Annual Report 2015
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Evolution of retail banking
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(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:74)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:73)(cid:73)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:87)(cid:3)(cid:86)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:69)(cid:85)(cid:68)(cid:81)(cid:70)(cid:75)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:89)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)
(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:83)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:3)(cid:88)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:87)(cid:87)(cid:72)(cid:85)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:82)(cid:81)(cid:72)(cid:16)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)
(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:72)(cid:71)(cid:3)(cid:7)(cid:21)(cid:17)(cid:20)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:87)(cid:75)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:68)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:80)(cid:86)(cid:72)(cid:79)(cid:89)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)
(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:68)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:17)(cid:3)
Groundwork has been laid
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(cid:58)(cid:72)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:74)(cid:82)(cid:68)(cid:79)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:78)(cid:72)(cid:72)(cid:83)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:73)(cid:79)(cid:68)(cid:87)(cid:16)(cid:87)(cid:82)(cid:16)(cid:71)(cid:82)(cid:90)(cid:81)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:72)(cid:81)(cid:68)(cid:69)(cid:79)(cid:72)(cid:71)(cid:3)
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(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:72)(cid:81)(cid:75)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:90)(cid:68)(cid:92)(cid:3)(cid:90)(cid:72)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:79)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:87)(cid:92)(cid:83)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:76)(cid:83)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:73)(cid:68)(cid:86)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:68)(cid:86)(cid:3)(cid:179)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:17)(cid:180)(cid:3)(cid:3)(cid:36)(cid:70)(cid:75)(cid:76)(cid:72)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:85)(cid:88)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:3)(cid:81)(cid:68)(cid:89)(cid:76)(cid:74)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:3)(cid:70)(cid:75)(cid:68)(cid:79)(cid:79)(cid:72)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:3)(cid:41)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)
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Further revenue enhancements
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Credit
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Looking ahead
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file Number 001-11138
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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, 2015) was approximately $851,661,514.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of February 26, 2016, was 88,961,268.
Smaller reporting company
Non-accelerated filer
Accelerated filer
No
No
No
DOCUMENTS INCORPORATED BY REFERENCE
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 26, 2016 are incorporated by reference into Part III.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
PART I
ITEM 1.
Business
ITEM 1A.
Risk Factors
ITEM 1B.
Unresolved Staff Comments
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Mine Safety Disclosures
Executive Officers of First Commonwealth Financial Corporation
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities
ITEM 6.
Selected Financial Data
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A.
Controls and Procedures
ITEM 9B.
Other Information
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
Principal Accountant Fees and Services
PART IV
ITEM 15.
Exhibits, Financial Statements and Schedules
Signatures
PAGE
4
15
19
20
20
20
21
22
24
25
48
49
107
107
111
112
112
112
113
113
114
117
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, 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
PART I
ITEM 1.
Overview
Business
First Commonwealth Financial Corporation (“First Commonwealth,” the “Company” 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, 2015, we had total
assets of $6.6 billion, total loans of $4.7 billion, total deposits of $4.2 billion and shareholders’ equity of $719.5 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, 2015, the Bank operated 110 community banking offices
throughout western and central Pennsylvania, four community banking offices in Central Ohio, and loan production offices in
Akron and 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 116 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.
Historical and Recent Developments
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, and Unitas National Bank and Reliable Savings Bank in 1994. In 1995, we merged all of our
banking subsidiaries (other than Reliable Savings Bank) into Deposit Bank and renamed the resulting institution “First
Commonwealth Bank.” We then merged Reliable Savings Bank into FCB in 1997. We acquired Southwest Bank in 1998 and
merged it into FCB in 2002.
We expanded our presence in the Pittsburgh market through the acquisitions of Pittsburgh Savings Bank (dba BankPittsburgh)
in 2003, Great American Federal in 2004 and Laurel Savings Bank in 2006. These acquisitions added 27 branches in Allegheny
and Butler Counties.
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 prior acquisitions and de novo strategy, FCB operates 60 branches in the Pittsburgh
metropolitan statistical area and currently ranks tenth in deposit market share.
In 2015, we entered central Ohio through the acquisition of First Community Bank with $102.8 million in assets and four
branches in the Columbus area.
First Commonwealth regularly evaluates merger and acquisition opportunities and from time to time conducts due diligence
activities related to possible transactions with other financial institutions and financial services companies. As a result, merger
or acquisition discussions and, in some cases, negotiations, may take place and future merger acquisitions involving cash, debt
or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values, and,
therefore, some dilution of First Commonwealth’s tangible book value and net income per common share may occur in
connection with any future transaction.
Loan Portfolio
The Company’s loan portfolio includes several categories of loans that are discussed in detail below. The Company does not
engage in subprime lending.
4
Commercial, Financial, Agricultural and Other
Commercial, financial, agricultural and other loans represent term loans used to acquire business assets or revolving lines of credit
used to finance working capital. These loans are generally secured by a first lien position on the borrower’s business assets as a
secondary source of repayment. The type and amount of the collateral varies depending on the amount and terms of the loan, but
generally may include accounts receivable, inventory, equipment or other assets. Loans also may be supported by personal
guarantees from the principals of the commercial loan borrowers.
Commercial loans are underwritten for credit-worthiness based on the borrowers’ financial information, cash flow, net worth, prior
loan performance, existing debt levels, type of business and the industry in which it operates. Advance rates on commercial loans
are generally collateral-dependent and are determined based on the type of equipment, the mix of inventory and the quality of
receivables.
Credit risk for commercial loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of secured
loans, from a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent
liquidation of collateral. The Company’s Credit Policy establishes loan concentration limits by borrower, geography and industry.
Commercial Real Estate
Commercial real estate loans represent term loans secured by owner-occupied and non-owner occupied properties. Commercial
real estate loans are underwritten based on an evaluation of each borrower’s cash flow as the principal source of loan repayment,
and are generally secured by a first lien on the property as a secondary source of repayment. Our underwriting process for non-
owner occupied properties evaluates the history of occupancy, quality of tenants, lease terms, operating expenses and cash flow.
Commercial real estate loans are subject to the same credit evaluation as previously described for commercial loans. Approximately
23%, by principal amount, of our commercial real estate loans involve owner-occupied properties.
For loans secured by commercial real estate, at origination the Company obtains current and independent appraisals from licensed
or certified appraisers to assess the value of the underlying collateral. The Company’s general policy for commercial real estate
loans is to limit the terms of the loans to not more than 10 years with loan-to-value ratios not exceeding 80% on owner-occupied
and income producing properties. For non-owner occupied commercial real estate loans, the loan terms are generally aligned with
the property’s lease terms and are generally underwritten with a loan-to-value ratio not exceeding 75%.
Credit risk for commercial real estate loans can arise from economic conditions that could impact market demand, rental rates and
property vacancy rates and declines in the collateral value in relation to the outstanding loan balance in the event of a default and
subsequent liquidation of collateral.
Real Estate Construction
Real estate construction represents financing for real estate development. The underwriting process for these loans is designed to
confirm that the project will be economically feasible and financially viable and is generally conducted as though the Company
would be providing permanent financing for the project. Development and construction loans are secured by the properties under
development or construction, and personal guarantees are typically obtained as a secondary repayment source. The Company
considers the financial condition and reputation of the borrower and any guarantors and generally requires a global cash flow
analysis in order to assess the overall financial position of the developer.
Construction loans to residential builders are generally made for the construction of residential homes for which a binding sales
contract exists and for which the prospective buyers have been pre-qualified for permanent mortgage financing by either third-
party lenders or the Company. These loans are generally for a period of time sufficient to complete construction. The Company
no longer provides builder lot development lending.
Credit risk for real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete
the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.
Residential Real Estate Loans
During the third quarter of 2014, First Commonwealth reentered the residential mortgage business, after a strategic decision in
2005 to discontinue mortgage lending. Residential real estate loans include first lien mortgages used by the borrower to purchase
or refinance a principal residence and home equity loans and lines of credit secured by residential real estate. The Company’s
underwriting process for these loans determines credit-worthiness based upon debt-to-income ratios, collateral values and other
relevant factors.
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Credit risk for residential real estate loans can arise from a borrower’s inability or unwillingness to repay the loan or a shortfall in
the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent liquidation
of the real estate collateral.
The residential real estate portfolio includes both conforming and non-conforming mortgage loans. Conforming mortgage loans
represent loans originated in accordance with underwriting standards set forth by the government-sponsored entities, including
the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage
Association, which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage lenders. These
loans are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or less
(or have mortgage insurance to insure down to 80%), and are made to borrowers in good credit standing. Non-conforming mortgage
loans represent loans that generally are not saleable in the secondary market to the government-sponsored entities due to factors
such as the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan.
The Company does not offer “subprime,” “interest-only” or “negative amortization” mortgages.
Home equity lines of credit and other home equity loans are originated by the Company for typically up to 90% of the appraised
value, less the amount of any existing prior liens on the property. Additionally, the Company’s credit policy requires borrower
FICO scores of not less than 661 and a debt-to-income ratio of not more than 43%.
Loans to Individuals
The Loans to Individuals category includes consumer installment loans, personal lines of credit and indirect automobile loans.
Credit risk for consumer loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of secured
loans, by a shortfall in the value of the collateral in relation to the outstanding loan balance in the event of a default and subsequent
liquidation of collateral.
The underwriting criteria for automobile loans allow for such loans to be made for up to 100% of the purchase price or the retail
value of the vehicle as listed by the National Automobile Dealers Association. The terms of the loan are determined by the age
and condition of the collateral, and range from 36 to 84 months. Collision insurance policies are required on all automobile loans.
The Company also makes other consumer loans, which may or may not be secured. The terms of secured consumer loans generally
depend upon the nature of the underlying collateral. Unsecured consumer loans usually do not exceed $35 thousand and have a
term of no longer than 36 months.
Deposits
Deposits are our primary source of funds to support our revenue-generating assets. We offer traditional deposit products to
businesses and other customers with a variety of rates and terms. Deposits at our bank are insured by the FDIC up to statutory
limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business and
prudently managing our cost of funds. At December 31, 2015, we held $4.2 billion of total deposits, which consisted of $1.1
billion, or 27%, in non-interest bearing checking accounts, $2.5 billion, or 59%, in interest bearing checking accounts, money
market and savings accounts, and $0.6 billion, or 14%, in CDs and IRAs.
Our deposit base is diversified by client type. As of December 31, 2015, no individual depositor represented more than 1% of
our total deposits, and our top ten depositors represented only 1.1% of our total deposits. The composition of our deposit mix
has recently changed with an increased proportion of non-interest-bearing deposits and other transaction accounts and a lower
proportion of more expensive time deposits. This shift in deposit mix has been largely responsible for the recent declines in our
average cost of deposits to 0.18% at December 31, 2015 from 0.28% at December 31, 2014.
Competition
The banking and financial services industry is extremely competitive in our market area. We face vigorous competition for
customers, loans and deposits from many companies, including commercial banks, savings and loan associations, finance
companies, credit unions, trust companies, mortgage companies, money market mutual funds, insurance companies, and
brokerage and investment firms. Many of these competitors are significantly larger than us, have greater resources, higher
lending limits and larger branch systems and offer a wider array of financial services than us. In addition, some of these
competitors, such as credit unions, are subject to a lesser degree of regulation or taxation than that imposed on us.
Employees
At December 31, 2015, First Commonwealth and its subsidiaries employed 1,210 full-time employees and 101 part-time
employees.
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Supervision and Regulation
The following discussion sets forth the material elements of the regulatory framework applicable to financial holding
companies, such as First Commonwealth and their subsidiaries. The regulatory framework is intended primarily for the
protection of depositors, other customers and the federal deposit insurance fund and not for the protection of security holders.
The rules governing the regulation of financial institutions and their holding companies are very detailed and technical.
Accordingly, the following discussion is general in nature and is not intended to be complete or to describe all the laws and
regulations that apply to First Commonwealth and its subsidiaries. A change in applicable statutes, regulations or regulatory
policy may have a material adverse effect on our business, financial condition or results of operations.
Bank Holding Company Regulation
First Commonwealth is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended
(“BHC Act”), and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (“FRB”).
Acquisitions. Under the BHC Act, First Commonwealth is required to obtain the prior approval of the FRB before it can merge
or consolidate with any other bank holding company or acquire all or substantially all of the assets of any bank that is not
already majority owned by it or acquire direct or indirect ownership, or control of, any voting shares of any bank that is not
already majority owned by it, if after such acquisition it would directly or indirectly own or control more than 5% of the voting
shares of such bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory
authorities will consider, among other things, the competitive effect and public benefits of the transactions, the financial,
including capital, position of the combined organization, the risks to the stability of the U.S. banking or financial system, the
applicant's performance record under the Community Reinvestment Act ("CRA") and its compliance with fair housing and
other consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities.
Non-Banking Activities. In general, the BHC Act limits the business of bank holding companies to banking, managing or
controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident
thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as First
Commonwealth may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either
(i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally, without in either case the
prior approval of the FRB. Activities that are financial in nature include securities underwriting and dealing, insurance agency
activities and making merchant banking investments.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries
must be well capitalized and well managed. A depository institution subsidiary is considered to be well capitalized if it satisfies
the requirements for this status discussed in the section captioned Prompt Corrective Action, included elsewhere in this item. A
depository institution subsidiary is considered well managed if it received a composite rating and management rating of at least
satisfactory in its most recent examination. A financial holding company’s status will also depend upon its maintaining its status
as well capitalized and well managed under applicable FRB regulations. If a financial holding company ceases to meet these
capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an
agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding
company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company
may not commence any of the broader financial activities permissible for financial holding companies or acquire a company
engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180
days, the FRB may require divestiture of the holding company’s depository institutions.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company
engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least satisfactory in its most recent examination under the CRA.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or
such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the
bank holding company.
Reporting. Under the BHC Act, First Commonwealth is subject to examination by the FRB and is required to file periodic
reports and other information of its operations with the FRB. 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.
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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 under federal banking laws. The Federal Reserve Act imposes quantitative and qualitative
requirements and collateral requirements on covered transactions by FCB with, or for the benefit of, its affiliates, and generally
requires those transactions to be on terms at least as favorable to FCB as if the transaction were conducted with an unaffiliated
third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of
securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain
derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as
collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, any such
transaction by FCB (or its subsidiaries) must be limited to certain thresholds on an individual and aggregate basis and, for credit
transactions with any affiliate, must be secured by designated amounts of specified collateral.
