, the swaps were valued utilizing more than interest rate yield curves.
The tables below present the balances of assets measured at fair value on a nonrecurring basis at December 31 and total gains
and losses realized on these assets during the year ended December 31:
Impaired loans
Other real estate owned
Total Assets
Impaired loans
Other real estate owned
Total Assets
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:47)e(cid:89)el (cid:20)
(cid:47)e(cid:89)el (cid:21)
(cid:47)e(cid:89)el (cid:22)
(cid:55)otal
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
— $
—
— $
36,903
12,752
49,655
$
$
13,656
172
13,828
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:47)e(cid:89)el (cid:20)
(cid:47)e(cid:89)el (cid:21)
(cid:47)e(cid:89)el (cid:22)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
— $
—
— $
82,949
11,981
94,930
$
$
6,827
247
7,074
$
$
$
$
50,559
12,924
63,483
(cid:55)otal
89,776
12,228
102,004
$
$
$
$
$
$
$
$
(cid:55)otal
(cid:42)a(cid:76)ns
(cid:11)(cid:47)osses(cid:12)
(13,681)
(198)
(13,879)
(cid:55)otal
(cid:42)a(cid:76)ns
(cid:11)(cid:47)osses(cid:12)
(13,793)
(3,772)
(17,565)
Impaired loans over $100 thousand are individually reviewed to determine the amount of each loan considered to be at risk of
noncollection. The fair value for impaired loans that are collateral based is determined by reviewing real property appraisals,
equipment valuations, accounts receivable listings and other financial information. A discounted cash flow analysis is
performed to determine fair value for impaired loans when an observable market price or a current appraisal is not available.
First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve months on all impaired loans
with balances of $250 thousand and over. For balances under $250 thousand, we rely on broker-priced opinions.
The fair value for other real estate owned classified as Level 2 is determined by either an independent market based appraisal
less estimated costs to sell or an executed sales agreement. The fair value for other real estate owned classified as Level 3 is
83
determined using an internal valuation. Other real estate owned has a current carrying value of $11.7 million as of
December 31, 2013 and consisted primarily of commercial real estate properties in Pennsylvania. We review whether events
and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets
may not be recoverable. If events and circumstances indicate further impairment, we will record a charge to the extent that the
carrying value of the assets exceed their fair values, less estimated costs to sell, as determined by valuation techniques
appropriate in the circumstances.
Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in
certain circumstances. Additional information related to this measurement is provided in Note 14 “Goodwill and Other
Amortizing Intangible Assets.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during
2013.
FASB ASC Topic 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial
assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The
methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a
recurring or non-recurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are
discussed below.
Cash and due from banks and interest bearing bank deposits: The carrying amounts for cash and due from banks and interest-
bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities are based on quoted market prices, if available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations
values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain
assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments,
which includes FHLB stock, is considered a reasonable estimate of fair value.
Loans held for sale: The fair value of loans held for sale are estimated utilizing a present value of future discounted cash flows
of the loan utilizing a risk based expected return to discount the value unless a sales agreement has been executed, in which
case the sales price would equal fair value.
Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently
offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans, which
is not an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”
Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and
standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not
necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The
carrying amount and estimated fair value for standby letters of credit was $0.1 million and $0.2 million at December 31, 2013
and 2012, respectively. See Note 12 “Commitments and Letters of Credit,” for additional information.
Deposit liabilities: Management estimates the fair value of deposits based on a market valuation of similar deposits. The
carrying value of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date.
Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest
rates currently being offered and a schedule of aggregated expected maturities.
Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental
borrowing rate for similar types of borrowings. The carrying amounts of other short-term borrowings such as federal funds
purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of
the borrowings.
Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the
future cash flows using First Commonwealth’s estimated incremental borrowing rate for similar types of borrowing
arrangements.
84
The following table presents carrying amounts and estimated fair values of First Commonwealth’s financial instruments at
December 31:
(cid:21)(cid:19)(cid:20)(cid:22)
Fa(cid:76)r (cid:57)al(cid:88)e Meas(cid:88)re(cid:80)ents (cid:56)s(cid:76)ng(cid:29)
(cid:38)arr(cid:92)(cid:76)ng
A(cid:80)o(cid:88)nt
(cid:55)otal
(cid:47)e(cid:89)el (cid:20)
(cid:47)e(cid:89)el (cid:21)
(cid:47)e(cid:89)el (cid:22)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
74,427
$
74,427
$
74,427
$
3,012
3,012
3,012
— $
—
1,318,365
1,318,365
35,444
35,444
4,283,833
4,321,847
4,603,863
4,531,685
626,615
144,385
72,167
626,603
145,477
51,706
—
—
—
—
—
—
—
1,293,422
35,444
36,903
4,531,685
626,603
145,477
—
—
24,943
—
4,284,944
—
—
—
—
51,706
(cid:21)(cid:19)(cid:20)(cid:21)
Fa(cid:76)r (cid:57)al(cid:88)e Meas(cid:88)re(cid:80)ents (cid:56)s(cid:76)ng(cid:29)
(cid:38)arr(cid:92)(cid:76)ng
A(cid:80)o(cid:88)nt
(cid:55)otal
(cid:47)e(cid:89)el (cid:20)
(cid:47)e(cid:89)el (cid:21)
(cid:47)e(cid:89)el (cid:22)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
98,724
$
98,724
$
98,724
$
4,258
4,258
1,171,303
1,171,303
28,228
28,228
4,204,704
4,245,114
4,557,881
4,493,764
356,227
174,471
105,750
356,221
176,178
76,735
4,258
555
—
—
—
—
—
—
— $
—
1,145,955
28,228
82,949
4,493,764
356,221
176,178
—
—
—
24,793
—
4,162,165
—
—
—
76,735
Financial assets
Cash and due from banks
Interest-bearing deposits
Securities available for sale
Other investments
Loans
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
Financial assets
Cash and due from banks
Interest-bearing deposits
Securities available for sale
Other investments
Loans
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
85
(cid:49)ote (cid:21)(cid:19)(cid:178)(cid:44)n(cid:70)o(cid:80)e (cid:55)a(cid:91)es
The income tax provision (benefit) for the years ended December 31 is as follows:
Current tax provision for income exclusive of securities transactions:
Federal
State
Total current tax provision
Deferred tax provision (benefit)
Total tax provision (benefit)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
2,509
$
12,035
$
68
2,577
12,704
72
12,107
2,551
15,281
$
14,658
$
651
161
812
(1,192)
(380)
The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
A(cid:80)o(cid:88)nt
(cid:8) o(cid:73)
(cid:51)reta(cid:91)
(cid:44)n(cid:70)o(cid:80)e
A(cid:80)o(cid:88)nt
(cid:8) o(cid:73)
(cid:51)reta(cid:91)
(cid:44)n(cid:70)o(cid:80)e
A(cid:80)o(cid:88)nt
(cid:8) o(cid:73)
(cid:51)reta(cid:91)
(cid:44)n(cid:70)o(cid:80)e
Tax at statutory rate
$
19,867
35% $
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
19,814
35% $
5,213
35 %
Increase (decrease) resulting from:
Income from bank owned life
insurance
Tax-exempt interest income, net
Tax credits
Other
(1,939)
(2,600)
(144)
97
(3)
(5)
—
—
Total tax provision (benefit)
$
15,281
27% $
(2,048)
(2,789)
(267)
(52)
14,658
(4)
(5)
—
—
26% $
(1,959)
(3,453)
(270)
89
(380)
(13)
(23)
(2)
—
(3)%
The total tax provision for financial reporting differs from the amount computed by applying the statutory federal income tax
rate to income before taxes. First Commonwealth ordinarily generates an annual effective tax rate that is less than the statutory
rate of 35% due to benefits resulting from tax-exempt interest, income from bank owned life insurance and tax benefits
associated with low income housing tax credits. The consistent level of tax benefits that reduce First Commonwealth’s tax rate
below the 35% statutory rate produced an annual effective tax rate of 27% and 26% for the years ended December 31, 2013 and
2012, respectively. The relatively low level of annual pretax income produced a tax benefit for the year ended December 31,
2011.
86
The tax effects of temporary differences between the financial statement carrying amounts and the tax bases of assets and
liabilities that represent significant portions of the deferred tax assets and liabilities at December 31 are presented below:
Deferred tax assets:
Allowance for credit losses
Postretirement benefits other than pensions
Alternative minimum tax credit carryforward
Unrealized loss on securities available for sale
Writedown of other real estate owned
Deferred compensation
Accrued interest on nonaccrual loans
Other-than-temporary impairment of securities
Depreciation of assets
Accrued incentives
Unfunded loan commitment allowance
Deferred rent
Other
Total deferred tax assets
Deferred tax liabilities:
Basis difference in assets acquired
Loan origination fees and costs
Income from unconsolidated subsidiary
Unrealized gain on securities available for sale
Other
Total deferred tax liabilities
Net deferred tax asset
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
18,979
$
23,515
726
13,896
11,235
207
2,118
1,481
9,693
1,546
1,153
1,106
653
2,462
65,255
(518)
(637)
(590)
—
(332)
(2,077)
63,178
$
769
13,026
—
3,647
2,203
3,887
15,233
952
—
836
—
2,795
66,863
(808)
(606)
(575)
(592)
(150)
(2,731)
64,132
$
The net deferred tax asset of $63.2 million as of December 31, 2013 includes a $13.9 million alternative minimum tax credit
carryforward with an indefinite life. There is also a $9.7 million deferred tax asset for other-than-temporary impairment of
securities, of which $0.4 million are potential capital losses that can only be utilized if capital gains are realized.