SEC Regulations. First Commonwealth is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and
various state securities commissions for matters relating to the offer and sale of its securities and is subject to the SEC rules and
regulations relating to periodic reporting, proxy solicitation and insider trading.
Bank Regulation
FCB is a state bank chartered under the Pennsylvania Banking Code and is not a member of the FRB. As such, FCB is subject
to the supervision of, and is regularly examined by, both the Federal Deposit Insurance Corporation (“FDIC”) and the
Pennsylvania Department of Banking and 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.
Dividends and Stress Testing. First Commonwealth is a legal entity separate and distinct from its banking and other
subsidiaries. As a bank holding company, First Commonwealth is subject to certain restrictions on its ability to pay dividends
under applicable banking laws and regulations. Federal bank regulators are authorized to determine under certain circumstances
relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. In particular, federal bank regulators have stated that paying dividends that
deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that
banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current
financial and economic environment, the FRB has indicated that bank holding companies should carefully review their dividend
policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very
strong.
A significant portion of our income comes from dividends from our bank, which is also the primary source of our liquidity. In
addition to the restrictions discussed above, our bank is subject to limitations under Pennsylvania law regarding the level of
dividends that it may pay to us. In general, dividends may be declared and paid only out of accumulated net earnings and may
not be declared or paid unless surplus is at least equal to capital. Dividends may not reduce surplus without the prior consent of
the Pennsylvania Department of Banking. FCB has not reduced its surplus through the payment of dividends. As of
December 31, 2015, FCB could pay dividends to First Commonwealth of $99.2 million without reducing its capital levels
below "well capitalized" levels and without the approval of the Pennsylvania Department of Banking.
In October 2012, as required by the Dodd-Frank Act, the FRB and the FDIC published final rules regarding company-run stress
testing. These rules require bank holding companies and banks with average total consolidated assets greater than $10 billion to
conduct an annual company-run stress test of capital, consolidated earnings and losses under one base and at least two stress
scenarios provided by the federal bank regulators. Although our assets are currently below this threshold, we have nevertheless
commenced stress testing to ensure that we are able to meet these requirements in a timely fashion. Neither we nor our bank is
currently subject to the stress testing requirements, but we expect that once we are subject to those requirements, the FRB, the
FDIC and the Pennsylvania Department of Banking and Securities will consider our results as an important factor in evaluating
our capital adequacy, and that of our bank, in evaluating any proposed acquisitions and in determining whether any proposed
dividends or stock repurchases by us or by our bank may be an unsafe or unsound practice.
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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 Financial Protection. We are subject to a number of federal and state consumer protection laws that extensively
govern our relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act,
the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection
Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury
laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require
disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in
credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive
and abusive practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight. Violations of
applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including
actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer
protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including
regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we
operate and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to
obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition
from engaging in such transactions even if approval is not required.
The Dodd-Frank Act created a new, independent federal agency, the Consumer Financial Protection Bureau ("CFPB"), which
was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws.
The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and promote
the availability of financial services to underserved consumers and communities. Although all institutions are subject to rules
adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal
regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more.
The FDIC has primary responsibility for examination of our bank and enforcement with respect to federal consumer protection
laws so long as our bank has total consolidated assets of less than $10 billion, and state authorities are responsible for
monitoring our compliance with all state consumer laws. The CFPB also has the authority to require reports from institutions
with less than $10 billion in assets, such as our bank, to support the CFPB in implementing federal consumer protection laws,
supporting examination activities, and assessing and detecting risks to consumers and financial markets.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws
and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance
regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in
Lending Act, the Equal Credit Opportunity Act and new requirements for financial services products provided for in the Dodd-
Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of
products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more
broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products
and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional
remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory,
examination and enforcement authority over various consumer financial products and services, including the ability to require
reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as
injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain
cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from
adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could
also adversely affect our business, financial condition or results of operations.
Deposit Insurance. Deposits of FCB are insured up to applicable limits by the FDIC and are subject to deposit insurance
assessments to maintain the Deposit Insurance Fund (“DIF”). Deposit insurance assessments are based upon average total assets
minus average total equity. The insurance assessments are based upon a matrix that takes into account a bank’s capital level and
supervisory rating. The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation,
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rule, order or condition imposed by the FDIC. As an institution with less than $10 billion in assets, FCB’s assessment rates are
based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). For institutions with $10
billion or more in assets, assessment rates are calculated using a scorecard that combines the supervisory risk ratings of the
institution with certain forward-looking financial measures. These assessment rates are subject to adjustments based upon the
insured depository institution’s ratio of long-term unsecured debt to the assessment base, long-term unsecured debt issued by
other insured depository institutions to the assessment base, and brokered deposits to the assessment base. However, the
adjustments based on brokered deposits to the assessment base will not apply so long as the institution is well capitalized and
has a composite CAMELS rating of 1 or 2. The CAMELS rating system is a bank rating system where bank supervisory
authorities rate institutions according to six factors: capital adequacy, asset quality, management quality, earnings, liquidity, and
sensitivity to market risk. The FDIC may make additional discretionary assessment rate adjustments.
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. In October 2015, the FDIC proposed to impose a surcharge on the quarterly assessments of insured depository
institutions with total consolidated assets of $10 billion or more. This surcharge will not impact First Commonwealth.
Repeal Of Federal Prohibitions On Payment Of Interest On Demand Deposits. The federal prohibition restricting depository
institutions from paying interest on demand deposit accounts was repealed effective on July 21, 2011 as part of the Dodd-Frank
Act.
Capital Requirements
First Commonwealth and FCB are each required to comply with applicable capital adequacy standards established by the FRB.
The current risk-based capital standards applicable to First Commonwealth and FCB, parts of which are currently in the process
of being phased-in, are based on the December 2010 final capital framework for strengthening international capital standards,
known as Basel III, of the Basel Committee on Banking Supervision (the “Basel Committee”).
Prior to January 1, 2015, the risk-based capital standards applicable to First Commonwealth and FCB were based on the 1988
Capital Accord, known as Basel I, of the Basel Committee. In July 2013, the federal bank regulators approved final rules (the
“Basel III Capital Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The
Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their
depository institution subsidiaries, including First Commonwealth and FCB, as compared to the Basel I risk-based capital rules.
The Basel III Capital Rules became effective for First Commonwealth and FCB on January 1, 2015 (subject to a phase-in
period for certain provisions).
The Basel III Capital Rules, among other things:
•
•
•
•
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.
Under the Basel III Capital Rules, the initial minimum capital ratios that became effective on January 1, 2015 are as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets
6.0% Tier 1 capital to risk-weighted assets
8.0% Total capital to risk-weighted assets
4.0% Tier 1 capital to average quarterly assets
When fully phased in on January 1, 2019, the Basel III Capital Rules will require First Commonwealth and FCB to maintain a
2.5% “capital conservation buffer” to the required ratios of CET1 to risk-weighted assets, Tier 1 capital to risk-weighted assets
and Total capital to risk-weighted assets, effectively resulting in minimum ratios of 7.0%, 8.5% and 10.5%, respectively.
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.
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The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized
through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1
to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
During 2015, First Commonwealth and FCB made a one-time permanent election, as permitted under Basel III Capital Rules, to
exclude the effects of accumulated other comprehensive income items for the purposes of determining regulatory capital ratios.
Implementation of the deductions and other adjustments to CET1 began 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).
With respect to FCB, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of
the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.” The Basel III Capital Rules prescribe
a standardized approach for risk weightings that expand the risk-weighting categories from the 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. Specific changes to the rules impacting First Commonwealth’s
determination of risk-weighted assets include, among other things:
• Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate
acquisition, development and construction loans.
• Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
•
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one
year or less that is not unconditionally cancellable (currently set at 0%).
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions
based on the risk weight category of the underlying collateral securing the transaction.
Providing for a 100% risk weight for claims on securities firms.
•
• Eliminating the current 50% cap on the risk weight for OTC derivatives.
•
Management believes that, as of December 31, 2015, 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 in effect as of that date.
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
September 2014, the federal bank regulators approved final rules implementing the LCR for advanced approaches banking
organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total
on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in
total consolidated assets that are not advanced approach banking organizations, neither of which would apply to First
Commonwealth or FCB. The federal bank regulators have not yet proposed rules to implement the NSFR or addressed the
scope of bank organizations to which it will apply. The Basel Committee's final NSFR document states that the NSFR applies to
internationally active banks, as did its final LCR document as to that ratio.
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Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take
“prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA
includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels
compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital
measures are the total capital ratio, the CET1 capital ratio (a new ratio requirement under the Basel III Capital Rules), the Tier 1
capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital
ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any
capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1
capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is
not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1
capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv)
“significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less
than 3%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically
undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An
institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain
matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the
capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other
purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend)
or paying any management fee to its parent holding company if the depository institution would thereafter be
“undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital
restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration
plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with
such capital restoration plan and must also provide appropriate assurances of performance. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it
became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a
receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal
banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or
deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized
institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
First Commonwealth believes that, as of December 31, 2015, FCB was a “well-capitalized” bank as defined by the FDIC. See
Note 25 “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.
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The Volcker Rule
The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring
hedge funds and private equity funds (so called "covered funds"). The statutory provision is commonly called the “Volcker
Rule.” Banks with less than $10 billion in total consolidated assets, such as FCB, that do not engage in any covered activities,
other than trading in certain government, agency, state or municipal obligations, do not have any significant compliance
obligations under the rules implementing the Volcker Rule. We are continuing to evaluate the effects of the Volcker Rule on our
business, but we do not currently anticipate that the Volcker Rule will have a material effect on our operations.
Depositor Preference
Under federal law, depositors (including the FDIC with respect to the subrogated claims of insured depositors) and certain
claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims
against such an institution in the liquidation or other resolution of such an institution by any receiver.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the FRB adopted rules establishing standards for assessing whether the
interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to
the costs incurred by issuers for processing such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay
to us and other card-issuing banks for processing electronic payment transactions. Under the final rules, the maximum
permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit
interchange transactions. The FRB also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud
prevention purposes if the issuer complies with certain fraud-related requirements required by the FRB. The FRB also has rules
governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or
prepaid product.
The Dodd-Frank Act contained an exemption from the interchange fee cap for any debit card issuer that, together with its
affiliates, has total assets of less than $10 billion as of the end of the previous calendar year. We currently qualify for this
exemption. If we did not qualify for the exemption, it is projected that the interchange fee cap would adversely impact
interchange income by $6.0 million. We would become subject to the interchange fee cap beginning July 1 of the year
following the time when our total assets reaches or exceeds $10 billion.
Heightened Requirements for Bank Holding Companies with $10 Billion or More in Assets
Various federal banking laws and regulations, including rules adopted by the FRB pursuant to the requirements of the Dodd-
Frank Act, impose heightened requirements on certain large banks and bank holding companies. Most of these rules apply
primarily to bank holding companies with at least $50 billion in total consolidated assets, but certain rules also apply to banks
and bank holding companies with at least $10 billion in total consolidated assets. Following the time at which our or our bank’s
total consolidated assets, as applicable, equal or exceed $10 billion, we or our bank, as applicable, will, among other
requirements:
•
•
•
be required to perform annual stress tests as described above under Dividends and Stress Testing;
be required to establish a dedicated risk committee of our board of directors responsible for overseeing our enterprise-
wide risk management policies, which must be commensurate with our capital structure, risk profile, complexity,
activities, size and other appropriate risk-related factors, and including as a member at least one risk management
expert;
calculate our FDIC deposit assessment base using the performance score and a loss-severity score system described
above under Deposit Insurance; and
be examined for compliance with federal consumer protection laws primarily by the CFPB as described above under
Consumer Financial Protection.
While neither we nor our bank currently have $10 billion or more in total consolidated assets, we have begun analyzing these
rules to ensure we are prepared to comply with the rules when and if they become applicable.
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Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers
and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to
outside vendors.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering
and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United
States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Financial institutions are
also prohibited from entering into specified financial transactions and account relationships and must use enhanced due
diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification
program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money
laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions
for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious
legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve
merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not
required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be
violating these obligations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade
sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign
countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Commonwealth is
responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting
unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to
comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in
those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the
manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the
application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure
under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes,
require us to increase our regulatory capital and modify our business strategy, and limit our ability to pursue business
opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely
affected, perhaps materially, as a result.
Availability of Financial Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any
document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. Our SEC filings are also available to the public on the SEC website at www.sec.gov and on our website at
www.fcbanking.com.
We also make available on our website, www.fcbanking.com, and in print to any shareholder who requests them, our Corporate
Governance Guidelines, the charters for our Audit, Risk, Compensation and Human Resources, and Governance Committees,
and the Code of Conduct and Ethics that applies to all of our directors, officers and employees.
Our Chief Executive Officer has certified to the New York Stock Exchange (“NYSE”) that, as of the date of the certification, he
was not aware of any violation by First Commonwealth of NYSE’s corporate governance listing standards. In addition, our
Chief Executive Officer and Chief Financial Officer have made certain certifications concerning the information contained in
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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.
ITEM 1A.
Risk Factors
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:
Changes in interest rates could negatively impact our financial condition and results of operations.
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.
We are subject to extensive government regulation and supervision.
Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system
as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend
policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations
and policies for possible changes. 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
implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could
subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-
banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations policies
or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal
and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil
money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are
pursuing aggressive enforcement actions with respect compliance and other legal matters involving financial activities, which
heightens the risks associated with actual and perceived compliance failures. See “Supervision and Regulation” included in
Item 1. Business for a more detailed description of the Dodd-Frank Act and other regulatory requirements applicable to First
Commonwealth.
Declines in real estate values could adversely affect our earnings and financial condition.
As of December 31, 2015, approximately 62% of our loans were secured by real estate. These loans consist of residential real
estate loans (approximately 26% of total loans), commercial real estate loans (approximately 31% of total loans) and real estate
construction loans (approximately 5% 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.
Our earnings are significantly affected by general business and economic conditions.
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.
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Our allowance for credit losses may be insufficient.
All borrowers carry the potential to default and our remedies to recover may not fully satisfy money previously loaned. We
maintain an allowance for credit losses, which 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
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 or losses, and possibly risk-based capital, and may have a
material adverse effect on our financial condition and results of operations.
Acts of cyber-crime may compromise client and company information, disrupt access to our systems or result in loss of
client or company assets.
Our business is dependent upon the availability of technology, the Internet and telecommunication systems to enable financial
transactions by clients, record and monitor transactions and transmit and receive data to and from clients and third parties.
Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by
clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our
technologies, systems, networks and our clients’ devices have been subject to, and are likely to continue to be the target of,
cyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the
unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other
information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’
business operations. Any of the foregoing could have a material adverse effect on First Commonwealth's business, financial
condition and results of operations.
We must evaluate whether any portion of our recorded goodwill is impaired. Impairment testing may result in a
material, non-cash write-down of our goodwill assets and could have a material adverse impact on our results of
operations.
At December 31, 2015, 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.
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First Commonwealth relies on dividends from its subsidiaries for most of its revenues.
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.
Competition from other financial institutions in originating loans, attracting deposits and providing various financial
services may adversely affect our profitability.
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.
Negative publicity could damage our reputation.
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 interruption to our information systems could adversely impact our operations.
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.
Our controls and procedures may fail or be circumvented.
Our internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on
certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any
failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures
could have a material adverse effect on First Commonwealth’s business, financial condition and results of operations.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions
to better serve customers and to reduce costs. Our future success depends, in part, upon its ability to address the needs of its
customers by using technology to provide products and services that will satisfy customer demands, as well as to create
additional efficiencies in our operations. Many of the our competitors have substantially greater resources to invest in
technological improvements. We may not be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse effect on First Commonwealth’s business,
financial condition and results of operations.
Our operations rely on external vendors.
We rely on certain vendors to provide products and services necessary to maintain day-to-day operations of First
Commonwealth. In particular, we contracted with an external vendor for our core processing system used to maintain customer
and account records, reflect account transactions and activity, and support our customer relationship management systems for
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substantially all of our deposit and loan customers. Accordingly, our operations are exposed to risk that these vendors will not
perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to
perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s
organizational structure, financial condition, support for existing products and services or strategic focus or for any other
reason, could be disruptive to First Commonwealth’s operations and financial reporting, which could have a material adverse
effect on First Commonwealth’s business and, in turn, First Commonwealth’s financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, First
Commonwealth may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or
toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for
remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial
expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In
addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our
exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be
sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with
an environmental hazard could have a material adverse effect on First Commonwealth’s business, financial condition and
results of operations.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our
business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on
our ability to conduct business. In addition, such events could affect the stability of First Commonwealth’s deposit base, impair
the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property
damage, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event in the future
could have a material adverse effect on our business, which, in turn, could have a material adverse effect on First
Commonwealth’s business, financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and
counterparties.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of
customers and counterparties, including financial statements, credit reports and other financial information. We may also rely
on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and
completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial
information could have a material adverse impact on First Commonwealth’s business, financial condition and results of
operations.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity
management, clearing, counterparty and other relationships. Within the financial services industry, loss of public confidence,
including through default by any one institution, could lead to liquidity challenges or to defaults by other institutions. Concerns
about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as
the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading,
clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to
market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial
intermediaries, such as clearing agencies, banks and exchanges with which we interact on a daily basis or key funding providers
such as the Federal Home Loan Banks, any of which could have a material adverse effect on our access to liquidity or otherwise
have a material adverse effect on our business, financial condition or results of operations.
First Commonwealth’s stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find
attractive. First Commonwealth’s stock price can fluctuate significantly in response to a variety of factors including, among
other things:
• Actual or anticipated variations in quarterly results of operations.
• Recommendations by securities analysts.
• Operating and stock price performance of other companies that investors deem comparable to First Commonwealth.
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• News reports relating to trends, concerns and other issues in the financial services industry.
•
Perceptions in the marketplace regarding First Commonwealth and/or its competitors.
• New technology used, or services offered, by competitors.
•
•
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or
involving First Commonwealth or its competitors.
Failure to integrate acquisitions or realize anticipated benefits from acquisitions.
• Changes in government regulations.
• Geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, including real or anticipated changes in the strength of the Pennsylvania economy; industry factors
and general economic and political conditions and events, such as economic slowdowns or recessions; interest rate changes or
credit loss trends could also cause First Commonwealth’s stock price to decrease regardless of operating results.
The trading volume in First Commonwealth’s common stock is less than that of other larger financial services
companies.
Although First Commonwealth’s common stock is listed for trading on the NYSE, the trading volume in its common stock is
less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth,
liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of First Commonwealth’s
common stock at any given time. This presence depends on the individual decisions of investors and general economic and
market conditions over which we have no control. Given the lower trading volume of First Commonwealth’s common stock,
significant sales of First Commonwealth’s common stock, or the expectation of these sales, could cause First Commonwealth’s
stock price to fall.
First Commonwealth may not continue to pay dividends on its common stock in the future.
Holders of First Commonwealth common stock are only entitled to receive such dividends as its board of directors may declare
out of funds legally available for such payments. Although First Commonwealth has historically declared cash dividends on its
common stock, it is not required to do so and may reduce or eliminate its common stock dividend in the future. This could
adversely affect the market price of First Commonwealth’s common stock. Also, First Commonwealth is a bank holding
company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the
guidelines of the FRB regarding capital adequacy and dividends.
As more fully discussed in Part II, Item 8, Financial Statements and Supplementary Data-Note 25, Regulatory Restrictions and
Capital Adequacy, which is located elsewhere in this report, the ability of First Commonwealth to declare or pay dividends on
its common stock may also be subject to certain restrictions in the event that First Commonwealth elects to defer the payment
of interest on its junior subordinated debt securities.
An investment in First Commonwealth’s common stock is not an insured deposit.
First Commonwealth’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other
deposit insurance fund or by any other public or private entity. Investment in First Commonwealth’s common stock is
inherently risky for the reasons described in this Risk Factors section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company. As a result, if you acquire First Commonwealth’s common
stock, you could lose some or all of your investment.
Provisions of our articles of incorporation, bylaws and Pennsylvania law, as well as state and federal banking
regulations, could delay or prevent a takeover of us by a third party.
Provisions in our articles of incorporation and bylaws, the corporate law of the Commonwealth of Pennsylvania, and state and
federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders,
or otherwise adversely affect the price of our common stock. These provisions include, among other things, advance notice
requirements for proposing matters that shareholders may act on at shareholder meetings. In addition, under Pennsylvania law,
we are prohibited from engaging in a business combination with any interested shareholder for a period of five years from the
date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential
takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price
of, and the voting and other rights of the holders of, our common stock.
ITEM 1B.
Unresolved Staff Comments
None.
19
ITEM 2.
Properties
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 24 are leased and 86 are owned. We also lease two loan
production offices. During 2015, we acquired First Community Bank which added four banking offices, three of which are
owned and one is leased. In addition, during 2015, we closed four banking offices, three of which were owned and one was
leased.
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.
ITEM 3.
Legal Proceedings
The information required by this Item is set forth in Part II, Item 8, Note 23, “Contingent Liabilities,” which is incorporated
herein by reference in response to this item.
ITEM 4.
Mine Safety Disclosures
Not applicable.
20
Executive Officers of First Commonwealth Financial Corporation
The name, age and principal occupation for each of the executive officers of First Commonwealth Financial Corporation as of
December 31, 2015 is set forth below:
I. Robert Emmerich, age 65, 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 57, 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 56, 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 48, 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 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 53, 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.
James R. Reske, age 52, joined First Commonwealth Financial Corporation as Executive Vice President, Chief Financial
Officer and Treasurer on April 28, 2014. Prior to joining First Commonwealth, Mr. Reske served as Executive Vice President,
Chief Financial Officer, and Treasurer at United Community Financial Corporation in Youngstown, Ohio from 2008 until April
2014. Mr. Reske's financial services career includes investment banking roles within the Financial Institutions Groups at
Keybanc Capital Markets, Inc. in Cleveland, Ohio and at Morgan Stanley & Company in New York. Mr. Reske also provided
expertise and counsel to financial institutions and other organizations on mergers and acquisitions and capital markets activities
as an attorney at Wachtell, Lipton, Rosen & Katz, as well as at Sullivan & Cromwell. Earlier in his career, Mr. Reske worked at
the Board of Governors of the Federal Reserve System in Washington, DC and at the Federal Reserve Bank of Boston.
Carrie L. Riggle, age 46, 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.
Matthew C. Tomb, age 39, 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.
21
PART II
ITEM 5.
Securities
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity
First Commonwealth is listed on the NYSE under the symbol “FCF.” As of December 31, 2015, there were approximately
6,650 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.
Period
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
Cash Dividends
Per Share
$
$
$
9.14
9.84
9.77
9.88
High Sale
Low Sale
$
9.34
9.41
9.49
9.55
$
$
7.85
8.90
8.31
8.85
7.83
8.14
8.39
8.36
0.07
0.07
0.07
0.07
Cash Dividends
Per Share
0.07
0.07
0.07
0.07
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 25, Regulatory Restrictions and Capital Adequacy.” In
addition, under the terms of the capital securities issued by First Commonwealth Capital Trust II and III, First Commonwealth
could not pay dividends on its common stock if First Commonwealth deferred payments on the junior subordinated debt
securities that provide the cash flow for the payments on the capital securities.
22
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, 2010, and the cumulative return is measured as of each
subsequent fiscal year end.
Index
First Commonwealth Financial Corporation
Russell 2000
KBW Regional Banking Index
12/31/2010
100.00
100.00
100.00
12/31/2011
75.90
95.82
94.86
12/31/2012
101.19
111.49
107.58
12/31/2013
134.92
154.78
157.96
12/31/2014
145.69
162.35
161.80
12/31/2015
147.78
155.18
171.51
Period Ending
23
ITEM 6.
Selected Financial Data
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 securities (losses) gains
Other income
Other expenses
Income before income taxes
Income tax provision (benefit)
Net Income
Per Share Data—Basic
Net Income
Dividends declared
Average shares outstanding
Per Share Data—Diluted
Net Income
Average shares outstanding
At End of Period
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
Key Ratios
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
Periods Ended December 31,
2015
2014
2013
2012
2011
(dollars in thousands, except share data)
$
$
$
$
204,071
15,595
188,476
14,948
173,528
(153)
61,478
163,874
70,979
20,836
50,143
0.56
0.28
89,356,767
$
$
$
$
202,181
18,501
183,680
11,196
172,484
550
60,309
171,210
62,133
17,680
44,453
0.48
0.28
93,114,654
$
$
$
$
206,358
21,707
184,651
19,227
165,424
(1,158)
61,321
168,824
56,763
15,281
41,482
$
$
219,075
30,146
188,929
20,544
168,385
192
65,242
177,207
56,612
14,658
41,954
$
$
231,545
41,678
189,867
55,816
134,051
2,185
55,484
176,826
14,894
(380)
15,274
0.43
0.23
97,028,157
0.40
$
$
0.18
103,885,396
0.15
$
$
0.12
104,700,227
$
0.56
89,356,767
$
0.48
93,114,654
$
0.43
97,029,832
$
0.40
103,885,663
$
0.15
104,700,393
$ 6,566,890
1,333,836
$ 6,360,285
1,354,364
$ 6,214,861
1,353,809
$ 5,995,390
1,199,531
$ 5,841,122
1,182,572
4,683,750
50,812
4,195,894
1,510,825
72,167
9,314
719,546
4,457,308
52,051
4,315,511
1,105,876
72,167
89,459
716,145
4,283,833
54,225
4,603,863
626,615
72,167
144,385
711,697
4,204,704
67,187
4,557,881
356,227
105,750
174,471
746,007
4,057,055
61,234
4,504,684
312,777
105,750
101,664
758,543
0.78%
6.98
0.71%
6.18
110.42
102.08
50.00
11.23
58.33
11.45
0.68%
5.70
91.87
53.49
11.87
0.71%
5.46
90.78
44.57
12.95
0.27%
2.00
88.70
82.26
13.33
24
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2015, 2014 and 2013. During 2014, First
Commonwealth sold FCFA's registered investment advisory business. The purpose of this discussion is to focus on information
concerning our financial condition and results of operations that is not readily apparent from the Consolidated Financial
Statements. In order to obtain a more thorough understanding of this discussion, you should refer to the Consolidated Financial
Statements, the notes thereto and other financial information presented in this Annual Report.
Company Overview
First Commonwealth provides a diversified array of consumer and commercial banking services through our bank subsidiary,
FCB. We also provide trust and wealth management services through FCB and insurance products through FCIA. At
December 31, 2015, FCB operated 110 community banking offices throughout western Pennsylvania and central Ohio as well
as loan production offices in Akron and Cleveland, Ohio.
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, mortgage loans, 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 and stock and bond brokerage services
through an arrangement with a broker-dealer and insurance brokers. Most of our commercial customers are small and mid-sized
businesses in 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, less frequently,
through sales of assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses
on loans, operating expenses, income taxes and, less frequently, loss on sale or other-than-temporary impairments on
investment securities.
General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan
growth, as well as impacting the credit strength of existing and potential borrowers.
Critical Accounting Policies and Significant Accounting Estimates
First Commonwealth’s accounting and reporting policies conform to accounting principles generally accepted in the United
States of America (“GAAP”) and predominant practice in the banking industry. The preparation of financial statements in
accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in
the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be
inaccurate or vary from actual results and may significantly affect our reported results and financial position for the period
presented or in future periods. We currently view the determination of the allowance for credit losses, fair value of financial
instruments 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.
25
•
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 homogeneous 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, loss
emergence periods for each loan category 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 into 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
26
Discussion and Analysis of Financial Condition and Results of Operations and in Note 9 “Impairment of Investment Securities”
and Note 18 “Fair Values of Assets and Liabilities” of Notes to the Consolidated Financial Statements.
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.
Results of Operations—2015 Compared to 2014
Net Income
Net income for 2015 was $50.1 million, or $0.56 per diluted share, as compared to net income of $44.5 million, or $0.48 per
diluted share, in 2014. The growth in net income is a result of an increase in net interest income of $4.8 million, combined with
a decrease in noninterest expense of $7.3 million and growth in noninterest income of $0.5 million.
Our return on average equity was 7.0% and return on average assets was 0.78% for 2015, compared to 6.2% and 0.71%,
respectively, for 2014.
Average diluted shares for the year 2015 were 4% less than the comparable period in 2014 primarily due to a $25.0 million
common stock buyback program authorized during 2015.
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 2015 was $3.5 million compared to $3.3 million in 2014. Net interest
income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income) at
75% for the years ended December 31, 2015 and 2014.
Net interest income, on a fully taxable equivalent basis, was $191.9 million for the year-ended December 31, 2015, a $4.9
million, or 3%, increase compared to $187.0 million for the same period in 2014. The net interest margin, on a fully taxable
equivalent basis, increased 1 basis points to 3.28% in 2015 from 3.27% in 2014. 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.