Management assesses all available positive and negative evidence to estimate if sufficient future taxable income will be
generated to utilize the existing deferred tax assets. In evaluating deferred tax assets, future taxable income forecasted over the
next three years was considered. The amount of future taxable income used in management’s valuation is based upon
management approved forecasts, evaluation of historical earnings levels, proven ability to raise capital to support growth or
during times of economic stress and consideration of prudent and feasible potential tax strategies. If future events differ from
our current forecasts, a valuation allowance may be required, which could have a material impact on our financial condition and
results of operations. Based on our evaluation, including the consideration of the weighting of positive and negative evidence,
as of December 31, 2013, management has determined that no valuation allowance is necessary for the deferred tax assets
because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and
through future taxable income.
First Commonwealth adopted new authoritative accounting guidance issued under FASB ASC Topic 740-10, “Accounting for
Uncertainty in Income Taxes” as of January 1, 2007, and had no material unrecognized tax benefits or accrued interest and
penalties as of December 31, 2013. We do not expect the total amount of unrecognized tax benefits to significantly increase in
the next twelve months and will record interest and penalties as a component of noninterest expense.
First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service as well as all states in which
we conduct business. Federal and state income tax years 2010 through 2012 are open for examination as of December 31, 2013.
87
(cid:49)ote (cid:21)(cid:20)(cid:178)(cid:53)et(cid:76)re(cid:80)ent (cid:51)lans
First Commonwealth has a savings plan pursuant to the provisions of section 401(k) of the Internal Revenue code. Effective
January 1, 2013, a participating employee can receive a maximum matching contribution of 6% of their compensation. In
addition, each participating employee may contribute up to 80% of their eligible compensation to the plan. The 401(k) plan
expense was $2.6 million in 2013, $2.6 million in 2012, and $2.5 million in 2011.
First Commonwealth maintains a Non-Qualified Deferred Compensation Plan ("NQDC Plan") to provide deferred
compensation for those employees whose total annual or annualized Plan compensation for a calendar year is at least $110,000.
Prior to 2012, the NQDC Plan was called the Supplemental Executive Retirement Plan (“SERP”). The NQDC Plan provides
participants whose maximum retirement contribution is limited by IRS rules to defer additional compensation.
Participants in the NQDC Plan are eligible to defer (on a pre-tax basis) from 1% to 25% of their eligible Plan compensation.
There was no NQDC Plan expense in 2013 and 2012. In 2011 there was $86 thousand in expense recognized related to the
SERP.
Select employees from former acquisitions were covered by postretirement benefit plans which provide medical and life
insurance coverage. The measurement date for these plans was December 31.
(cid:51)ostret(cid:76)re(cid:80)ent (cid:37)ene(cid:73)(cid:76)ts (cid:50)ther than (cid:51)ens(cid:76)ons (cid:73)ro(cid:80) (cid:51)r(cid:76)or A(cid:70)(cid:84)(cid:88)(cid:76)s(cid:76)t(cid:76)ons
Net periodic benefit cost of these plans for the years ended December 31, was as follows:
Service cost
Interest cost on projected benefit obligation
Amortization of transition obligation
Gain amortization
Net periodic benefit cost
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
— $
— $
62
—
(7)
55
$
75
2
(32)
45
$
—
86
2
(50)
38
$
$
88
The following table sets forth the change in the benefit obligation and plan assets as of December 31:
Change in Benefit Obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial (gain) loss
Net benefits paid
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Net benefits paid
Fair value of plan assets at end of year
Funded Status at End of Year
Unrecognized transition obligation
Unrecognized net gain
Amounts recognized in retained earnings
As of December 31, the funded status of the plan is:
Amounts Recognized in the Statement of Financial Condition as Other liabilities
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
1,986
$
1,892
—
62
—
(225)
(179)
1,644
—
—
179
(179)
—
1,644
—
430
2,074
$
—
75
—
269
(250)
1,986
—
—
250
(250)
—
1,986
—
212
2,198
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
1,644
$
1,986
$
$
The following table sets forth the amounts recognized in accumulated other comprehensive income that have not yet been
recognized as components of net periodic benefit costs as of December 31:
Amounts recognized in accumulated other comprehensive income, net of
tax:
Net (gain) loss
Transition obligation
Total
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
(280) $
—
(280) $
(138) $
—
(138) $
(333)
1
(332)
Weighted-average assumptions used to determine the benefit obligation as of December 31 are as follows:
Weighted-average Assumptions
Discount rate
Health care cost trend: Initial
Health care cost trend: Ultimate
Year ultimate reached
89
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
4.01%
6.75%
4.75%
2022
3.31%
7.00%
4.75%
2022
4.22%
8.00%
4.75%
2016
Weighted-average assumptions used to determine the net benefit costs as of December 31 are as follows:
Weighted Average Assumptions for Net Periodic Cost
Discount rate
Health care cost trend: Initial
Health care cost trend: Ultimate
Year ultimate reached
Corridor
Recognition period for gains and losses
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
3.31%
7.00%
4.75%
2022
10.00%
11.0
4.22%
8.00%
4.75%
2016
10.00%
12.0
4.71%
9.00%
4.75%
2016
10.00%
12.7
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) introduced a prescription drug
benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription
drug benefit that is at least actuarially equivalent to Medicare Part D. The postretirement plans of First Commonwealth are
provided through insurance coverage; therefore, First Commonwealth will not receive a direct federal subsidy. The preceding
measures of the accumulated postretirement benefit cost assume that First Commonwealth will not receive the subsidy due to
the relatively small number of retirees.
The health care cost trend rate assumption can have a significant impact on the amounts reported for this plan. A one-
percentage-point change in assumed health care cost trend rates would have the following effects:
Effect on postretirement benefit obligation
Effect on total of service and interest cost components
As of December 31, 2013, the projected benefit payments for the next ten years are as follows:
2014
2015
2016
2017
2018
2019 - 2023
(cid:50)ne(cid:16)(cid:51)er(cid:70)entage(cid:16)
(cid:51)o(cid:76)nt (cid:44)n(cid:70)rease
(cid:50)ne(cid:16)(cid:51)er(cid:70)entage(cid:16)
(cid:51)o(cid:76)nt (cid:39)e(cid:70)rease
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
43
2
(39)
(2)
(cid:51)ro(cid:77)e(cid:70)te(cid:71) (cid:37)ene(cid:73)(cid:76)t
(cid:51)a(cid:92)(cid:80)ents
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
198
$
193
187
181
163
564
The projected payments were calculated using the same assumptions as those used to calculate the benefit obligations included
in this note.
The estimated costs that will be amortized from accumulated other comprehensive income into net periodic cost for 2014 are as
follows (dollars in thousands):
(cid:51)ostret(cid:76)re(cid:80)ent
(cid:37)ene(cid:73)(cid:76)ts
Net gain
Transition obligation
Total
90
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
(29)
—
(29)
$
(cid:49)ote (cid:21)(cid:21)(cid:178)(cid:56)nearne(cid:71) (cid:40)S(cid:50)(cid:51) Shares
During 2012, all employees with at least one year of service were eligible to participate in the ESOP. Contributions to the plan
are determined by the Board of Directors and are based upon a prescribed percentage of the annual compensation of all
participants. The ESOP acquired shares of First Commonwealth’s common stock in a transaction whereby the ESOP Trust
borrowed funds that were guaranteed by First Commonwealth. The borrowed amounts represented leveraged and unallocated
shares, and accordingly were recorded as long-term debt with the offset as a reduction of common shareholders’ equity. The
borrowing had a balance of $1.6 million at December 31, 2011 and matured in November of 2012. All the remaining shares
held as collateral for the loan were released and allocated to participants when the borrowing was repaid. Compensation costs
related to the plan were $733 thousand and $717 thousand in 2012 and 2011, respectively.
As of December 31, 2012, First Commonwealth terminated the ESOP and appropriate forms have been filed with the IRS in
order to receive a determination letter.
The following is an analysis of ESOP shares held in suspense and the fair value of those shares as of December 31:
Shares in suspense, beginning of the year
Shares allocated
Shares acquired
Shares in suspense, end of the year
Fair market value of shares in suspense
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
104,661
(104,661)
—
—
—
237,106
(132,445)
—
104,661
550
Interest paid on the ESOP loan and dividends received on unallocated shares for the year ended December 31 were:
Interest paid on ESOP loan
Dividends on unallocated shares
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
$
13
19
38
32
Dividends on unallocated shares were used for debt service while all dividends on allocated shares were allocated or paid to the
participants.
(cid:49)ote (cid:21)(cid:22)(cid:178)(cid:44)n(cid:70)ent(cid:76)(cid:89)e (cid:38)o(cid:80)(cid:83)ensat(cid:76)on (cid:51)lan
On January 20, 2009, the Board of Directors of the Company adopted with shareholder approval, the First Commonwealth
Financial Corporation Incentive Compensation Plan. This plan allows for shares of common stock to be issued to employees,
directors, and consultants of the Company and its subsidiaries as an incentive to aid in the financial success of the Company.
The shares can be issued as options, stock appreciation rights, performance share or unit awards, dividend or dividend
equivalent rights, stock awards, restricted stock awards, or other annual incentive awards. Up to 5,000,000 shares of stock can
be awarded under this plan, of which, 4,330,038 shares are still eligible for awards.
91
Restricted Stock
The following provides detail on the restricted stock awards which were issued and outstanding in 2013, 2012 and 2011 in
order to retain and attract key employees. The grant date fair value of the restricted stock awards is equal to the price of the
Corporation’s common stock on grant date.
(cid:42)rant (cid:39)ate
August 16, 2013
May 31, 2013
March 1, 2013
February 24, 2012
February 24, 2012
January 1, 2012
November 21, 2011
April 1, 2011
January 22, 2010
April 1, 2008
November 12, 2007
Shares (cid:76)ss(cid:88)e(cid:71)
(cid:42)rant (cid:51)r(cid:76)(cid:70)e
(cid:57)est(cid:76)ng (cid:39)ate
3,000 $
7.57 August 16, 2016
45,000
10,000
34,000
90,000
100,000
10,000
25,000
30,120
12,654
35,000
7.21 May 31, 2016
7.35 March 1, 2016
5.96 December 31, 2014
5.96 February 24, 2015
5.26 January 1, 2016
4.41 November 21, 2014
6.82 April 1, 2016
5.70 January 22, 2012
12.35 April 1, 2011
10.95 November 12, 2010
(cid:49)(cid:88)(cid:80)(cid:69)er o(cid:73)
(cid:40)(cid:84)(cid:88)al (cid:57)est(cid:76)ng
(cid:51)er(cid:76)o(cid:71)s
1
3
1
1
1
4
1
1
2
3
3
Compensation expense related to restricted stock was $509 thousand, $395 thousand and $249 thousand in 2013, 2012 and
2011, respectively. As of December 31, 2013, there was $2.2 million of unrecognized compensation cost related to unvested
restricted stock awards granted.
A summary of the status of First Commonwealth’s estimated unvested service-based restricted stock awards as of December 31
and changes for the years ended on those dates is presented below:
Outstanding, beginning of the year
Granted
Vested
Forfeited
Outstanding, end of the year
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:42)rant (cid:39)ate
Fa(cid:76)r (cid:57)al(cid:88)e
5.71
7.25
5.46
5.96
6.07
Shares
253,000
$
58,000
(35,000)
(5,000)
271,000
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:42)rant (cid:39)ate
Fa(cid:76)r (cid:57)al(cid:88)e
6.00
5.65
5.73
5.96
5.71
Shares
50,060
$
224,000
(17,060)
(4,000)
253,000
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:42)rant (cid:39)ate
Fa(cid:76)r (cid:57)al(cid:88)e
6.52
6.13
7.16
—
6.00
Shares
34,338
$
35,000
(19,278)
—
50,060
The following provides detail on restricted stock awards estimated to be granted on a performance award basis during 2013,
2012 and 2011. These plans were previously approved by the Board of Directors.
(cid:42)rant (cid:39)ate
January 17, 2011
February 24, 2012
January 28, 2013
(cid:55)arget
Share
Awar(cid:71)
54,166
68,000
128,611
(cid:51)er(cid:73)or(cid:80)an(cid:70)e
(cid:51)er(cid:76)o(cid:71)
(cid:11)(cid:92)ears(cid:12)
3
3
3
Awar(cid:71) (cid:76)(cid:73)
threshol(cid:71)
(cid:80)et
Awar(cid:71) (cid:76)(cid:73)
targets are
(cid:80)et
Awar(cid:71) (cid:76)(cid:73)
targets
e(cid:91)(cid:70)ee(cid:71)e(cid:71)
Awar(cid:71) (cid:76)(cid:73)
threshol(cid:71) not
a(cid:70)h(cid:76)e(cid:89)e(cid:71)
40%
40%
40%
100%
100%
100%
200%
200%
200%
—%
—%
—%
(cid:57)est(cid:76)ng A(cid:73)ter
(cid:51)er(cid:73)or(cid:80)an(cid:70)e
(cid:51)er(cid:76)o(cid:71) (cid:11)(cid:92)ears(cid:12)
1
1
1
F(cid:76)nal (cid:89)est(cid:76)ng
January 17, 2014
December 31, 2015
December 31, 2016
92
The following table summarizes the estimated unvested target share awards for the Plans as of December 31:
Outstanding, beginning of the year
Granted
Vested
Forfeited
Outstanding, end of the year
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
151,333
138,611
—
(39,167)
250,777
93,333
74,000
—
(16,000)
151,333
—
126,000
—
(32,667)
93,333
The estimated unvested target awards for the Plans have an estimated fair value of $8.82 per share for each year based on the
closing price of Company stock as of December 31, 2013.
Stock Option Plan
First Commonwealth’s stock based compensation plan expired on October 15, 2005, and is described below. All of the exercise
prices and related number of shares have been adjusted to reflect historical stock splits. The plan permitted the Executive
Compensation Committee to grant options for up to 4.5 million shares of First Commonwealth’s common stock through
October 15, 2005.
The vesting requirements and terms of options granted were at the discretion of the Executive Compensation Committee.
Options granted in 2005 vested in the year granted. All options expire ten years from the grant date. All equity compensation
plans were approved by security holders.
A summary of the status of First Commonwealth’s outstanding stock options as of December 31 and changes for the years
ended on those dates is presented below:
Outstanding, beginning of the year
Granted
Exercised
Forfeited
Balance, end of the year
Exercisable at the end of the year
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:22)
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:21)
(cid:20)(cid:21)(cid:18)(cid:22)(cid:20)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:91)er(cid:70)(cid:76)se
(cid:51)r(cid:76)(cid:70)e
$
11.64
—
—
11.19
14.49
14.49
Shares
196,322
—
—
(169,322)
27,000
27,000
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:91)er(cid:70)(cid:76)se
(cid:51)r(cid:76)(cid:70)e
$
10.03
—
6.76
10.68
11.64
11.64
Shares
496,863
—
(130,672)
(169,869)
196,322
196,322
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:91)er(cid:70)(cid:76)se
(cid:51)r(cid:76)(cid:70)e
$
10.05
—
5.29
10.61
10.03
10.03
Shares
640,866
—
(13,760)
(130,243)
496,863
496,863
The intrinsic value of stock options exercised during the years ended December 31, 2012 and 2011 was $1.41 and $1.17 per
share. There were no options exercised during the year ended December 31, 2013.
The following table summarizes information about the stock options outstanding at December 31, 2013:
(cid:50)(cid:83)t(cid:76)ons (cid:50)(cid:88)tstan(cid:71)(cid:76)ng
(cid:50)(cid:83)t(cid:76)ons (cid:40)(cid:91)er(cid:70)(cid:76)sa(cid:69)le
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:53)e(cid:80)a(cid:76)n(cid:76)ng
(cid:38)ontra(cid:70)t
(cid:47)(cid:76)(cid:73)e
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:91)er(cid:70)(cid:76)se
(cid:51)r(cid:76)(cid:70)e
(cid:49)(cid:88)(cid:80)(cid:69)er
(cid:40)(cid:91)er(cid:70)(cid:76)sa(cid:69)le
(cid:58)e(cid:76)ghte(cid:71)
A(cid:89)erage
(cid:40)(cid:91)er(cid:70)(cid:76)se
(cid:51)r(cid:76)(cid:70)e
(cid:49)(cid:88)(cid:80)(cid:69)er
(cid:50)(cid:88)tstan(cid:71)(cid:76)ng
27,000
0.6
$
14.49
27,000
$
14.49
(cid:53)ange o(cid:73) (cid:40)(cid:91)er(cid:70)(cid:76)se (cid:51)r(cid:76)(cid:70)es
$14.41 - $14.55
(cid:49)ote (cid:21)(cid:23)(cid:178)(cid:38)ont(cid:76)ngent (cid:47)(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es
Legal proceedings
Market Rate Savings IRA Litigation
McGrogan v. First Commonwealth Bank was filed as a class action on January 12, 2009, in the Court of Common Pleas of
Allegheny County, Pennsylvania. The action alleges that First Commonwealth Bank (the “Bank”) promised class members a
minimum interest rate of 8% on its IRA Market Rate Savings Account for as long as the class members kept their money on
deposit in the IRA account. The class asserted that the Bank committed fraud, breached its modified contract with the class
93
members, and violated the Pennsylvania Unfair Trade Practice and Consumer Protection Law (UTPCPL) when it resigned as
custodian of the IRA Market Rate Savings Accounts in 2008 and offered the class members a roll-over IRA account with a
3.5% interest rate. Plaintiffs sought monetary damages for the alleged breach of contract, punitive damages for the alleged fraud
and Unfair Trade Practice and Consumer Protection Law violations and attorney’s fees. The court granted class certification as
to the breach of modified contract claim and denied class certification as to the fraud and Pennsylvania Unfair Trade Practice
and Consumer Protection Law claims. The breach of contract claim was predicated upon a letter sent to customers in 1998
which reversed an earlier decision by the Bank to reduce the rate paid on the accounts. The letter stated, in relevant part, “This
letter will serve as notification that a decision has been made to re-establish the rate on your account to eight percent (8)%. This
rate will be retroactive to your most recent maturity date and will continue going forward on deposits presently in the account
and on annual additions.” On August 30, 2012, the Court entered an order granting the Bank’s motion for summary judgment
and dismissed the class action claims. The Court found that the Bank retained the right to resign as custodian of the accounts
and that the act of resigning as custodian and closing the accounts did not breach the terms of the underlying IRA contract. On
appeal, the Superior Court affirmed the denial of class certification to the claims of fraud in the execution and violation of the
UTPCPL. The Superior Court found that none of the other issues were ripe for appeal. Jurisdiction was returned to the Court
of Common Pleas where the individual fraud and UTPCPL claims of Mr. and Mrs. McGrogan await trial.