27
The interest rate environment and resulting decline in rates earned on interest-earning assets challenged the net interest margin
during the year ended December 31, 2015. Yields and spreads on new loan volumes continued to experience pricing pressures
in 2015, specifically for fixed rate commercial loans, home equity loans and indirect auto loans. Also contributing to lower
yields on earning assets is the runoff of existing older assets, which were earning higher interest rates than new volumes.
Growth in earning assets has helped to offset the spread compression as average earning assets for the year ended December 31,
2015 increased $125.4 million, or 2%, compared to the comparable period in 2014. The acquisition of First Community, as of
October 1, 2015, accounted for $15.2 million of the increase in average earning assets for 2015. Interest-sensitive assets totaling
$3.1 billion will either reprice or mature over the next twelve months.
The taxable equivalent yield on interest-earning assets was 3.55% for the year ended December 31, 2015, a decrease of 4 basis
points from the 3.59% yield for the same period in 2014. This decline can be attributed to lower replacement yields on loan
portfolio runoff and maturities as a result of narrowing pricing spreads. Partially offsetting the decrease in loan yield is an 18
basis point increase in the investment portfolio yield. This increase can be attributed to the runoff or sale of lower yielding U.S.
Agency securities which were replaced with higher yielding investment securities. Investment portfolio purchases during the
year ended December 31, 2015 have been primarily in mortgage-related assets with approximate durations of 48-60 months and
municipal securities with a duration of five years. The mortgage-related investments have monthly principal payments that will
provide for reinvestment opportunities should interest rates rise.
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 0.34% for the year-ended December 31, 2015, compared to 0.41% for the same period in
2014. This decline is primarily due to a 28 basis point decline in the cost of time deposits as maturities repriced to lower rates
or were replaced with lower cost short-term borrowings.
Comparing the year-ended December 31, 2015 with the same period in 2014, changes in interest rates negatively impacted net
interest income by $5.1 million. The lower yield on interest-earning assets adversely impacted net interest income by $4.6
million, while a change in the mix of interest-bearing liabilities had a negative impact of $0.5 million on net interest income.
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, growing the loan portfolio and changing the mix of our investment
portfolio.
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 $10.1 million in the year ended December 31, 2015 compared to
the same period in 2014. Higher levels of interest-earning assets resulted in an increase of $6.6 million in interest income, while
increased short-term borrowings, partially offset by a reduction in time deposits and long-term borrowings, decreased interest
expense by $3.4 million. During the first quarter of 2015, as a means of protecting the net interest margin against a prolonged
low rate environment, the Company entered into $100 million in interest rate swaps which extended the duration of a portion of
our $1.4 billion in LIBOR based loans. A similar cash flow interest rate swap, with a notional amount of $100.0 million, was
entered into in 2014.
Positively affecting net interest income was a $100.4 million increase in average net free funds at December 31, 2015 as
compared to December 31, 2014. Average net free funds are the excess of noninterest-bearing demand deposits, other
noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in
net free funds was a $88.5 million increase in average noninterest-bearing demand deposits. 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, 2015 decreased $338.8 million million, or 33%, compared to the comparable period in 2014, while
the average rate paid on time deposits decreased 28 basis points. The positive change in deposit mix is expected to continue as
$354.1 million in certificates of deposits either mature or reprice over the next twelve months.
28
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 Years Ended December 31,
2015
2014
2013
Interest income per Consolidated Statements of Income
Adjustment to fully taxable equivalent basis
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
Interest expense
$
(dollars in thousands)
$
204,071
3,465
207,536
15,595
$
202,181
3,327
205,508
18,501
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
191,941
$
187,007
$
206,358
4,081
210,439
21,707
188,732
29
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:
Average Balance Sheets and Net Interest Analysis
2015
2014
2013
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
(dollars in thousands)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Assets
Interest-earning assets:
Interest-bearing deposits with
banks
Tax-free investment securities (e)
Taxable investment securities
Loans, net of unearned
income (b)(c)(f)
Total interest-earning assets
Noninterest-earning assets:
Cash
Allowance for credit losses
Other assets
Total noninterest-earning
assets
Total Assets
Liabilities and Shareholders’
Equity
Interest-bearing liabilities:
Interest-bearing demand
deposits (d)
Savings deposits (d)
Time deposits
Short-term borrowings
Long-term debt
Total interest-bearing
liabilities
$
8,640
$
14
0.16% $
4,728
$
0.25% $
3,355
$
12,274
83
12
478
3.89
2.27
4.00
3.59
1,534
30,241
175,747
207,536
3.79
2.42
3.86
3.55
40,459
1,248,689
4,553,634
5,851,422
66,937
(49,776)
530,068
547,229
$ 6,398,651
1,352,494
30,662
4,356,566
5,726,062
174,356
205,508
71,139
(54,517)
538,429
555,051
$ 6,281,113
1,300,538
30,218
4,255,593
5,559,569
180,208
210,439
71,930
(62,800)
563,283
572,413
$ 6,131,982
7
6
0.21%
7.40
2.32
4.23
3.79
$
654,926
$
231
0.04% $
625,516
$
192
0.03% $
670,524
$
236
0.04%
1,855,024
689,247
1,252,531
119,277
2,542
4,701
5,018
3,103
0.14
0.68
0.40
2.60
1,876,972
1,028,053
815,394
200,114
2,348
9,913
2,449
3,599
0.13
0.96
0.30
1.80
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
4,571,005
15,595
0.34
4,546,049
18,501
0.41
4,479,702
21,707
0.48
Noninterest-bearing liabilities and
shareholders’ equity:
Noninterest-bearing demand
deposits (d)
Other liabilities
Shareholders’ equity
Total noninterest-bearing
funding sources
Total Liabilities and
Shareholders’ Equity
Net Interest Income and Net Yield
on Interest-Earning Assets
1,052,886
56,036
718,724
1,827,646
$ 6,398,651
964,422
51,347
719,295
1,735,064
$ 6,281,113
876,111
48,335
727,834
1,652,280
$ 6,131,982
$
191,941
3.28%
$
187,007
3.27%
$
188,732
3.39%
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 for the year ended 2013.
(f)
Includes held for sale loans.
30
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:
Analysis of Year-to-Year Changes in Net Interest Income
2015 Change from 2014
2014 Change from 2013
Total
Change
Change Due
To Volume
Change Due
To Rate (a)
Total
Change
Change Due
To Volume
Change Due
To Rate (a)
(dollars in thousands)
$
2
1,056
(421)
1,391
2,028
39
194
(5,212)
2,569
(496)
(2,906)
4,934
$
$
10
1,096
(2,356)
7,883
6,633
9
(29)
(3,253)
1,311
(1,455)
(3,417)
10,050
$
(8) $
(40)
1,935
(6,492)
(4,605)
30
223
(1,959)
1,258
959
511
(5,116) $
$
5
472
444
(5,852)
(4,931)
(44)
(614)
(2,485)
1,187
(1,250)
(3,206)
(1,725) $
3
902
1,205
4,271
6,381
(18)
(98)
(1,358)
876
(694)
(1,292)
7,673
$
$
2
(430)
(761)
(10,123)
(11,312)
(26)
(516)
(1,127)
311
(556)
(1,914)
(9,398)
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
Net interest income
$
(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 the 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
Total
2015
2014
Dollars
Percentage
Dollars
Percentage
$
$
11,740
(1,252)
(106)
1,352
3,214
14,948
(dollars in thousands)
79% $
(8)
(1)
9
21
100% $
15,141
(5,581)
(1,560)
639
2,557
11,196
135%
(50)
(14)
6
23
100%
The provision for credit losses for the year 2015 totaled $14.9 million, an increase of $3.8 million, or 33.51%, compared to the
year 2014. The majority of the 2015 provision expense is attributable to commercial, financial, agricultural and other loans as a
result of specific reserves established or charge-offs recorded for three borrowers. Outstanding balances as of December 31,
2015 for these borrowers includes $3.9 million to a steel and mine equipment company, $7.5 million to an oil and gas well
servicer and $3.9 million to a sporting goods manufacturer. These provisions were partially offset by the release of $1.1 million
in specific reserves for loans transferred to held for sale in the first quarter of 2015. These held for sale loans were sold during
the third quarter of 2015, at which time a gain of $0.4 million was recognized.
31
The provision expense for commercial real estate loans is primarily due to charge-offs in this loan category, while the provision
expense for loans to individuals is largely due to charge-offs in the indirect automobile portfolio. Real estate construction and
residential real estate reflect a negative provision expense primarily due to a decline in historical loss factors for these
categories.
The majority of the 2014 provision expense, or $5.8 million, is attributable to specific reserves for an $8.2 million loan to an oil
and gas servicing company, which was transferred to nonaccrual status during 2014. This loan was sold during the second
quarter of 2014, resulting in a $5.8 million charge-off. Also impacting the provision expense for the commercial, financial,
agricultural and other loan category were specific reserves related to a $4.2 million loan to an audio visual equipment
distributor, which was transferred to nonaccrual status during 2014. Offsetting these increases in provision expense was the
release of approximately $2.7 million in specific reserves related to the payoff of a $4.7 million nonaccrual loan to a local
developer. The negative provision expense for real estate construction and residential real estate is the result of declines in both
the level of impaired loans and historical loss rates for these loan categories. Provision expense for loans to individuals is
directly related to the level of charge-offs during 2014.
The allowance for credit losses was $50.8 million, or 1.08%, of total loans outstanding at December 31, 2015, compared to
$52.1 million, or 1.17%, at December 31, 2014. Nonperforming loans as a percentage of total loans decreased to 1.09% at
December 31, 2015 from 1.24% at December 31, 2014. The allowance to nonperforming loan ratio was 99.9% as of
December 31, 2015 and 94.2% at December 31, 2014. Net charge-offs were $16.2 million for the year-ended December 31,
2015 compared to $13.4 million for the same period in 2014.
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, loss emergence periods, historical loss
experience, delinquency trends, deterioration in collateral values and volatility in economic indicators such as growth in GDP,
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, 2015.
32
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 charge-offs
Provision charged to expense
Balance, end of year
Ratios:
2015
2014
2013
2012
2011
(dollars in thousands)
$
$
$
4,683,750
4,553,634
52,051
$
$
$
4,457,308
4,356,566
54,225
$
$
$
4,283,833
4,255,593
67,187
$
$
$
4,204,704
4,165,292
61,234
$
$
$
4,057,055
4,061,822
71,229
11,429
8
1,539
1,538
4,354
18,868
1,097
84
587
229
684
2,681
16,187
14,948
50,812
$
8,911
296
3,153
1,148
3,964
17,472
734
1,340
650
612
766
4,102
13,370
11,196
52,051
$
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
$
Net charge-offs as a percentage of average
loans outstanding
Allowance for credit losses as a percentage of
end-of-period loans outstanding
0.36%
1.08%
0.31%
1.17%
0.76%
1.27%
0.35%
1.60%
1.62%
1.51%
Noninterest Income
The components of noninterest income for each year in the three-year period ended December 31 are as follows:
2015
2014
2013
$ Change
% Change
2015 compared to 2014
(dollars in thousands)
Noninterest Income:
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 loans
Gain on sale of assets
Total noninterest income
$
$
5,834
$
6,000
$
6,166
$
15,319
8,522
5,412
14,501
7,614
57,202
(153)
2,819
1,457
61,325
$
15,661
6,483
5,502
14,222
7,445
55,313
550
516
4,480
60,859
$
15,652
6,005
5,539
13,746
12,060
59,168
(1,158)
624
1,529
60,163
$
(166)
(342)
2,039
(90)
279
169
1,889
(703)
2,303
(3,023)
466
(3)%
(2)
31
(2)
2
2
3
(128)
446
(67)
1 %
Noninterest income, excluding net securities gains (losses), gain on sale of loans and gain on sale of assets, increased $1.9
million, or 3.42%, in 2015, as a result of a $2.0 million increase in insurance and retail brokerage commissions. This increase
is attributable to increased production and an agency acquisition in the fourth quarter of 2014. The increase in card-related
33
interchange income can be attributed to growth in the number of deposit customers, as well as continued increases in electronic
payments by our customers. The fair value adjustment on derivatives contributed $0.1 million to the other income category
increase. Offsetting these increases is a $0.3 million decrease in service charges on deposit accounts primarily due to lower
overdraft fees.
Total noninterest income increased $0.5 million, or 1%, in comparison to the year ended 2014. The most notable change
includes a $3.0 million decrease in the gain on sale of assets as a result of a $1.2 million gain recognized in 2014 on the sale of
the Company's registered investment advisory business and three OREO properties that resulted in gains of $3.2 million.
Offsetting this decrease is a $2.3 million increase in the gain on sale of loans primarily due to the Company reentering the
secondary mortgage market.
Comparing the year 2015 to the year 2014, net securities gains (losses) decreased $0.7 million. This change is primarily due to
a $0.3 million loss recognized in the fourth quarter of 2015 on the sale of approximately $75 million of low-yielding US agency
securities. Proceeds from the sale of these securities were reinvested into higher yielding mortgage-backed securities. In 2014, a
$0.5 million gain was recognized as a result of the early redemption on one of our pooled trust preferred securities.
If the Company's total assets would equal or exceed $10 billion we would no longer qualify for exemption from the interchange
fee cap included in the Dodd-Frank Act. The estimated impact of this change would decrease interchange income by $6.0
million.
Noninterest Expense
The components of noninterest expense for each year in the three-year period ended December 31 are as follows:
2015
2014
2013
$ Change
% Change
2015 Compared to 2014
(dollars in thousands)
Noninterest Expense:
$
Salaries and employee benefits
Net occupancy
Furniture and equipment
Data processing
Advertising and promotion
Pennsylvania shares tax
Intangible amortization
Collection and repossession
Other professional fees and services
FDIC insurance
Other operating expenses
Subtotal
Loss on sale or write-down of assets
Litigation and operational losses
Loss on early redemption of
subordinated debt
Furniture and equipment - related to IT
conversion
Conversion related
Merger and acquisition related
$
89,161
13,712
10,737
6,123
2,638
4,693
605
2,826
4,034
4,014
19,178
157,721
3,112
2,119
—
—
—
922
$
87,223
13,119
12,235
6,124
2,953
3,776
631
2,754
3,986
4,054
18,609
155,464
1,595
6,786
—
5,577
1,788
—
$
86,012
13,607
13,148
6,009
3,129
5,638
1,064
3,836
3,731
4,366
19,928
160,468
1,054
1,115
1,629
1,970
2,588
—
Total noninterest expense
$
163,874
$
171,210
$
168,824
$
1,938
593
(1,498)
(1)
(315)
917
(26)
72
48
(40)
569
2,257
1,517
(4,667)
—
(5,577)
(1,788)
922
(7,336)
2 %
5
(12)
—
(11)
24
(4)
3
1
(1)
3
1
95
(69)
—
(100)
(100)
NA
(4)%
Noninterest expense, excluding the loss on sale or write-down of assets, litigation and operational losses, furniture and
equipment expense related to the IT conversion, conversion related and merger and acquisition related expense, increased $2.3
million, or 1%, for the year ended 2015 compared to 2014. Contributing to the 2015 increase is salaries and employee benefits
expense which increased $1.9 million, or 2%, primarily due to $2.1 million in one-time severance charges related to the
realignment of our consumer business.