In December 2013, three new complaints were filed by 34 former members of the McGrogan class:
(1) Jarrett et al. v. First Commonwealth Bank - An action filed by eight plaintiffs on December 2, 3013 in the Westmoreland
County Court of Common Pleas asserting claims for fraud in the inducement, fraud in the execution, violation of the
UTPCPL, breach of fiduciary duty and promissory estoppel.
(2) Young et al. v. First Commonwealth Bank - An action filed by 12 plaintiffs on December 2, 2013 in the Westmoreland
County Court of Common Pleas asserting claims for fraud in the inducement, fraud in the execution, violation of the
UTPCPL, breach of fiduciary duty and promissory estoppel.
(3) Fisanik et. al. v. First Commonwealth Bank - An action filed by 14 plaintiffs on December 9, 2013 in the Cambria County
Court of Common Pleas asserting claims for fraud in the inducement, fraud in the execution, violation of the UTPCPL, and
breach of fiduciary duty.
The 36 plaintiffs who have filed individual actions held Market Rate Savings IRA balances totaling approximately $4 million at
the time of the Bank’s resignation as custodian of the IRAs in 2008. The average age of the plaintiffs at that time was 62.
At this time, the Bank believes the claims are without merit.
Other matters
First Commonwealth identified an error related to historical tax reporting for approximately 700-900 customers. A liability
related to this error is considered probable, resulting in an $0.8 million contingency reserve as of December 31, 2013. As
resolution of this issue continues, the $0.8 million reserve represents management's best estimate of liability. The contingent
reserve is included in “Other liabilities” in the Consolidated Statements of Financial Condition.
There are no other material legal proceedings to which First Commonwealth or its subsidiaries are a party, or of which their
property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will
not have a material adverse effect on the consolidated operations or financial position of First Commonwealth or its
subsidiaries.
(cid:49)ote (cid:21)(cid:24)(cid:178)(cid:53)elate(cid:71) (cid:51)art(cid:92) (cid:55)ransa(cid:70)t(cid:76)ons
Some of First Commonwealth’s directors, executive officers, principal shareholders and their related interests had transactions
with the subsidiary bank in the ordinary course of business. All deposit and loan transactions were made on substantially the
same terms, such as collateral and interest rates, as those prevailing at the time for comparable transactions. In the opinion of
management, these transactions do not involve more than the normal risk of collectibility nor do they present other unfavorable
features. It is anticipated that further such transactions will be made in the future.
94
The following is an analysis of loans to related parties (dollars in thousands):
December 31, 2012
Advances
Repayments
Other
December 31, 2013
$
$
1,733
1,823
(2,095)
(778)
683
The “Other” line primarily reflects decreases due to changes in the individuals designated as a “related party” during the year.
(cid:49)ote (cid:21)(cid:25)(cid:178)(cid:53)eg(cid:88)lator(cid:92) (cid:53)estr(cid:76)(cid:70)t(cid:76)ons an(cid:71) (cid:38)a(cid:83)(cid:76)tal A(cid:71)e(cid:84)(cid:88)a(cid:70)(cid:92)
The amount of funds available to the parent from its subsidiary bank is limited by restrictions imposed on all financial
institutions by banking regulators. The dividend restrictions have not had, and are not expected to have, a significant impact on
First Commonwealth’s ability to meet its cash obligations. Cash dividends declared per common share were $0.23 for 2013 and
$0.18 for 2012.
First Commonwealth is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, First Commonwealth and its banking subsidiary must
meet specific capital guidelines that involve quantitative measures of First Commonwealth’s assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting practices. First Commonwealth’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
First Commonwealth maintains capital to absorb unexpected losses. In order to provide assurance that our capital levels are
adequate for our risk exposure we test our capital position under several stress scenarios on a bi-annual basis. This analysis is
subject to Board of Directors review and approval. Our most recent capital stress test was completed in December 2013.
On July 9, 2013, federal banking agencies approved changes to the regulatory capital framework which are effective beginning
on January 1, 2015, with some items phasing in over a period of time. The most significant of these changes include higher
minimum capital requirements, as the minimum tier I capital ratio increased from 4.0% to 6.0% and the establishment of a new
common equity tier I capital ratio with a minimum level of 4.5%. Additionally, the new rules improve the quality of capital by
providing stricter eligibility criteria for regulatory capital instruments and provide for a phase-in, beginning January 1, 2016, of
a capital conservation buffer of 2.5% of risk-weighted assets. This buffer provides a requirement to hold common equity tier 1
capital above the minimum risk-based capital requirements. Management currently expects First Commonwealth will remain
well-capitalized after the adoption of these changes.
Under current regulations, quantitative measures established by regulation to ensure capital adequacy require First
Commonwealth to maintain minimum amounts and ratios of Total and Tier I capital (common and certain other “core” equity
capital) to risk weighted assets, and of Tier I capital to average assets. As of December 31, 2013, First Commonwealth and its
banking subsidiary met all capital adequacy requirements to which they are subject.
95
As of December 31, 2013, First Commonwealth Bank was considered well capitalized under the regulatory framework for
prompt corrective action. To be considered well capitalized, the bank must maintain minimum Total risk-based capital, Tier I
risk-based capital and Tier I leverage ratios as set forth in the table below:
A(cid:70)t(cid:88)al
(cid:53)eg(cid:88)lator(cid:92) M(cid:76)n(cid:76)(cid:80)(cid:88)(cid:80)
(cid:58)ell (cid:38)a(cid:83)(cid:76)tal(cid:76)(cid:93)e(cid:71)
(cid:53)eg(cid:88)lator(cid:92) (cid:42)(cid:88)(cid:76)(cid:71)el(cid:76)nes
(cid:38)a(cid:83)(cid:76)tal
A(cid:80)o(cid:88)nt
(cid:53)at(cid:76)o
(cid:38)a(cid:83)(cid:76)tal
A(cid:80)o(cid:88)nt
(cid:53)at(cid:76)o
(cid:38)a(cid:83)(cid:76)tal
A(cid:80)o(cid:88)nt
(cid:53)at(cid:76)o
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
As of December 31, 2013
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 656,235
First Commonwealth Bank
637,415
13.26% $ 396,009
8.00%
N/A
N/A
12.87
396,275
8.00
$ 495,344
10.00%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 598,851
First Commonwealth Bank
580,031
12.10% $ 198,004
4.00%
N/A
11.71
198,138
4.00
$ 297,206
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $ 598,851
First Commonwealth Bank
580,031
10.00% $ 239,430
237,993
9.75
4.00%
4.00
N/A
$ 297,491
N/A
6.00%
N/A
5.00%
As of December 31, 2012
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 708,583
First Commonwealth Bank
669,131
14.53% $ 390,173
8.00%
N/A
N/A
13.75
389,421
8.00
$ 486,776
10.00%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 647,460
First Commonwealth Bank
608,176
13.28% $ 195,087
4.00%
N/A
12.49
194,710
4.00
$ 292,066
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $ 647,460
First Commonwealth Bank
608,176
11.24% $ 230,322
4.00%
N/A
10.64
228,544
4.00
$ 285,680
N/A
6.00%
N/A
5.00%
(cid:49)ote (cid:21)(cid:26)(cid:178)(cid:38)a(cid:83)(cid:76)tal
On June 19, 2012 First Commonwealth announced a $50.0 million common stock repurchase program. On January 29, 2013, an
additional share repurchase program was authorized for up to $25.0 million in shares of the Company’s common stock. As of
December 31, 2013, First Commonwealth has purchased 10,116,039 shares at an average price of $6.88 per share.
The Company amended its Dividend Reinvestment Plan (“DRIP”) during the second quarter of 2009 to provide the flexibility
to raise capital by selling up to 5,000,000 shares of common stock through the DRIP. These shares may be sold pursuant to
routine reinvested dividends, as well as optional cash purchases. During 2013, 2012 and 2011, there were no shares issued
under this program.
96
(cid:49)ote (cid:21)(cid:27)(cid:178)(cid:38)on(cid:71)ense(cid:71) F(cid:76)nan(cid:70)(cid:76)al (cid:44)n(cid:73)or(cid:80)at(cid:76)on o(cid:73) F(cid:76)rst (cid:38)o(cid:80)(cid:80)onwealth F(cid:76)nan(cid:70)(cid:76)al (cid:38)or(cid:83)orat(cid:76)on (cid:11)(cid:83)arent (cid:70)o(cid:80)(cid:83)an(cid:92) onl(cid:92)(cid:12)
State(cid:80)ents o(cid:73) F(cid:76)nan(cid:70)(cid:76)al (cid:38)on(cid:71)(cid:76)t(cid:76)on
Assets
Cash
Loans
Investment in subsidiaries
Investment in unconsolidated subsidiary trusts
Investment in jointly-owned company
Premises and equipment, net
Receivable from subsidiaries
Dividends receivable from subsidiaries
Other assets
(cid:55)otal assets
(cid:47)(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es an(cid:71) Sharehol(cid:71)ers(cid:182) (cid:40)(cid:84)(cid:88)(cid:76)t(cid:92)
Accrued expenses and other liabilities
Subordinated debentures payable
Shareholders’ equity
(cid:55)otal l(cid:76)a(cid:69)(cid:76)l(cid:76)t(cid:76)es an(cid:71) sharehol(cid:71)ers(cid:182) e(cid:84)(cid:88)(cid:76)t(cid:92)
State(cid:80)ents o(cid:73) (cid:44)n(cid:70)o(cid:80)e
Interest and dividends
Dividends from subsidiaries
Interest expense
Other income
Operating expense
Income (loss) before taxes and equity in undistributed (loss) earnings
of subsidiaries
Applicable income tax benefits
Income (loss) before equity in undistributed (loss) earnings of
subsidiaries
Equity in undistributed (loss) earnings of subsidiaries
Net income
(cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
8,370
$
19,493
27
30
696,438
736,165
2,182
8,559
6,376
267
1,319
62,633
786,171
2,307
72,167
711,697
$
$
786,171
$
3,291
8,347
9,347
1,583
1,205
76,715
856,176
4,419
105,750
746,007
856,176
$
$
$
For the (cid:92)ears en(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
1
$
1
$
65,140
(3,128)
2,653
(8,820)
55,846
3,384
64,342
(5,711)
12,581
(19,061)
52,152
4,364
59,230
(17,748)
41,482
$
56,516
(14,562)
41,954
$
$
1
10,321
(5,605)
30,595
(44,057)
(8,745)
6,618
(2,127)
17,401
15,274
97
State(cid:80)ents o(cid:73) (cid:38)ash Flow
(cid:50)(cid:83)erat(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
For the (cid:92)ears en(cid:71)e(cid:71) (cid:39)e(cid:70)e(cid:80)(cid:69)er (cid:22)(cid:20)(cid:15)
(cid:21)(cid:19)(cid:20)(cid:22)
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:21)(cid:19)(cid:20)(cid:20)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:12)
$
41,482
$
41,954
$
15,274
Depreciation and amortization
Net gain (loss) on sales of assets
Decrease (increase) in prepaid income taxes
Undistributed equity in subsidiaries
Other net
Net cash provided by operating activities
(cid:44)n(cid:89)est(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
Net change in loans
Purchases of premises and equipment
Proceeds from sale of other assets
Net cash provided by (used in) investing activities
F(cid:76)nan(cid:70)(cid:76)ng A(cid:70)t(cid:76)(cid:89)(cid:76)t(cid:76)es
Repayments of subordinated debenture
Proceeds from issuance of common stock
Discount on dividend reinvestment plan purchases
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
Stock option tax benefit
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
3,030
17
3,044
17,748
12,964
78,285
4
(123)
1,132
1,013
(34,702)
—
(112)
(22,344)
176
(33,439)
—
(90,421)
(11,123)
19,493
3,719
(107)
(3,044)
14,562
8,789
65,873
4
(3,005)
4,309
1,308
—
—
(92)
(18,759)
1,028
(36,242)
1
(54,064)
13,117
6,376
$
8,370
$
19,493
$
3,730
(1,069)
—
(17,401)
1,649
2,183
5
(5,736)
1,461
(4,270)
—
144
(63)
(12,558)
72
(9)
6
(12,408)
(14,495)
20,871
6,376
Cash dividends declared per common share were $0.23 for 2013, $0.18 for 2012 and $0.12 for 2011.
During 2004, the ESOP obtained a $14.0 million line of credit from an unrelated financial institution. The line of credit was
used to purchase stock in 2005 for the ESOP and was guaranteed by First Commonwealth. During 2005, $8.5 million was
borrowed on the line. There were no additional borrowings on the line during 2013, 2012 and 2011. The loan was recorded as
long-term debt and the offset was recorded as a reduction of common shareholders’ equity. The final payment on the ESOP was
made in November 2012 eliminating the outstanding debt. See Note 22 “Unearned ESOP Shares.”
First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As
of December 31, 2013, there are no amounts outstanding on this line and we are in compliance with all debt covenants related
to the line of credit.
(cid:49)ote (cid:21)(cid:28)(cid:178)S(cid:88)(cid:69)se(cid:84)(cid:88)ent (cid:40)(cid:89)ent
On January 28, 2014, an additional share repurchase program was authorized for up to $25.0 million in shares of the
Company’s common stock. Under this program, management is authorized to repurchase shares through Rule 10b5-1 plans,
open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal
securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934. Depending on market conditions and other
factors, repurchases may be made at any time or from time to time, without prior notice. First Commonwealth may suspend or
discontinue the program at any time.
98
(cid:52)(cid:88)arterl(cid:92) S(cid:88)(cid:80)(cid:80)ar(cid:92) o(cid:73) F(cid:76)nan(cid:70)(cid:76)al (cid:39)ata(cid:178)(cid:56)na(cid:88)(cid:71)(cid:76)te(cid:71)
The unaudited quarterly results of operations for the years ended December 31 are as follows:
Fo(cid:88)rth
(cid:52)(cid:88)arter
(cid:55)h(cid:76)r(cid:71)
(cid:52)(cid:88)arter
Se(cid:70)on(cid:71)
(cid:52)(cid:88)arter
F(cid:76)rst
(cid:52)(cid:88)arter
(cid:21)(cid:19)(cid:20)(cid:22)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Net impairment losses
Net securities gains
Other noninterest income
Other expenses
Income before income taxes
Income tax provision
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
Average shares outstanding
Average shares outstanding assuming dilution
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Net impairment losses
Net securities gains
Other noninterest income
Other expenses
Income before income taxes
Income tax provision
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
Average shares outstanding
$
$
$
$
$
$
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t (cid:83)er share (cid:71)ata(cid:12)
$
52,308
50,981
$
$
51,308
5,002
46,306
1,216
45,090
—
(1,395)
14,659
45,327
13,027
3,768
9,259
0.10
0.10
$
$
5,079
47,229
2,714
44,515
—
229
16,854
40,045
21,553
5,699
15,854
0.16
0.16
$
$
5,283
45,698
10,800
34,898
—
4
14,927
41,998
7,831
2,015
5,816
0.06
0.06
$
$
51,761
6,343
45,418
4,497
40,921
—
4
14,881
41,454
14,352
3,799
10,553
0.11
0.11
95,119,572
95,138,836
96,194,594
96,208,545
97,564,699
97,577,010
99,288,738
99,305,414
Fo(cid:88)rth
(cid:52)(cid:88)arter
(cid:55)h(cid:76)r(cid:71)
(cid:52)(cid:88)arter
Se(cid:70)on(cid:71)
(cid:52)(cid:88)arter
F(cid:76)rst
(cid:52)(cid:88)arter
(cid:21)(cid:19)(cid:20)(cid:21)
(cid:11)(cid:71)ollars (cid:76)n tho(cid:88)san(cid:71)s(cid:15) e(cid:91)(cid:70)e(cid:83)t (cid:83)er share (cid:71)ata(cid:12)
$
53,880
54,712
$
$
53,867
6,676
47,191
5,706
41,485
—
29
14,074
43,842
11,746
3,011
8,735
0.09
0.09
$
$
7,230
46,650
6,754
39,896
—
163
17,692
44,765
12,986
3,139
9,847
0.09
0.09
$
$
7,794
46,918
4,297
42,621
—
—
16,096
41,848
16,869
4,548
12,321
0.12
0.12
$
$
56,616
8,446
48,170
3,787
44,383
—
—
17,380
46,752
15,011
3,960
11,051
0.11
0.11
101,777,594
104,080,025
104,894,261
104,810,727
Average shares outstanding assuming dilution
101,787,103
104,098,383
104,901,239
104,816,442
99
(cid:44)(cid:55)(cid:40)M (cid:28)(cid:17)
(cid:38)hanges (cid:76)n an(cid:71) (cid:39)(cid:76)sagree(cid:80)ents w(cid:76)th A(cid:70)(cid:70)o(cid:88)ntants on A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng an(cid:71) F(cid:76)nan(cid:70)(cid:76)al (cid:39)(cid:76)s(cid:70)los(cid:88)re
None.
(cid:44)(cid:55)(cid:40)M (cid:28)A(cid:17)
(cid:38)ontrols an(cid:71) (cid:51)ro(cid:70)e(cid:71)(cid:88)res
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.