34
Pennsylvania shares tax expense in 2015 increased $0.9 million over 2014 as the result of a $0.7 million agreement reached in
the third quarter of 2015 for a disputed tax assessment. The dispute related to the capital treatment of minority interest in a
non-controlled subsidiary for the years 2011, 2012, and 2013. There are no other tax years open for assessment of this minority
interest issue.
Offsetting these increases is a $1.5 million decrease in furniture and equipment expense due to declines in equipment and
software maintenance costs as a result of the IT system conversion completed in the third quarter of 2014.
Loss on the sale or write-down of assets increased $1.5 million for the year 2015 compared to 2014. The loss in 2015 includes
$1.5 million in write-downs on OREO properties as a result of updated appraisals obtained on properties for two commercial
loan relationships and $0.9 million in write-downs related to the disposition of four branch offices that were closed or relocated
due to cost or other market opportunities. In 2014, a former headquarters building was donated to a local university, resulting in
a $0.6 million donation expense.
Litigation and operational losses decreased $4.7 million as a result of an $8.6 million litigation reserve recognized in 2014.
Partially offsetting this charge in 2014 was a $3.0 million recovery on an external fraud loss from a prior year. For the year
2015, litigation and operational losses are largely due to fraud losses recognized in conjunction with several merchant debit
card breaches.
Merger related expenses totaled $0.9 million and include one-time expenses related to the acquisition of Columbus, Ohio based
First Community Bank.
During the third quarter of 2014, First Commonwealth completed a system conversion to the Jack Henry and Associates
Silverlake core processing system and outsourced certain data processing services that had previously been performed in-house.
Expenses related to this conversion included accelerated depreciation for data processing hardware and software, early
termination charges on previous contracts, and staffing and employment-related charges. For the year ended 2014, $5.6 million
in accelerated depreciation and $1.8 million in other conversion related expenses were recognized.
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.
Income Tax
The provision for income taxes of $20.8 million in 2015 reflects an increase compared to the provision for income taxes of
$17.7 million in 2014 mostly due to the increase in the level of pretax income of $71.0 million and $62.1 million for 2015 and
2014, respectively.
The effective tax rate was 29% and 28% for tax expense in 2015 and 2014, respectively. 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.
Financial Condition
First Commonwealth’s total assets increased by $206.6 million in 2015. Loans, including loans held for sale, increased $229.7
million, or 5%, while investments decreased $38.9 million, or 3%.
Loan growth in 2015 was primarily in the real estate construction, commercial real estate and commercial, financial,
agricultural categories. Impacting loan growth in 2015 was a decline of $44.2 million in loans to individuals as a result of a
$43.6 million decline in the indirect auto loan portfolio. The volume decrease is a direct result of the Company's pricing as
competitors offered aggressive pricing with narrowing spreads.
During 2015, approximately $470.6 million in investment securities were called or matured. Some of these securities were
lower yielding securities and as such, their replacement contributed to the increase in yield earned on the portfolio. In total,
$360.3 million in mortgage-backed securities, $23.4 million in agency securities and $22.5 million in municipal securities were
purchased in 2015 to help increase earnings from the portfolio while maintaining a reduced risk profile.
First Commonwealth’s total liabilities increased $203.2 million, or 4%, in 2015. Deposits decreased $119.6 million, or 3%, and
long-term debt decreased $80.1 million, or 50%, as funding needs were met with lower costing short-term borrowings, which
increased $404.9 million, or 37%.
35
Total shareholders equity increased $3.4 million in 2015. Growth in shareholders equity was due to net income of $50.1 million
and increases in other comprehensive income of $2.1 million, partially offset by $25.1 million in dividends declared and $25.4
million in stock repurchases.
Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
2015
2014
2013
2012
2011
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(dollars in thousands)
$ 1,150,906
25% $ 1,052,109
24% $ 1,021,056
24% $ 1,019,822
24% $
996,739
25%
220,736
1,224,465
1,479,000
608,643
5
26
31
13
120,785
1,226,344
1,405,256
652,814
3
27
31
15
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
$ 4,683,750
100% $ 4,457,308
100% $ 4,283,833
100% $ 4,204,704
100% $ 4,043,643
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 $4.7 billion as of December 31, 2015, reflecting growth of $226.4 million, or 5%, compared to
December 31, 2014. Loan growth was experienced in all categories except loans to individuals and residential real estate, with
the majority of the growth being recognized in real estate construction and commercial, financial, agricultural and other loans.
Declines in the loans to individuals category is primarily due to a decline in indirect auto loans. The decline in residential real
estate loans is the result of continued runoff in our mortgage portfolio, as many of the loans originated by our mortgage banking
area are sold in the secondary market. Increases in commercial, financial, agricultural and other portfolio and commercial real
estate loans can largely be attributed to growth in direct middle market lending and syndications in Pennsylvania and
contiguous states. Growth in construction loans is primarily the result of several multifamily and hospitality projects in the
Columbus, Cleveland and Pittsburgh markets. The acquisition of First Community contributed $58.3 million to loan growth for
the year 2015.
The majority of our loan portfolio is with borrowers located in Pennsylvania. The Company expanded into the Ohio market
area with the opening of a loan production office in Cleveland, Ohio in 2013 and the acquisition of First Community Bank of
Columbus, Ohio in the fourth quarter of 2015. As of December 31, 2015 and 2014, there were no concentrations of loans
relating to any industry in excess of 10% of total loans.
The credit quality of the loan portfolio continued to improve during 2015 with decreases in the level of criticized assets,
delinquency and nonaccrual loans. As of December 31, 2015, criticized loans (i.e., loans designated OAEM, substandard,
impaired or doubtful) decreased $6.2 million, or 4%, from December 31, 2014. Criticized loans totaled $134.0 million at
December 31, 2015 and represented 3% of the total loan portfolio. Additionally, delinquencies on accruing loans decreased $5.9
million, or 31%, at December 31, 2015 compared to December 31, 2014. As of December 31, 2015, nonaccrual loans
decreased $6.0 million, or 14%, compared to December 31, 2014.
36
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at
December 31, 2015 were as follows:
Within
One Year
One to
5 Years
After
5 Years
Total
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
$
$
77,200
$
(dollars in thousands)
661,802
$
348,160
78,516
115,303
2,779
273,798
94,666
394,399
17,806
1,168,673
$
260,857
907,816
45,635
969,056
126,396
1,489,247
290,103
1,199,144
1,168,673
$
1,489,247
$
$
$
1,087,162
218,817
1,478,758
146,981
2,931,718
$
(a) The maturity of real estate construction loans include term commitments that follow the construction period. Loans with
these term commitments will be moved to the commercial real estate category when the construction phase of the
project is completed.
First Commonwealth has a legal lending limit of $98.4 million to any one borrower or closely related group of borrowers, but
has established lower thresholds for credit risk management.
First Commonwealth defines exposure to the Oil and Gas Industry as any borrower who is involved in exploration and
production, and any company in the industry supply chain, that generates 40% or more of their sales revenue from exploration
and production activities.
As of December 31, 2015, the Company had a total of $144.2 million in commitments to the Oil and Gas Industry, with $65.2
million in outstanding loan balances against those commitments. Of this total, commitments of $40.7 million with outstanding
balances of $12.3 million are for exploration and production, while $103.5 million in commitments, with outstanding balances
of $52.9 million, are related to ancillary businesses.
Two customers account for 85.9% of the loans related to exploration and production and both are pass rated credits. These
credit facilities are primarily used to support letters of credit and have little or no usage. One commercial relationship in this
category, totaling $3.4 million, is on non-performing status and has been even before the oil price decline that began in the third
quarter of 2014.
The ancillary business consists of well services, transportation, equipment and materials to support the Oil and Gas Industry.
Two customers, which account for 27.0% of the ancillary exposure, are bulk transporters of refined product and are not
expected to be negatively impacted from lower oil prices. There are four pass rated credits, with total commitments of $37.7
million in the ancillary sector that may see some impact from reduced drilling activity due to lower oil and gas prices. The
Company will continue to monitor their performance accordingly. One commercial relationship with $2.3 million in
outstanding loans for an ancillary business has been on non-performing status since 2012.
Nonperforming Loans
Nonperforming loans include nonaccrual loans and restructured loans. Nonaccrual loans represent loans on which interest
accruals have been discontinued. Restructured loans are those loans whose terms have been renegotiated to provide a reduction
or deferral of principal or interest as a result of the deteriorating financial position of the borrower under terms not available in
the market.
We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable
to fully collect principal or interest due according to the contractual terms of the loan. Consumer loans are placed in nonaccrual
status at 150 days past due. Other types of loans are typically placed in nonaccrual status when there is evidence of a
significantly weakened financial condition or principal and interest is 90 days or more delinquent. Interest received on a
nonaccrual loan is normally applied as a reduction to loan principal rather than interest income utilizing the cost recovery
methodology of revenue recognition.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable
risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral and the
37
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:
Nonperforming Loans:
Loans on nonaccrual basis
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
Loans outstanding at end of period
Average loans outstanding
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
2015
2014
2013
2012
2011
(dollars in thousands)
$
$
$
24,345
—
12,360
14,139
50,844
2,455
$
$
$
25,715
—
16,952
12,584
55,251
2,619
$
$
$
28,908
—
16,980
13,495
59,383
2,505
$
$
$
43,539
—
50,979
13,037
107,555
2,447
$
$
$
33,635
13,412
44,841
20,276
112,164
11,015
9,398
$
$ 4,683,750
$ 4,553,634
7,197
$
$ 4,457,308
$ 4,356,566
11,728
$
$ 4,283,833
$ 4,255,593
11,262
$
$ 4,204,704
$ 4,165,292
30,035
$
$ 4,057,055
$ 4,061,822
1.09%
1.24%
1.39%
2.56%
2.76%
14,948
50,812
16,187
$
$
$
11,196
52,051
13,370
$
$
$
19,227
54,225
32,189
$
$
$
20,544
67,187
14,591
$
$
$
55,816
61,234
65,811
0.36%
0.31%
0.76%
0.35%
1.62%
92.35%
83.74%
59.73%
140.80%
84.81%
1.08%
1.17%
1.27%
1.60%
1.51%
99.94%
94.21%
91.31%
62.47%
62.01%
572
—
572
$
$
784
—
784
$
$
7,920
679
7,241
$
$
15,036
369
14,667
$
$
14,872
1,393
13,479
$
$
$
$
$
(a) End of period loans and nonperforming loans exclude loans held for sale.
Nonperforming loans decreased $4.4 million to $50.8 million at December 31, 2015, compared to $55.3 million at
December 31, 2014. Nonperforming loans as a percentage of total loans decreased to 1.1% from 1.2% at December 31, 2015
compared to December 31, 2014. Other real estate owned totaled $9.4 million at December 31, 2015, compared to $7.2 million
at December 31, 2014.
Also included in nonperforming loans are troubled debt restructured loans (“TDRs”). TDRs are those loans whose terms have
been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of
the borrower under terms not available in the market. TDRs decreased $3.0 million during 2015. For additional information on
TDRs please refer to Note 10 “Loans and Allowance for Credit Losses.”
Net charge-offs were $16.2 million in 2015 compared to $13.4 million for the year 2014. The most significant credit losses
recognized during the year included charge-offs for three commercial borrowers, including $3.3 million for a local energy
company, $2.3 million for local water facility construction company and $2.0 million for steel and mining equipment company.
38
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 increased to 92.4% for the year ended December 31, 2015 from
83.7% for the year ended December 31, 2014.
Allowance for Credit Losses
Following is a summary of the allocation of the allowance for credit losses at December 31:
2015
2014
2013
2012
2011
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
(dollars in thousands)
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Unallocated
Total
Allowance for credit losses
as percentage of end-of-
period loans outstanding
$ 31,035
887
2,606
11,924
4,360
25% $ 29,627
2,063
5
24% $ 22,663
6,600
3
24% $ 19,852
8,928
2
24% $ 18,200
6,756
2
26
31
13
3,664
11,881
4,816
27
31
15
7,727
11,778
5,457
30
30
14
— N/A
— N/A
— N/A
5,908
22,441
4,132
5,926
30
30
14
N/A
8,237
18,961
4,244
4,836
25%
2
28
31
14
N/A
$ 50,812
$ 52,051
$ 54,225
$ 67,187
$ 61,234
1.08%
1.17%
1.27%
1.60%
1.51%
(a) Represents the ratio of loans in each category to total loans.
The allowance for credit losses decreased $1.2 million from December 31, 2014 to December 31, 2015. The allowance for
credit losses as a percentage of end-of-period loans outstanding was 1.1% at December 31, 2015 compared to 1.2% at
December 31, 2014. The allowance for credit losses includes both a general reserve for performing loans and specific reserves
for impaired loans. Comparing December 31, 2015 to December 31, 2014, the general reserve for performing loans decreased
from 0.96% to 0.94% of total performing loans. Specific reserves decreased from 19.5% of nonperforming loans at
December 31, 2014 to 16.0% of nonperforming loans at December 31, 2015. The allowance for credit losses as a percentage of
nonperforming loans was 99.9% and 94.2% at December 31, 2015 and 2014, 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 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. For years ended December 31, 2015, 2014 and
2013, any additional allocation made to the allowance as a result of this review is reflected in the applicable loan category in the
previous table. For years ended December 31, 2012 and 2011, any additional allocation made to the allowance for credit losses
as a result of this review 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 18 “Fair
Values of Assets and Liabilities,” $37.8 million of available for sale securities at December 31, 2015, are classified as Level 3
assets because of inactivity in the market.