(cid:44)(cid:55)(cid:40)M (cid:28)(cid:37)(cid:17)
(cid:50)ther (cid:44)n(cid:73)or(cid:80)at(cid:76)on
None.
100
(cid:51)A(cid:53)(cid:55) (cid:44)(cid:44)(cid:44)
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:19)(cid:17)
(cid:39)(cid:76)re(cid:70)tors(cid:15) (cid:40)(cid:91)e(cid:70)(cid:88)t(cid:76)(cid:89)e (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)ers an(cid:71) (cid:38)or(cid:83)orate (cid:42)o(cid:89)ernan(cid:70)e
Information called for by this item concerning the identification, business experience and qualifications of First
Commonwealth’s directors will be included in First Commonwealth’s definitive Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the annual meeting of shareholders to be held April 22, 2014 (the “Proxy
Statement”), under the heading “Proposal 1—Election of Directors,” and is incorporated herein by reference.
Information called for by this item concerning First Commonwealth’s compliance with section 16(a) of the Exchange Act will
be included in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance,” and is
incorporated herein by reference.
First Commonwealth has adopted a code of conduct and ethics that applies to all employees of the Company, including
executive officers. In addition, First Commonwealth has adopted a code of ethics for the Chief Executive Officer and all senior
financial officers of the Company. Both of these codes are filed as exhibits to this Annual Report on Form 10-K and are posted
on First Commonwealth’s website at http://www.fcbanking.com. Refer to Item 15 of this Annual Report on Form 10-K for a list
of exhibits.
There have been no material changes to the procedures by which security holders of First Commonwealth may recommend
nominees to First Commonwealth’s Board of Directors since First Commonwealth last disclosed those procedures in its
definitive Proxy Statement in connection with the 2013 annual meeting of shareholders.
Information called for by this item concerning First Commonwealth’s Audit Committee and the identification of “Audit
Committee financial experts” will be included in the Proxy Statement under the heading “Corporate Governance,” and is
incorporated herein by reference.
Certain information regarding executive officers is included under the caption “Executive Officers of First Commonwealth
Financial Corporation” after Part I, Item 4, of this Report.
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:20)(cid:17)
(cid:40)(cid:91)e(cid:70)(cid:88)t(cid:76)(cid:89)e (cid:38)o(cid:80)(cid:83)ensat(cid:76)on
Information called for by this item concerning compensation of First Commonwealth’s executive officers and the report of the
Compensation and Human Resources Committee will be included in the Proxy Statement under the heading “Executive
Compensation,” and is incorporated herein by reference.
Information called for by this item concerning compensation of First Commonwealth’s directors will be included in the Proxy
Statement under the heading “Compensation of Directors,” and is incorporated herein by reference.
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:21)(cid:17)
Se(cid:70)(cid:88)r(cid:76)t(cid:92) (cid:50)wnersh(cid:76)(cid:83) o(cid:73) (cid:38)erta(cid:76)n (cid:37)ene(cid:73)(cid:76)(cid:70)(cid:76)al (cid:50)wners an(cid:71) Manage(cid:80)ent an(cid:71) (cid:53)elate(cid:71) Sto(cid:70)(cid:78)hol(cid:71)er Matters
Information called for by this item concerning security ownership of certain beneficial owners and security ownership of
management will be included in the Proxy Statement under the headings “Security Ownership of Certain Beneficial Owners”
and “Securities Owned by Directors and Management,” and is incorporated herein by reference.
The following table provides information related to our existing equity compensation plans as of December 31, 2013:
(cid:51)lan (cid:38)ategor(cid:92)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(cid:49)(cid:88)(cid:80)(cid:69)er o(cid:73)
se(cid:70)(cid:88)r(cid:76)t(cid:76)es to (cid:69)e
(cid:76)ss(cid:88)e(cid:71) (cid:88)(cid:83)on
e(cid:91)er(cid:70)(cid:76)se o(cid:73)
o(cid:88)tstan(cid:71)(cid:76)ng
o(cid:83)t(cid:76)ons(cid:15) warrants
an(cid:71) r(cid:76)ghts
(cid:58)e(cid:76)ghte(cid:71) a(cid:89)erage
e(cid:91)er(cid:70)(cid:76)se (cid:83)r(cid:76)(cid:70)e o(cid:73)
o(cid:88)tstan(cid:71)(cid:76)ng
o(cid:83)t(cid:76)ons(cid:15) warrants
an(cid:71) r(cid:76)ghts
(cid:49)(cid:88)(cid:80)(cid:69)er o(cid:73)
se(cid:70)(cid:88)r(cid:76)t(cid:76)es
re(cid:80)a(cid:76)n(cid:76)ng
a(cid:89)a(cid:76)la(cid:69)le (cid:73)or
(cid:73)(cid:88)t(cid:88)re (cid:76)ss(cid:88)an(cid:70)e
(cid:88)n(cid:71)er e(cid:84)(cid:88)(cid:76)t(cid:92)
(cid:70)o(cid:80)(cid:83)ensat(cid:76)on
(cid:83)lans
27,000
N/A
27,000
$
$
14.49
N/A
14.49
4,330,038
N/A
4,330,038
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:22)(cid:17)
(cid:38)erta(cid:76)n (cid:53)elat(cid:76)onsh(cid:76)(cid:83)s an(cid:71) (cid:53)elate(cid:71) (cid:55)ransa(cid:70)t(cid:76)ons(cid:15) an(cid:71) (cid:39)(cid:76)re(cid:70)tor (cid:44)n(cid:71)e(cid:83)en(cid:71)en(cid:70)e
Information called for by this item concerning transactions with related persons and review, approval or ratification of
transactions with related persons will be included in the Proxy Statement under the heading “Related Party Transactions,” and is
incorporated herein by reference.
101
Information called for by this item concerning director independence will be included in the Proxy Statement under the heading
“Corporate Governance,” and is incorporated herein by reference.
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:23)(cid:17)
(cid:51)r(cid:76)n(cid:70)(cid:76)(cid:83)al A(cid:70)(cid:70)o(cid:88)ntant Fees an(cid:71) Ser(cid:89)(cid:76)(cid:70)es
Information called for by this item concerning fees paid to First Commonwealth’s principal accountant and First
Commonwealth’s pre-approval policies and procedures will be included in the Proxy Statement under the heading “Annual
Audit Information,” and is incorporated herein by reference.
102
(cid:51)A(cid:53)(cid:55) (cid:44)(cid:57)
(cid:44)(cid:55)(cid:40)M (cid:20)(cid:24)(cid:17)
(cid:40)(cid:91)h(cid:76)(cid:69)(cid:76)ts(cid:15) F(cid:76)nan(cid:70)(cid:76)al State(cid:80)ents an(cid:71) S(cid:70)he(cid:71)(cid:88)les
(A)
Documents Filed as Part of this Report
Financial Statements
(1)
All financial statements of the registrant as set forth under Item 8 of the Report on Form 10-K.
(2)
Financial Statement Schedules
(cid:39)es(cid:70)r(cid:76)(cid:83)t(cid:76)on
Indebtedness to Related Parties
Guarantees of Securities of Other Issuers
(3)
Exhibits
(cid:51)age
N/A
N/A
(cid:39)es(cid:70)r(cid:76)(cid:83)t(cid:76)on
Amended and Restated Articles of Incorporation of
First Commonwealth Financial Corporation
(cid:44)n(cid:70)or(cid:83)orate(cid:71) (cid:69)(cid:92) (cid:53)e(cid:73)eren(cid:70)e to
Exhibit 3.1 to the quarterly report on Form
10-Q for the quarter ended June 30, 2010
Amended and Restated By-Laws of First
Commonwealth Financial Corporation
Amended and Restated Non-Qualified Deferred
Compensation Plan (formerly known as the
Supplemental Executive Retirement Plan)
Amended and Restated Employment Agreement dated
January 1, 2012 entered into among First
Commonwealth Financial Corporation, First
Commonwealth Bank and T. Michael Price
Exhibit 3.1 to the current report as Form 8-K
filed January 20, 2011
Exhibit 10.2 to the annual report on Form 10-
K filed March 5, 2012
Exhibit 10.1 to the current report on Form 8-
K filed January 5, 2012
Change of Control Agreement dated December 30,
2011 entered into between FCFC and T. Michael Price
Exhibit 10.3 to the current report on Form 8-
K filed January 5, 2012
First Commonwealth Financial Corporation Incentive
Compensation Plan
Annex I to Proxy Statement filed March 16,
2009 relating to the 2009 Annual Meeting of
Shareholders
2013 Annual Incentive Plan
2011-2013 Long Term Incentive Plan
2012-2014 Long-Term Incentive Plan
2013-2015 Long-Term Incentive Plan
Exhibit 10.1 to the quarterly report on
Form 10-Q filed May 8, 2013
Exhibit 10.2 to the quarterly report on
Form 10-Q filed May 10, 2011
Exhibit 10.5 to the quarterly report on
Form 10-Q filed May 8, 2012
Exhibit 10.2 to the quarterly report on Form
10-Q filed May 8, 2013
Form of Restricted Stock Agreement for service-based
restricted stock
Exhibit 10.3 to the quarterly report on
Form 10-Q filed May 8, 2012
Employment Agreement dated January 22, 2010
entered into between FCFC and Robert E. Rout
Exhibit 10.1 to the current report on Form 8-
K filed January 28, 2010
Change of Control Agreement dated December 30,
2011 entered into between FCFC and Robert E. Rout
Exhibit 10.4 to the current report on Form 8-
K filed January 5, 2012
Change of Control Agreement dated December 30,
2011 entered into between FCFC and I. Robert
Emmerich
Change of Control Agreement dated December 30,
2011 entered into between FCFC and Leonard V.
Lombardi
Exhibit 10.12 to the annual report on Form
10-K filed March 5, 2012
Exhibit 10.13 to the annual report on Form
10-K filed March 5, 2012
S(cid:70)he(cid:71)(cid:88)le
(cid:49)(cid:88)(cid:80)(cid:69)er
I
II
(cid:40)(cid:91)h(cid:76)(cid:69)(cid:76)t
(cid:49)(cid:88)(cid:80)(cid:69)er
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
103
(cid:40)(cid:91)h(cid:76)(cid:69)(cid:76)t
(cid:49)(cid:88)(cid:80)(cid:69)er
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
21.10
23.10
31.10
31.20
32.10
32.20
(cid:39)es(cid:70)r(cid:76)(cid:83)t(cid:76)on
Change of Control Agreement dated December 30,
2011 entered into between FCFC and Matthew C.
Tomb
Amended and Restated Employment Agreement dated
January 1, 2012 among First Commonwealth Financial
Corporation, First Commonwealth Bank and T.
Michael Price
Change of Control Agreement dated March 1, 2013
entered into between FCFC and Norman J.
Montgomery
(cid:44)n(cid:70)or(cid:83)orate(cid:71) (cid:69)(cid:92) (cid:53)e(cid:73)eren(cid:70)e to
Exhibit 10.14 to the annual report on Form
10-K filed March 5, 2012
Exhibit 10.1 to the current report on Form
8-K filed January 5, 2012
Exhibit 10.3 to the quarterly report on Form
10-Q filed May 8, 2013
Change of Control Agreement dated March 1, 2013
entered into between FCFC and Carrie L. Riggle
Exhibit 10.4 to the quarterly report on Form
10-Q filed May 8, 2013
Change of Control Agreement dated May 31, 2013
entered into between FCFC and Jane Grebenc
Exhibit 10.2 to the quarterly report on Form
10-Q filed August 7, 2013
Restricted Stock Agreement dated April 1, 2011
entered into between FCFC and I. Robert Emmerich
Exhibit 10.15 to the annual report on Form
10-K filed March 5, 2012
Restricted Stock Agreement dated January 1, 2012
entered into between FCFC and T. Michael Price
Exhibit 10.2 to the current report on Form
8-K filed January 5, 2012
Employment Agreement dated May 31, 2013 entered
into between FCFC and Jane Grebenc
Exhibit 10.1 to the quarterly report on Form
10-Q filed August 7, 2013
Restricted Stock Agreement dated May 31, 2013
entered into between FCFC and Jane Grebenc
Exhibit 10.3 to the quarterly report on Form
10-Q filed August 7, 2013
Retirement and Transition Services Agreement dated
November 29, 2013 entered into between FCFC and
Robert E. Rout
Amended and Restated Director Retainer Plan
Subsidiaries of the Registrant
Consent of KPMG LLP Independent Registered Public
Accounting Firm
Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 10.1 to the current report on Form
8-K filed December 2, 2013
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
101.00
Interactive Data File (XBRL)
104
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania.
S(cid:44)(cid:42)(cid:49)A(cid:55)(cid:56)(cid:53)(cid:40)S
FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant)
By:
/S/ T. Michael Price
(cid:55)(cid:17) M(cid:76)(cid:70)hael (cid:51)r(cid:76)(cid:70)e
(cid:51)res(cid:76)(cid:71)ent an(cid:71) (cid:38)h(cid:76)e(cid:73) (cid:40)(cid:91)e(cid:70)(cid:88)t(cid:76)(cid:89)e (cid:50)(cid:73)(cid:73)(cid:76)(cid:70)er
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
S(cid:76)gnat(cid:88)re
(cid:38)a(cid:83)a(cid:70)(cid:76)t(cid:92)
(cid:39)ate
Dated: March 3, 2014
/S/ James G. Barone
Director
(cid:45)a(cid:80)es (cid:42)(cid:17) (cid:37)arone
/S/ Julie A. Caponi
Director
(cid:45)(cid:88)l(cid:76)e A(cid:17) (cid:38)a(cid:83)on(cid:76)
/S/ Ray T. Charley
Director
(cid:53)a(cid:92) (cid:55)(cid:17) (cid:38)harle(cid:92)
/S/ Gary R. Claus
Director
(cid:42)ar(cid:92) (cid:53)(cid:17) (cid:38)la(cid:88)s
/S/ David S. Dahlmann
(cid:39)a(cid:89)(cid:76)(cid:71) S(cid:17) (cid:39)ahl(cid:80)ann
Director, Chairman
/S/ Johnston A. Glass
Director
(cid:45)ohnston A(cid:17) (cid:42)lass
/S/ Jon L. Gorney
Director
Director
Director
Director
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
President and Chief Executive Officer
(Principal Executive Officer)
March 3, 2014
Executive Vice President, Chief
Financial Officer, and Treasurer
Director
Director
March 3, 2014
March 3, 2014
March 3, 2014
(cid:45)on (cid:47)(cid:17) (cid:42)orne(cid:92)
/S/ David W. Greenfield
(cid:39)a(cid:89)(cid:76)(cid:71) (cid:58)(cid:17) (cid:42)reen(cid:73)(cid:76)el(cid:71)
/S/ Luke A. Latimer
(cid:47)(cid:88)(cid:78)e A(cid:17) (cid:47)at(cid:76)(cid:80)er
/S/ James W. Newill
(cid:45)a(cid:80)es (cid:58)(cid:17) (cid:49)ew(cid:76)ll
/S/ T. Michael Price
(cid:55)(cid:17) M(cid:76)(cid:70)hael (cid:51)r(cid:76)(cid:70)e
/S/ Robert E. Rout
(cid:53)o(cid:69)ert (cid:40)(cid:17) (cid:53)o(cid:88)t
/S/ Laurie S. Singer
(cid:47)a(cid:88)r(cid:76)e S(cid:17) S(cid:76)nger
/S/ Robert J. Ventura
(cid:53)o(cid:69)ert (cid:45)(cid:17) (cid:57)ent(cid:88)ra
105
(cid:40)(cid:91)h(cid:76)(cid:69)(cid:76)t (cid:21)(cid:20)(cid:17)(cid:20) S(cid:88)(cid:69)s(cid:76)(cid:71)(cid:76)ar(cid:76)es o(cid:73) F(cid:76)rst (cid:38)o(cid:80)(cid:80)onwealth F(cid:76)nan(cid:70)(cid:76)al (cid:38)or(cid:83)orat(cid:76)on
Percent Ownership by Registrant
First Commonwealth Bank
601 Philadelphia Street
Indiana, PA 15701
Incorporated under laws of Pennsylvania
Subsidiaries of First Commonwealth Bank
First Commonwealth Insurance Agency
601 Philadelphia Street
Indiana, PA 15701
Incorporated under laws of Pennsylvania
First Commonwealth Preferred, LLC
1105 N. Market Street, Suite 1300
Wilmington, DE 19801
Incorporated under laws of Delaware
First Commonwealth Community Development Corporation (Inactive)
654 Philadelphia Street
Indiana, PA 15701
Incorporated under laws of Pennsylvania
First Commonwealth Financial Advisors Incorporated
601 Philadelphia Street
Indiana, PA 15701
Incorporated under laws of Pennsylvania
FraMal Holdings Corporation
1105 N. Market Street, Suite 1300
Wilmington, DE 19801
Incorporated under laws of Delaware
First Commonwealth Capital Trust II
601 Philadelphia Street
Indiana, PA 15701
Incorporated under laws of Pennsylvania
First Commonwealth Capital Trust III
601 Philadelphia Street
Indiana, PA 15701
Incorporated under laws of Pennsylvania
Commonwealth Trust Credit Life Insurance Company
2700 North Third Street, Suite 3050
Phoenix, AZ 85004
Incorporated under laws of Arizona
100%
100%
100%
100%
100%
100%
100%
100%
50%
(cid:40)(cid:91)h(cid:76)(cid:69)(cid:76)t (cid:21)(cid:22)(cid:17)(cid:20) (cid:38)onsent o(cid:73) (cid:44)n(cid:71)e(cid:83)en(cid:71)ent (cid:53)eg(cid:76)stere(cid:71) (cid:51)(cid:88)(cid:69)l(cid:76)(cid:70) A(cid:70)(cid:70)o(cid:88)nt(cid:76)ng F(cid:76)r(cid:80)
The Board of Directors of First Commonwealth Financial Corporation:
We consent to the incorporation by reference of our reports dated March 3, 2014, with respect to the consolidated statements of
financial condition of First Commonwealth Financial Corporation and subsidiaries as of December 31, 2013 and 2012, and the
related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2013, and the effectiveness of internal control over financial reporting as
of December 31, 2013, which reports appear in the December 31, 2013 annual report on Form 10-K of First Commonwealth
Financial Corporation in the following documents:
• Registration statement No. 333-187288 on Form S-3 of First Commonwealth Financial Corporation’s Dividend