39
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
2015
2014
2013
(dollars in thousands)
$
20,034
$
23,344
$
22,639
778,476
28
19,201
27,066
1,897
42,239
888,941
2,170
947,635
72
269,181
27,058
6,682
41,926
1,315,898
1,420
1,009,519
104
267,971
80
6,693
42,040
1,349,046
1,420
Total Securities Available for Sale
$
891,111
$
1,317,318
$
1,350,466
As of December 31, 2015, securities available for sale had a fair value of $891.1 million. Gross unrealized gains were $11.9
million and gross unrealized losses were $16.5 million.
The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2015.
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
U.S.
Government
Agencies and
Corporations
States and
Political
Subdivisions
Other
Securities
Total
Amortized
Cost (a)
Weighted
Average
Yield (b)
(dollars in thousands)
$
$
2,605
34,549
55,334
725,251
817,739
$
$
— $
—
27,066
—
27,066
$
— $
—
—
44,136
44,136
$
2,605
34,549
82,400
769,387
888,941
0.62%
2.81
3.61
2.36
2.48%
(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 available for sale investment portfolio decreased $426.2 million, or 32%, at December 31, 2015
compared to 2014. Contributing to this decline is the classification of $384.3 million of 2015 investment purchases as held to
maturity.
Our investment portfolio includes an amortized cost of $42.2 million in pooled trust preferred collateralized debt obligations at
December 31, 2015. The valuation of these securities involves evaluating relevant credit and structural aspects, determining
appropriate performance assumptions and performing a discounted cash flow analysis.
40
Following is a detail schedule of the amortized cost of securities held to maturity as of December 31, 2015:
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
Mortgage-Backed Securities—Commercial
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 Securities Held to Maturity
2015
(dollars in thousands)
$
4,775
16,843
315,609
15,187
—
31,910
—
—
$
384,324
There were no securities held to maturity as of December 31, 2014 and 2013.
The following is a schedule of the contractual maturity distribution of securities held to maturity at December 31, 2015.
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
U.S.
Government
Agencies and
Corporations
States and
Political
Subdivisions
Total
Amortized
Cost
Weighted
Average
Yield
(dollars in thousands)
$
$
— $
—
15,187
337,227
352,414
$
— $
108
27,224
4,578
31,910
$
—
108
42,411
341,805
384,324
—%
1.88
3.05
2.39
2.46%
See Note 8 “Investment Securities,” Note 9 “Impairment of Investment Securities” and Note 18 “Fair Values of Assets and
Liabilities” for additional information related to the investment portfolio.
Deposits
Total deposits decreased $119.6 million, or 3%, in 2015, primarily due to the run off of time deposits of $240.1 million.
Contributing to the change in time deposits is a decrease of $146.3 million in deposits generated from the Certificate of Deposit
Account Registry Services program (“CDARS”), an 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:
2015
2014
2013
Amount
%
Amount
%
Amount
%
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
$
48,429
22,946
34,974
51,306
157,655
$
31% $
15
22
32
100% $
(dollars in thousands)
164,879
49% $
234,295
34,874
72,470
61,765
333,988
10
22
19
100% $
85,573
60,739
84,077
464,684
51%
18
13
18
100%
41
Short-Term Borrowings and Long-Term Debt
Short-term borrowings increased $404.9 million, or 37%, from $1,105.9 million as of December 31, 2014 to $1,510.8 million at
December 31, 2015. Long-term debt decreased $80.1 million, or 50%, from $161.6 million at December 31, 2014 to $81.5
million at December 31, 2015. 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 15
“Short-term Borrowings,” Note 16 “Subordinated Debentures” and Note 17 “Other Long-term Debt” of the Consolidated
Financial Statements.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below sets forth our contractual obligations to make future payments as of December 31, 2015. For a more detailed
description of each category of obligation, refer to the note in our Consolidated Financial Statements indicated in the table
below.
Footnote
Number
Reference
1 Year
or Less
After 1
But Within
3 Years
After 3
But Within
5 Years
(dollars in thousands)
After 5
Years
Total
FHLB advances
Subordinated debentures
Operating leases
Total contractual obligations
17
16
12
$
$
563
$
1,192
$
1,290
$
6,269
$
9,314
—
3,405
3,968
$
—
5,875
7,067
$
—
4,512
5,802
$
72,167
10,360
88,796
$
72,167
24,152
105,633
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 14 “Interest-Bearing Deposits” of the Consolidated Financial Statements.
In addition, see Note 11 “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, 2015. 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, 2015, a reserve for probable losses of $4.4 million was
recorded for unused commitments and letters of credit.
Liquidity
Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash
needs with cost-effective funding. Liquidity risk arises from the possibility that we may not be able to meet our financial
obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk,
our Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity and quantifies minimum liquidity requirements based on limits approved by our Board of
Directors. This policy designates our Asset/Liability Committee (“ALCO”) as the body responsible for meeting these
objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves
significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis
by our Treasury Department who monitors it by using such measures as a 30 day liquidity stress analysis, liquidity gap ratios
and noncore funding ratios.
We generate funds to meet our cash flow needs primarily through the core deposit base of FCB and the maturity or repayment
of loans and other interest-earning assets, including investments. Core deposits are the most stable source of liquidity a bank
can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes
influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and
yields offered on competing investments, such as money market mutual funds. Deposits decreased $209.9 million, or 3%,
during 2015, and comprised 72% of total liabilities at December 31, 2015, as compared to 76% at December 31, 2014. Proceeds
from the sale, maturity and redemption of investment securities totaled $470.6 million during 2015 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
42
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,
2015 our borrowing capacity at the Federal Reserve related to this program was $641.9 million and there were no amounts
outstanding. Additionally, as of December 31, 2015, our maximum borrowing capacity at the Federal Home Loan Bank of
Pittsburgh was $1.6 billion and as of that date amounts used against this capacity included $1.4 billion in outstanding
borrowings and $20.0 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, 2015, our maximum borrowing capacity under this program was
$973.1 million and as of that date there was $3.6 million outstanding. We also participate in a reciprocal program which allows
our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.
As of December 31, 2015, our outstanding certificates of deposits from this program have an average weighted rate of 0.25%
and an average original term of 138 days.
We also have available unused federal funds lines with four correspondent banks. These lines have an aggregate commitment
of $170.0 million with $4.0 million outstanding as of December 31, 2015.
The liquidity needs of First Commonwealth on an unconsolidated basis (the "Parent Company") consist primarily of operating
expenses, debt service payments and dividend payments to our stockholders, which totaled $32.4 million for the year ended
December 31, 2015, as well as any cash necessary to repurchase our shares, which totaled $25.4 million for the year ended
December 31, 2015. The primary source of liquidity for the Parent Company is dividends from subsidiaries. The Parent
Company had $72.2 million in junior subordinated debentures and cash and interest-bearing deposits of $10.0 million at
December 31, 2015. At the end of 2015 the Parent Company had a $15.0 million short-term, unsecured revolving line of credit
with another financial institution. As of December 31, 2015, there were no amounts outstanding under this line. The Parent
Company has the ability to enhance its liquidity position by raising capital or incurring debt.
Refer to “Financial Condition” above for additional information concerning our deposits, loan portfolio, investment securities
and borrowings.
Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity
prices. Our market risk is composed primarily of interest rate risk. Interest rate risk is comprised of repricing risk, basis risk,
yield curve risk and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability
portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indices, which do not always
change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a
given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options”
within asset and liability products as certain borrowers have the option to prepay their loans when rates fall, while certain
depositors can redeem or withdraw their deposits early when rates rise.
The process by which we manage our interest rate risk is called asset/liability management. The goals of our asset/liability
management are increasing net interest income without taking undue interest rate risk or material loss of net market value of
our equity, while maintaining adequate liquidity. Net interest income is increased by growing earning assets and increasing the
difference between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Liquidity is measured by
the ability to meet both depositors’ and credit customers’ requirements.
We use an asset/liability model to measure our interest rate risk. Interest rate risk measures include earnings simulation and gap
analysis. Gap analysis is a static measure that does not incorporate assumptions regarding future events. Gap analysis, while a
helpful diagnostic tool, displays cash flows for only a single rate environment. Net interest income simulations explicitly
measure the exposure to earnings from changes in market rates of interest. Under simulation analysis, our current financial
position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate
scenarios. Our net interest income simulations assume a level balance sheet whereby new volume equals run-off. The ALCO
reviews earnings simulations over multiple years under various interest rate scenarios. Reviewing these various measures
provides us with a reasonably comprehensive view of our interest rate profile.
The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing
liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive liabilities repricing within
a one year period was 0.71 and 0.69 at December 31, 2015 and 2014, respectively. A ratio of less than one indicates a higher
level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealh's ratio is largely
driven by the modeling of interest-bearing nonmaturity deposits, which are included in the analysis as repricing within one year.
43
Following is the gap analysis as of December 31:
2015
0-90 Days
91-180
Days
181-365
Days
Cumulative
0-365 Days
(dollars in thousands)
Over 1 Year
Through 5
Years
Over 5
Years
$ 2,371,092
115,292
$
184,323
50,950
$
315,162
102,357
$ 2,870,577
268,599
$ 1,439,199
597,263
$
343,538
454,200
2,808
—
—
2,808
—
—
2,489,192
125,403
2,476,973
1,583,132
4,185,508
$
$(1,696,316)
0.59
25.83%
235,273
89,522
—
140
89,662
145,611
2.62
2.22%
0-90 Days
$
$ 2,274,687
52,057
2,262
2,329,006
278,659
2,484,139
1,203,176
3,965,974
$(1,636,968)
0.59
$
91-180
Days
166,818
60,708
—
227,526
114,932
—
25,135
140,067
87,459
1.62
$
$
$
417,519
139,133
—
285
3,141,984
354,058
2,476,973
1,583,557
139,418
278,101
2.99
4.23%
4,414,588
$(1,272,604)
0.71
19.38%
2,036,462
797,738
244,173
—
2,487
246,660
$
$ 1,789,802
8.26
27.25%
4,000
—
6,263
10,263
787,475
77.73
11.99%
2014
181-365
Days
Cumulative
0-365 Days
(dollars in thousands)
Over 1 Year
Through 5
Years
294,772
125,801
—
420,573
193,346
—
29,873
223,219
197,354
1.88
$ 2,736,277
238,566
2,262
$ 1,412,835
767,521
—
2,977,105
586,937
2,484,139
1,258,184
2,180,356
251,153
—
2,385
4,329,260
$(1,352,155)
0.69
253,538
$ 1,926,818
8.60
Over 5
Years
267,876
338,182
—
606,058
4,255
—
6,931
11,186
594,872
54.18
$
$
25.74%
1.38%
3.10%
21.26%
30.29%
9.35%
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. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could
indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a
declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-
bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in
interest rates is provided in the table below the gap analysis.
44
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, 2015 ($)
December 31, 2015 (%)
December 31, 2014 ($)
December 31, 2014 (%)
Net interest income change (12 months)
-200
-100
+100
+200
$
$
$
$
(7,293)
(3.74)%
(5,280)
(2.85)%
(dollars in thousands)
(2,438)
(1.25)%
$
$
(1,414)
(0.76)%
$
$
916
0.47%
211
0.11%
1,900
0.97%
869
0.47%
The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates
versus if rates remained unchanged utilizing a flat balance sheet.
Net interest income change (12 months)
-200
-100
+100
+200
December 31, 2015 ($)
December 31, 2015 (%)
December 31, 2014 ($)
December 31, 2014 (%)
$
$
(11,405)
(5.85)%
(11,925)
$
$
(6.43)%
$
(dollars in thousands)
(5,132)
(2.63)%
(6,532)
(3.52)%
$
1,842
0.94%
577
0.31%
$
$
3,658
1.88%
1,511
0.82%
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 low interest rate environment. Results of the 100 and 200 basis point interest rate decline
scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1% and therefore are not modeled
to decline 100 or 200 basis points, yet our interest-sensitive assets are able to decline by these amounts. For the years 2015 and
2014, the cost of our interest-bearing liabilities averaged 0.34% and 0.41%, respectively, and the yield on our average interest-
earning assets, on a fully taxable equivalent basis, averaged 3.55% and 3.59%, 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.
During the first quarter of 2015, the Company entered into cash flow interest rate swaps in which we extended the duration of
$100.0 million of the $1.3 billion LIBOR based loans in our loan portfolio into fixed interest rates for a period of three or four
years. These swaps add approximately two bass points of protection to the net interest margin as a hedge against a prolonged
low rate environment. A similar cash flow interest rate swap, with a notional amount of $100.0 million, was entered into in
2014. Please refer to Note 7, "Derivatives," for additional information on interest rate swaps.
Asset/liability models require that certain assumptions be made, such as prepayment rates on earning assets and the impact of
pricing on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our
experience, business plans and published industry experience. While management believes such assumptions to be reasonable,
there can be no assurance that modeled results will approximate actual results.
Credit Risk
First Commonwealth maintains an allowance for credit losses at a level deemed sufficient 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 $4.4 million at December 31, 2015, and is classified in “Other liabilities” on the
Consolidated Statements of Financial Condition.
45
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 2015, 61 loans totaling $11.9
million were identified as troubled debt restructurings, resulting in specific reserves of $1.3 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 $50.8 million at December 31, 2015 or 1.08% of loans outstanding, compared to $52.1
million or 1.17% of loans outstanding at December 31, 2014. The decrease in the 2015 ratio compared to the 2014 ratio can be
attributed to a decline in criticized loans and a reduction in the qualitative factors related to leveraged finance transaction loans.
In addition, as of December 31, 2015, several credit measures showed improvement compared to December 31, 2014. The level
of criticized loans decreased $6.2 million from $140.1 million at December 31, 2014 to $134.0 million at December 31, 2015
and the level of nonperforming loans decreased $4.1 million for the same period.
The allowance for credit losses as a percentage of nonperforming loans was 99.9% at December 31, 2015 and 94.2% as of
December 31, 2014. The allowance for credit losses includes specific allocations of $7.0 million related to nonperforming
loans covering 14% of the total nonperforming balance at December 31, 2015 and specific allocations of $9.5 million covering
17% of the total nonperforming balance at December 31, 2014. 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, 2015.
The following table provides information on net charge-offs and nonperforming loans by loan category:
For the Period Ended December 31, 2015
As of December 31, 2015
% of
Total Net
Charge-
offs
Net
Charge-offs
as a %
of Average
Loans
Net
Charge-offs
Nonperforming
Loans
% of Total
Nonperforming
Loans
Nonperforming
Loans as a % of
Total Loans
(dollars in thousands)
$
10,332
63.83%
0.23% $
(76)
952
1,309
3,670
(0.47)
5.88
8.09
22.67
—
0.02
0.03
0.08
31,476
28
10,413
8,506
421
61.91%
0.67%
0.05
20.48
16.73
0.83
—
0.22
0.18
0.01
$
16,187
100.00%
0.36% $
50,844
100.00%
1.08%
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, financial, agricultural loans and residential real estate were the most significant
portions of the nonperforming loans as of December 31, 2015. See discussions related to the provision for credit losses and
loans for more information.
46
Results of Operations—2014 Compared to 2013
Summary of 2014 Results
Net income for 2014 was $44.5 million, or $0.48 per diluted share, as compared to a net income of $41.5 million, or $0.43 per
diluted share, in 2013. Net income in 2014 was positively impacted by an $8.0 million decrease in provision expense, offset by
a $5.7 million increase in operational losses and a $1.0 million decrease in net interest income.
Our return on average equity was 6.2% and return on average assets was 0.71% for 2014, compared to 5.7% and 0.68%,
respectively, for 2013.
Average diluted shares for the year 2014 were 4% less than the comparable period in 2013 primarily due to the common stock
buyback program authorized during 2014.
Net interest income, on a fully taxable equivalent basis, for 2014 was $1.7 million, or 1%, lower than 2013, primarily due to a
$66.3 million, or 1%, increase in average interest bearing liabilities and a 12 basis point decrease in the net interest margin.
Positively affecting net interest income in 2014 was a $100.1 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 3.27% in 2014 compared to 3.39% in 2013.
During the year-ended December 31, 2014, 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 $166.5 million, or 3%, compared to the
comparable period in 2013.
The taxable equivalent yield on interest-earning assets was 3.59% for the year-ended December 31, 2014, a decrease of 20 basis
points from the 3.79% yield for the same period in 2013. 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 0.41% for the year-ended December 31, 2014, compared to 0.48% for the same period in 2013.
Comparing the year-ended December 31, 2014 with the same period in 2013, changes in interest rates negatively impacted net
interest income by $9.4 million. The lower yield on interest-earning assets adversely impacted net interest income by $11.3
million, while the decline in the cost of interest-bearing liabilities positively impacted net interest income by $1.9 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 $7.7 million in the year-ended December 31, 2014
compared to the same period in 2013. Higher levels of interest-earning assets resulted in an increase of $6.4 million in interest
income, while volume changes primarily attributed to the mix of deposits reduced interest expense by $1.3 million.
Noninterest income, excluding net securities gains (losses) and gains on sale of assets, decreased $3.9 million, or 7%, in 2014,
largely due to a decline in the other income category. The decrease in the other income category can be attributed to a $2.3
million decline in commercial loan swap-related income and a $1.1 million decrease in investment management income as a
result of the sale of the Company's registered investment advisory business in the first quarter of 2014.
Total noninterest income increased $0.7 million, or 1%, in 2014 in comparison to the year ended 2013. The most notable
change includes a $2.8 million increase in the gain on sale of assets and the gain on sale of loans as a result of a $1.2 million
gain recognized on the sale of the Company's registered investment advisory business and $3.2 million in gains on the sale of
several OREO properties.
Comparing the year 2014 to the year 2013, net securities gains (losses) increased $1.7 million. This change is primarily the
result of a $1.3 million loss recognized in 2013 on the early redemption of one of our pooled trust preferred securities.
Total noninterest expense for the year 2014 increased $2.4 million in comparison to the year 2013, largely due to an $8.6
million litigation reserve, $2.8 million in increased expenses related to the IT system conversion and increased contribution
expense as a result of a $0.6 million charge related to the donation of a former headquarters building to a local university.
Salaries and employee benefit expense increased $1.2 million, or 1%, due to normal merit increases, additional staffing added
as part of the launch of our mortgage initiative and the acquisition of an insurance agency.
47
These increases were offset by declines of $1.9 million in Pennsylvania shares tax expense, $1.1 million in loan collection costs
and a $3.0 million partial recovery for a 2012 external fraud loss.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Information appearing in Item 7 of this report under the caption “Market Risk” is incorporated herein by reference in response
to this item.
48
ITEM 8.
Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and due from banks
Interest-bearing bank deposits
Securities available for sale, at fair value
Securities held to maturity, at amortized cost, (Fair value $382,341 at December 31, 2015)
Other investments
Loans held for sale
Loans:
Portfolio loans
Allowance for credit losses
Net loans
Premises and equipment, net
Other real estate owned
Goodwill
Amortizing intangibles, net
Bank owned life insurance
Other assets
Total assets
Liabilities
Deposits (all domestic):
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Subordinated debentures
Other long-term debt
Total long-term debt
Other liabilities
Total liabilities
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares
issued as of December 31, 2015 and 2014; and 88,961,268 shares and 91,723,028 shares
outstanding at December 31, 2015 and 2014, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net
Treasury stock (16,602,187 and 13,840,427 shares at December 31, 2015 and 2014,
respectively)
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2015
2014
(dollars in thousands, except
share data)
$
66,644
$
72,276
2,808
886,560
384,324
62,952
5,763
4,683,750
(50,812)
4,632,938
63,454
9,398
164,500
1,231
182,601
103,717
2,262
1,309,819
—
44,545
2,502
4,457,308
(52,051)
4,405,257
64,989
7,197
161,429
1,665
177,567
110,777
$ 6,566,890
$ 6,360,285
$ 1,116,689
3,079,205
$
4,195,894
1,510,825
72,167
9,314
81,481
59,144
989,027
3,326,484
4,315,511
1,105,876
72,167
89,459
161,626
61,127
5,847,344
5,644,140
—
—
105,563
365,981
378,081
(2,386)
105,563
365,615
353,027
(4,499)
(127,693)
719,546
(103,561)
716,145
$ 6,566,890
$ 6,360,285
The accompanying notes are an integral part of these Consolidated Financial Statements
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2015
Years Ended December 31,
2014
(dollars in thousands, except share data)
2013
Interest Income
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
Interest Expense
Interest on deposits
Interest on short-term borrowings
Interest on subordinated debentures
Interest on other long-term debt
Total interest expense
Net Interest Income
Provision for credit losses
Net Interest Income after Provision for Credit Losses
Noninterest Income
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 loans
Gain on sale of assets
Card related interchange income
Other income
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Net occupancy
Furniture and equipment
Data processing
Advertising and promotion
Pennsylvania shares tax
Intangible amortization
Collection and repossession
Other professional fees and services
FDIC insurance
Loss on sale or write-down of assets
Litigation and operational losses
Loss on early redemption of subordinated debt
Conversion related
Merger and acquisition related
Other operating expenses
Total noninterest expense
Income before income taxes
Income tax provision
Net Income
Average Shares Outstanding
Average Shares Outstanding Assuming Dilution
Per Share Data:
Basic Earnings Per Share
Diluted Earnings Per Share
Cash Dividends Declared per Common Share
$
172,819
$
171,196
$
176,129
26,807
997
3,434
14
204,071
7,474
5,018
2,329
774
15,595
188,476
14,948
173,528
(153)
5,834
15,319
8,522
5,412
2,819
1,457
14,501
7,614
61,325
89,161
13,712
10,737
6,123
2,638
4,693
605
2,826
4,034
4,014
3,112
2,119
—
—
922
19,178
163,874
70,979
20,836
50,143
89,356,767
89,356,767
0.56
0.56
0.28
$
$
$
$
$
$
$
$
28,767
311
1,895
12
202,181
12,453
2,449
2,292
1,307
18,501
183,680
11,196
172,484
550
6,000
15,661
6,483
5,502
516
4,480
14,222
7,445
60,859
87,223
13,119
17,812
6,124
2,953
3,776
631
2,754
3,986
4,054
1,595
6,786
—
1,788
—
18,609
171,210
62,133
17,680
44,453
93,114,654
93,114,654
0.48
0.48
0.28
$
$
$
$
29,916
4
302
7
206,358
15,596
1,262
3,128
1,721
21,707
184,651
19,227
165,424
(1,158)
6,166
15,652
6,005
5,539
624
1,529
13,746
12,060
60,163
86,012
13,607
15,118
6,009
3,129
5,638
1,064
3,836
3,731
4,366
1,054
1,115
1,629
2,588
—
19,928
168,824
56,763
15,281
41,482
97,028,157
97,029,832
0.43
0.43
0.23
The accompanying notes are an integral part of these Consolidated Financial Statements
50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income
Other comprehensive income (loss), before tax expense (benefit):
Unrealized holding gains (losses) on securities arising during the
period
Less: reclassification adjustment for losses (gains) on securities
included in net income
Unrealized gains on derivatives:
Unrealized holding gains on derivatives arising during the period
Reclassification adjustment for gains on derivatives included in
net income
Unrealized (losses) gains for postretirement obligations:
Transition obligation
Net (loss) gain
Total other comprehensive income (loss), before tax expense
(benefit)
Income tax expense (benefit) related to items of other comprehensive
income (loss)
Years Ended December 31,
2015
2014
2013
(dollars in thousands)
$
50,143
$
44,453
$
41,482
2,798
25,153
(34,975)
153
450
(49)
—
(102)
3,250
1,137
(550)
1,158
472
(10)
—
(313)
—
—
—
219
24,752
(33,598)
8,663
(11,751)
19,635
Comprehensive Income
$
52,256
$
60,542
$
The accompanying notes are an integral part of these Consolidated Financial Statements
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Shares
Outstanding
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Treasury
Stock
Total
Shareholders’
Equity
(dollars in thousands, except per share data)
Balance at December 31, 2014
91,723,028
$
105,563
$
365,615
$
353,027
$
(4,499) $
(103,561) $
716,145
Net income
Total other comprehensive income
Cash dividends declared ($0.28 per share)
Treasury stock acquired
Treasury stock reissued
Restricted stock
(2,918,066)
20,936
135,370
—
32
334
50,143
(25,089)
—
—
2,113
50,143
2,113
(25,089)
(25,383)
192
1,425
(25,383)
160
1,091
Balance at December 31, 2015
88,961,268
$
105,563
$
365,981
$
378,081
$
(2,386) $
(127,693) $
719,546
Shares
Outstanding
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Treasury
Stock
Total
Shareholders’
Equity
(dollars in thousands, except per share data)
Balance at December 31, 2013
95,245,215
$
105,563
$
365,333
$
334,748
$
(20,588) $
(73,359) $
711,697
Net income
Total other comprehensive income
Cash dividends declared ($0.28 per share)
Discount on dividend reinvestment plan
purchases
Treasury stock acquired
Treasury stock reissued
Restricted stock
(3,636,634)
21,960
92,487
—
(65)
35
312
44,453
(26,174)
—
—
16,089
44,453
16,089
(26,174)
(65)
(30,956)
(30,956)
157
597
192
909
Balance at December 31, 2014
91,723,028
$
105,563
$
365,615
$
353,027
$
(4,499) $
(103,561) $
716,145
Shares
Outstanding
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Treasury
Stock
Total
Shareholders’
Equity
(dollars in thousands, except per share data)
Balance at December 31, 2012
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
—
(112)
—
91
41,482
(22,344)
—
2
(21,847)
41,482
(21,847)
(22,344)
(112)
(32,217)
176
552
(32,217)
176
459
Balance at December 31, 2013
95,245,215
$
105,563
$
365,333
$
334,748
$
(20,588) $
(73,359) $
711,697
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Deferred tax expense
Depreciation and amortization
Net (gains) 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
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
(Increase) decrease in interest receivable
Decrease in interest payable
Decrease in prepaid FDIC insurance
(Increase) decrease in income taxes payable
Other—net
Net cash provided by operating activities
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions
Purchases
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
Acquisition, net of cash acquired
Net increase in loans
Purchases of premises and equipment
Net cash used in investing activities
Financing Activities
Net decrease in federal funds purchased
Net increase in other short-term borrowings
Net (decrease) increase in deposits
Repayments of other long-term debt
Proceeds from issuance of long-term debt
Repayments of subordinated debentures
Discount on dividend reinvestment plan purchases
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
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
Years Ended December 31,
2015
2014
2013
(dollars in thousands)
$
50,143
$
44,453
$
41,482
14,948
12,653
7,640
(729)
2,793
—
(5,412)
(86,576)
85,718
(41)
(103)
—
(354)
(7,929)
72,751
9,358
(380,877)
88,054
373,228
(24,150)
(65,605)
48,029
378
3,018
6,407
(3,533)
(191,853)
(4,887)
(142,433)
(5,000)
409,949
(209,928)
(80,145)
—
—
—
(25,089)
192
(25,383)
64,596
(5,086)
74,538
69,452
$
11,196
4,862
13,721
2,832
2,233
(37)
(5,275)
(17,697)
15,598
542
(404)
—
1,860
8,253
82,137
—
—
132,868
242,895
(339,649)
(40,920)
31,819
2,080
3,112
12,882
(3,042)
(195,120)
(10,980)
(164,055)
(7,000)
486,261
(288,352)
(59,889)
5,000
—
(65)
(26,174)
192
(30,956)
79,017
(2,901)
77,439
74,538
$
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
77,439
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Statement of Accounting Policies
General
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 a 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 as well as in central Ohio. First
Commonwealth has determined that 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.
Basis of Presentation
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.
Securities
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 held to maturity and 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
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.
54
Loans
Loans are carried at the principal amount outstanding. 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.
Loan 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.
Other Real Estate Owned
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.
55
Allowance for Credit Losses
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 loss is incurred until the bank experiences a
charge-off against the loan. 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 component of the allowance is determined 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 inherently imprecise. Management must make
estimates using assumptions and information that is often subjective and changes rapidly.
Allowance for Off-Balance Sheet Credit Exposures
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.
Bank Owned Life Insurance
First Commonwealth and the banks that First Commonwealth has acquired have 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 as non-interest income 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 $3.7 million and $3.9 million as of December 31,
2015 and 2014, respectively, and is reflected in "Other Liabilities" on the Consolidated Statements of Financial Condition.
Premises and Equipment
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.
56
Software costs are amortized on a straight-line basis over a period not to exceed seven years.
Goodwill
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.
Other Intangible Assets
Other intangible assets consist of core deposits and customer lists obtained through acquisitions. Core deposit intangibles are
amortized over their estimated lives using the present value of the benefit of the core deposits and straight-line methods of
amortization. Customer list intangibles are amortized over the expected lives using expected cash flows based on retention of
the customer base. These 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.
Accounting for the Impairment of Long-Lived 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.
Income Taxes
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.
Comprehensive Income Disclosures
“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, changes in the funded status of defined benefit
postretirement plans and changes in the fair value of the effective portion of cash flow hedges. Comprehensive income is
reported in the accompanying Consolidated Statements of Comprehensive Income, net of tax.