Reinvestment and Direct Stock Purchase Plan;
• Registration statement No. 333-165848 on Form S-3 of First Commonwealth Financial Corporation’s Shelf
Registration of Common Stock;
• Registration statement No. 333-154751 on Form S-3 of First Commonwealth Financial Corporation’s Shelf
Registration of Common Stock;
• Registration statement No. 333-111732 on Form S-3 of First Commonwealth Financial Corporation’s Stock Purchase
and Dividend Reinvestment Plan;
• Registration statement No. 333-113534 on Form S-8 of GA Financial, Inc. Stock Option Plan;
• Registration statement No. 333-111735 on Form S-8 of Pittsburgh Financial Corp. Stock Option Plan;
• Registration statement No. 033-55687 on Form S-8 of First Commonwealth Financial Corporation’s Stock Option
Plan; and
• Registration statement No. 333-159090 on Form S-8 of First Commonwealth Financial Corporation’s Incentive
Compensation Plan.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 3, 2014
(cid:40)(cid:59)(cid:43)(cid:44)(cid:37)(cid:44)(cid:55) (cid:22)(cid:20)(cid:17)(cid:20)
(cid:38)(cid:43)(cid:44)(cid:40)F (cid:40)(cid:59)(cid:40)(cid:38)(cid:56)(cid:55)(cid:44)(cid:57)(cid:40) (cid:50)FF(cid:44)(cid:38)(cid:40)(cid:53) (cid:38)(cid:40)(cid:53)(cid:55)(cid:44)F(cid:44)(cid:38)A(cid:55)(cid:44)(cid:50)(cid:49)
(cid:51)(cid:56)(cid:53)S(cid:56)A(cid:49)(cid:55) (cid:55)(cid:50) S(cid:40)(cid:38)(cid:55)(cid:44)(cid:50)(cid:49) (cid:22)(cid:19)(cid:21) (cid:50)F (cid:55)(cid:43)(cid:40) SA(cid:53)(cid:37)A(cid:49)(cid:40)S(cid:16)(cid:50)(cid:59)(cid:47)(cid:40)(cid:60) A(cid:38)(cid:55) (cid:50)F (cid:21)(cid:19)(cid:19)(cid:21)
I, T. Michael Price certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of First Commonwealth Financial Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
March 3, 2014
Date
/S/ T. Michael Price
Signature
President and Chief Executive Officer
Title
(cid:40)(cid:59)(cid:43)(cid:44)(cid:37)(cid:44)(cid:55) (cid:22)(cid:20)(cid:17)(cid:21)
(cid:38)(cid:43)(cid:44)(cid:40)F (cid:40)(cid:59)(cid:40)(cid:38)(cid:56)(cid:55)(cid:44)(cid:57)(cid:40) (cid:50)FF(cid:44)(cid:38)(cid:40)(cid:53) (cid:38)(cid:40)(cid:53)(cid:55)(cid:44)F(cid:44)(cid:38)A(cid:55)(cid:44)(cid:50)(cid:49)
(cid:51)(cid:56)(cid:53)S(cid:56)A(cid:49)(cid:55) (cid:55)(cid:50) S(cid:40)(cid:38)(cid:55)(cid:44)(cid:50)(cid:49) (cid:22)(cid:19)(cid:21) (cid:50)F (cid:55)(cid:43)(cid:40) SA(cid:53)(cid:37)A(cid:49)(cid:40)S(cid:16)(cid:50)(cid:59)(cid:47)(cid:40)(cid:60) A(cid:38)(cid:55) (cid:50)F (cid:21)(cid:19)(cid:19)(cid:21)
I, Robert E. Rout certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of First Commonwealth Financial Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
March 3, 2014
Date
/S/ Robert E. Rout
Signature
Executive Vice President and Chief Financial Officer
Title
(cid:40)(cid:59)(cid:43)(cid:44)(cid:37)(cid:44)(cid:55) (cid:22)(cid:21)(cid:17)(cid:20)
(cid:38)(cid:40)(cid:53)(cid:55)(cid:44)F(cid:44)(cid:38)A(cid:55)(cid:44)(cid:50)(cid:49) (cid:51)(cid:56)(cid:53)S(cid:56)A(cid:49)(cid:55) (cid:55)(cid:50) (cid:20)(cid:27) (cid:56)(cid:17)S(cid:17)(cid:38)(cid:17) S(cid:40)(cid:38)(cid:55)(cid:44)(cid:50)(cid:49) (cid:20)(cid:22)(cid:24)(cid:19)(cid:15)
AS A(cid:39)(cid:39)(cid:40)(cid:39) (cid:37)(cid:60) S(cid:40)(cid:38)(cid:55)(cid:44)(cid:50)(cid:49) (cid:28)(cid:19)(cid:25) (cid:50)F (cid:55)(cid:43)(cid:40)
SA(cid:53)(cid:37)A(cid:49)(cid:40)S(cid:16)(cid:50)(cid:59)(cid:47)(cid:40)(cid:60) A(cid:38)(cid:55) (cid:50)F (cid:21)(cid:19)(cid:19)(cid:21)
I, T. Michael Price, President and Chief Executive Officer of First Commonwealth Financial Corporation (“First
Commonwealth”), certify that the Annual Report of First Commonwealth on Form 10-K for the period ended December 31,
2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects, the financial condition of First Commonwealth at
the end of such period and the results of operations of First Commonwealth for such period.
DATED: March 3, 2014
/S/ T. Michael Price
T. Michael Price
President and Chief Executive Officer
(cid:40)(cid:59)(cid:43)(cid:44)(cid:37)(cid:44)(cid:55) (cid:22)(cid:21)(cid:17)(cid:21)
(cid:38)(cid:40)(cid:53)(cid:55)(cid:44)F(cid:44)(cid:38)A(cid:55)(cid:44)(cid:50)(cid:49) (cid:51)(cid:56)(cid:53)S(cid:56)A(cid:49)(cid:55) (cid:55)(cid:50) (cid:20)(cid:27) (cid:56)(cid:17)S(cid:17)(cid:38)(cid:17) S(cid:40)(cid:38)(cid:55)(cid:44)(cid:50)(cid:49) (cid:20)(cid:22)(cid:24)(cid:19)(cid:15)
AS A(cid:39)(cid:39)(cid:40)(cid:39) (cid:37)(cid:60) S(cid:40)(cid:38)(cid:55)(cid:44)(cid:50)(cid:49) (cid:28)(cid:19)(cid:25) (cid:50)F (cid:55)(cid:43)(cid:40)
SA(cid:53)(cid:37)A(cid:49)(cid:40)S(cid:16)(cid:50)(cid:59)(cid:47)(cid:40)(cid:60) A(cid:38)(cid:55) (cid:50)F (cid:21)(cid:19)(cid:19)(cid:21)
I, Robert E. Rout, Executive Vice President and Chief Financial Officer of First Commonwealth Financial Corporation (“First
Commonwealth”), certify that the Annual Report of First Commonwealth on Form 10-K for the period ended December 31,
2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects, the financial condition of First Commonwealth at
the end of such period and the results of operations of First Commonwealth for such period.
DATED: March 3, 2014
/S/ Robert E. Rout
Robert E. Rout
Executive Vice President and Chief Financial Officer
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Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders will be held at:
First Commonwealth Place
654 Philadelphia Street, Indiana, PA
on Tuesday, April 22, 2014 beginning at 3:00 p.m., Eastern Time.
Common Stock
First Commonwealth Financial Corporation common stock is listed on the New York Stock Exchange (NYSE)
and is traded under the symbol FCF. Current market prices for First Commonwealth Financial Corporation
common stock can be obtained from your local stock broker or by calling the Corporation at 724-349-7220
or 1-800-711-2265.
Transfer Agent
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Telephone: 1-866-203-5173
www.computershare.com/investor
Dividend Payments
Subject to the approval of the Board of Directors, quarterly cash dividends are paid in the months of
February, May, August and November.
Dividend Reinvestment
First Commonwealth Financial Corporation’s direct stock purchase and dividend reinvestment plan offers
shareholders an opportunity to reinvest their dividends in additional shares of the Corporation’s common
stock. Once enrolled in the plan, participants may also purchase shares through voluntary cash investments.
For more information on the plan, please call Computershare at 1-866-203-5173.
Direct Deposit of Dividends
For information about direct deposit of dividends to your U.S. bank account at no charge to you, please visit
www.computershare.com/investor or contact Computershare at 1-866-203-5173.
Investor/Shareholder Inquiries
Requests for information or assistance regarding investor/shareholder inquiries should be directed to the
Corporation at 724-349-7220 or 1-800-711-2265 or InvestorRelations@fcbanking.com.
First Commonwealth Financial Corporation
601 Philadelphia Street
Indiana, Pennsylvania 15701-0400
(724) 349.7220
(800) 711.BANK (2265)
fcbanking.com