Cash and Cash Equivalents
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.
Employee Stock Ownership Plan
Accounting treatment for First Commonwealth’s Employee Stock Ownership Plan (“ESOP”) described in Note 21 “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 were guaranteed by First Commonwealth.
The ESOP shares purchased subject to the debt guaranteed by First Commonwealth were recorded as a reduction of common
shareholders’ equity by recording unearned ESOP shares. Shares were committed to be released to the ESOP Trust for
allocation to plan participants through loan payments. As the shares were committed to be released, the unearned ESOP shares
account was credited for the average cost of the shares collateralizing the ESOP borrowed funds. Compensation cost was
recognized for these shares in accordance with the provisions of FASB ASC Topic 718 and was based upon the fair market
57
value of the shares that were committed to be released. Additional paid-in capital was 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.
Derivatives and Hedging Activities
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. For derivatives designated as cash flow hedges, changes in fair value of the effective
portion of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain
or loss included in OCI is recognized in the Consolidated Statement of Income.
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 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, 2015, First Commonwealth has interest derivative
positions that are not designated as hedging instruments. See Note 7, “Derivatives,” for a description of these instruments.
Earnings Per Common 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.
Fair Value Measurements
In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” First Commonwealth groups financial
assets and financial liabilities measured at fair value into 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,
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
58
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 18 “Fair Values of
Assets and Liabilities” for additional information.
Note 2—New Accounting Pronouncements
In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic
225-20),” which finalizes Proposed ASU No. 2014-220, and eliminates the concept of extraordinary items from U.S. GAAP.
Accordingly, this ASU eliminates FASB ASC Subtopic 225-20, "Income Statement - Extraordinary and Unusual Items", which,
until now, required that an entity separately classify, present, and disclose extraordinary events and transactions. This ASU is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of
this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805),” which requires that the acquirer
recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the
adjustment amounts are determined. The adjustments are required to be presented separately on the face of the income
statement or disclosed in the notes to show the portion of current-period earnings by line item that would have been recorded in
previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. This
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The
adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of
operations.
In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)”. In May 2014, the
FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", with an original effective date for
annual reporting periods beginning after December 15, 2016. The core principle of ASU 2014-09 is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 deferred the effective date of
ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017. We are
currently evaluating the potential impact of ASU 2015-14 on our financial statements.
In January 2016, the FASB issued ASU 2016-1, “Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.” ASU 2016-1, among other things, (i) requires equity investments,
with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the
impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to
identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost
on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of
the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has
elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the
balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need
for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-1 will be effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years, and is not expected to have a
significant impact on our financial statements
59
Note 3—Supplemental Comprehensive Income Disclosures
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 and reclassification
adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Consolidated Statements
of Income.
2015
2014
2013
Pretax
Amount
Tax
(Expense)
Benefit
Net of
Tax
Amount
Pretax
Amount
Tax
(Expense)
Benefit
Net of
Tax
Amount
Pretax
Amount
Tax
(Expense)
Benefit
Net of
Tax
Amount
(dollars in thousands)
Unrealized gains (losses) on
securities:
Unrealized holding gains
(losses) on securities arising
during the period
Reclassification adjustment
for losses (gains) on
securities included in net
income
Total unrealized gains
(losses) on securities
Unrealized gains (losses) on
derivatives:
Unrealized holding gains on
derivatives arising during
the period
Reclassification adjustment
for gains on derivatives
included in net income
Total unrealized gains
on derivatives
Unrealized (losses) gains for
postretirement obligations:
Transition obligation
Net (loss) gain
Total unrealized
(losses) gains for
postretirement
obligations
Total other
comprehensive
income (loss)
$
2,798
$
(978) $
1,820
$ 25,153
$ (8,803) $ 16,350
$ (34,975) $ 12,233
$ (22,742)
153
(54)
99
(550)
193
(357)
1,158
(405)
753
2,951
(1,032)
1,919
24,603
(8,610)
15,993
(33,817)
11,828
(21,989)
450
(158)
292
472
(165)
307
(49)
17
(32)
(10)
3
(7)
401
(141)
260
462
(162)
300
—
—
—
—
—
—
—
—
—
—
(102)
(102)
—
36
36
—
(66)
—
(313)
—
109
—
(204)
—
219
—
(77)
—
142
(66)
(313)
109
(204)
219
(77)
142
$
3,250
$ (1,137) $
2,113
$ 24,752
$ (8,663) $ 16,089
$ (33,598) $ 11,751
$ (21,847)
60
The following table details the change in components of OCI for the year-ended December 31:
Securities Available
for Sale
Derivatives
Post-Retirement
Obligation
Accumulated Other
Comprehensive
Income
2015
Balance at January 1
Other comprehensive income before
reclassification adjustment
Amounts reclassified from accumulated other
comprehensive income (loss)
Net gain
Net other comprehensive income during the period
Balance at December 31
$
$
(dollars in thousands)
(4,875) $
300
$
76
$
(4,499)
1,820
99
1,919
(2,956) $
292
(32)
260
560
$
2014
2,112
67
(66)
2,113
(2,386)
(66)
(66)
10
$
Balance at January 1
$
(20,868) $
— $
280
$
(20,588)
Securities Available
for Sale
Derivatives
Post-Retirement
Obligation
Accumulated Other
Comprehensive
Income
(dollars in thousands)
Other comprehensive income before
reclassification adjustment
Amounts reclassified from accumulated other
comprehensive income (loss)
Net gain
16,350
(357)
Net other comprehensive income during the period
Balance at December 31
$
15,993
(4,875) $
16,657
(364)
(204)
16,089
(4,499)
(204)
(204)
76
$
307
(7)
300
300
$
2013
Securities Available
for Sale
Derivatives
Post-Retirement
Obligation
Accumulated Other
Comprehensive
Income
Balance at January 1
Other comprehensive income before
reclassification adjustment
Amounts reclassified from accumulated other
comprehensive income (loss)
Net gain
Net other comprehensive income during the period
Balance at December 31
$
$
(dollars in thousands)
1,121
$
— $
138
$
1,259
(22,742)
753
(21,989)
(20,868) $
—
—
—
— $
(22,742)
753
142
(21,847)
(20,588)
142
142
280
$
61
Note 4—Supplemental Cash Flow Disclosures
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:
Cash paid during the period for:
Interest
Income taxes
Non-cash investing and financing activities:
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 increase (decrease) in market value adjustment to securities
available for sale
Gross increase in market value adjustment to derivatives
Investments committed to purchase, not settled
Net assets acquired through acquisition
Contribution of premises
Note 5—Earnings per Share
2015
2014
(dollars in thousands)
2013
$
15,818
$
18,943
$
8,331
10,700
8,257
—
3,196
2,949
401
694
463
—
5,061
—
3,035
24,601
472
—
—
682
23,022
3,080
12,326
348
20,135
(33,792)
—
—
—
—
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
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
Weighted average common shares and common stock equivalents used
to calculate diluted earnings per share
2015
105,563,455
(16,045,900)
(160,788)
2014
105,563,455
(12,294,217)
(154,584)
2013
105,563,455
(8,363,083)
(172,215)
89,356,767
93,114,654
97,028,157
—
—
1,675
89,356,767
93,114,654
97,029,832
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.
12/31/2015
Price Range
12/31/2014
Price Range
12/31/2013
Price Range
Stock Options
Restricted Stock
Shares
From
To
Shares
— $
— $
92,002
6.82
— 15,000
106,977
9.84
From
$ 14.55
5.26
To
$ 14.55
9.26
Shares
27,000
81,770
From
$ 14.41
4.41
To
$ 14.55
7.57
Note 6—Cash and Due from Banks
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 $4.6
million during 2015 and $4.9 million during 2014 with the Federal Reserve Bank.
62
Note 7—Derivatives
Derivatives Not Designated as Hedging Instruments
First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives
relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate
loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives
interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into
with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays
the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the
customer, and receives interest from the financial institution for the same floating rate on the same notional amount.
The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined
by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
We have sixteen 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 four 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.
Derivatives Designated as Hedging Instruments
The Company has entered into four interest rate swap contracts which were designated as cash flow hedges. The interest rate
swaps have a total notional amount of $200.0 million, $85.0 million with an original maturity of three years and $115.0 million
with an original maturity of four years. The Company's risk management objective for these hedges is to reduce its exposure to
variability in expected future cash flows related to interest payments on commercial loans benchmarked to the 1-month LIBOR
rate. Therefore, the interest rate swaps convert the interest payments on the first $200.0 million of 1-month LIBOR based
commercial loans into fixed rate payments.
The periodic net settlement of interest rate swaps is recorded as an adjustment to "Interest and fees on loans" in the
Consolidated Statement of Income. For the years ended December 31, 2015 and 2014, interest income was increased by $2.0
million and $0.3 million, respectively, as a result of these interest rate swaps. Changes in the fair value of the effective portion
of cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss
included in OCI is recognized in Interest and fees on loans, the same line item in the Consolidated Statement of Income as the
income on the hedged items. The cash flow hedges were highly effective at December 31, 2015 and December 31, 2014 and
changes in the fair value attributed to hedge ineffectiveness were not material. There were no cash flow hedges at December 31,
2013.
63
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:
Derivatives not Designated as Hedging Instruments
Credit value adjustment
Notional Amount:
Interest rate derivatives
Interest rate caps
Risk participation agreements
Sold credit protection on risk participation agreements
Derivatives Designated as Hedging Instruments
Fair value adjustment
Notional Amount - Interest rate derivatives
2015
2014
(dollars in thousands)
$
(542) $
(268)
276,860
22,793
126,612
(20,383)
922
200,000
273,388
6,656
113,624
(17,296)
472
100,000
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:
(Decrease) increase in other income
Hedging interest rate derivatives:
Increase in interest income
Increase in other income
2015
2014
2013
(dollars in thousands)
$
(274) $
(345) $
1,428
2,049
64
330
10
—
—
The fair value of our derivatives is included in a table in Note 18, “Fair Values of Assets and Liabilities,” in the line items
“Other assets” and “Other liabilities.”
64
Note 8—Investment Securities
Securities Available for Sale
Below is an analysis of the amortized cost and fair values of securities available for sale at December 31:
2015
2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
(dollars in thousands)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
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
Equities
Total Debt
Securities
Total
Securities
Available for
Sale
$
20,034
$
2,071
$
(13) $
22,092
$
23,344
$
2,595
$
(3) $
25,936
778,476
7,983
(8,882)
777,577
947,635
13,076
(9,830)
950,881
28
—
—
28
72
19,201
2
(85)
19,118
269,181
2
4
—
74
(1,308)
267,877
27,066
1,897
532
422
—
—
27,598
2,319
27,058
6,682
362
573
(43)
—
27,377
7,255
42,239
916
(7,497)
35,658
41,926
309
(13,236)
28,999
888,941
2,170
11,926
—
(16,477)
—
884,390
2,170
1,315,898
1,420
16,921
—
(24,420)
—
1,308,399
1,420
$ 891,111
$ 11,926
$ (16,477) $ 886,560
$1,317,318
$ 16,921
$ (24,420) $1,309,819
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.
In 2015, a $0.3 million loss was recognized on the sale of approximately $75.0 million of low-yielding U.S. government agency
securities. Proceeds from the sale of these securities were reinvested into higher yielding mortgage-backed securities.
During 2014, a gain of $0.5 million was recognized as the result of a recovery on a trust preferred security for which a $1.3
million loss was recognized in 2013 due to 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
65
Commonwealth. The gain recognized in 2014 was a result of additional proceeds distributed as part of the final liquidation of
the trust.
The amortized cost and estimated fair value of debt securities available for sale at December 31, 2015, by contractual maturity,
are shown below:
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Amortized
Cost
Estimated
Fair Value
(dollars in thousands)
$
2,601
$
16,600
27,066
44,136
90,403
2,595
16,523
27,598
37,977
84,693
Mortgage-Backed Securities (a)
Total Debt Securities
799,697
884,390
(a) Mortgage Backed Securities include an amortized cost of $20.0 million and a fair value of $22.1 million for Obligations
of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $778.5 million and a fair value of $777.6
million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
798,538
888,941
$
$
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to
securities available for sale were as follows for the 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
2015
2014
2013
(dollars in thousands)
88,054
$
132,868
$
671
— $
(284)
(284)
131
—
—
131
(153) $
$
291
(243)
48
502
—
—
502
550
$
233
—
233
4
(1,395)
—
(1,391)
(1,158)
$
$
$
Securities available for sale with an approximate fair value of $416.1 million and $563.2 million were pledged as of
December 31, 2015 and 2014, respectively, to secure public deposits and for other purposes required or permitted by law.
66
Securities Held to Maturity
Below is an analysis of the amortized cost and fair values of debt securities held to maturity at December 31, 2015. There were
no held to maturity securities at December 31, 2014.
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential
Mortgage-Backed Securities – Commercial
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential
Mortgage-Backed Securities – Commercial
Obligations of States and Political Subdivisions
Total Securities Held to Maturity
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(dollars in thousands)
Estimated
Fair Value
$
4,775
$
— $
(7) $
4,768
16,843
315,609
15,187
31,910
$ 384,324
$
—
30
—
301
331
(247)
16,596
(1,824)
(178)
(58)
313,815
15,009
32,153
$ (2,314) $ 382,341
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2015, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Mortgage-Backed Securities (a)
Total Debt Securities
Amortized
Cost
Estimated
Fair Value
(dollars in thousands)
— $
108
27,224
4,578
31,910
352,414
384,324
$
—
108
27,487
4,558
32,153
350,188
382,341
$
$
(a) Mortgage Backed Securities include an amortized cost of $21.6 million and a fair value of $21.4 million for Obligations of U.S.
Government agencies issued by Ginnie Mae and an amortized cost of $330.8 million and a fair value of $328.8 million for Obligations of
U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
Securities held to maturity with an amortized cost of $45.7 million were pledged as of December 31, 2015 to secure public
deposits for other purposes required or permitted by law.
Note 9—Impairment of Investment Securities
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,
2015, 2014 and 2013, no other-than-temporary impairment charges were recognized.
First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the
average cost method to determine the net gain or loss on equity securities.
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the
length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term
prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more
likely than not to sell 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
67
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 18, “Fair Values of Assets and Liabilities,” for additional information.
The following table presents the gross unrealized losses and estimated fair values at December 31, 2015 for both available for
sale and held to maturity securities by investment category and time frame for which the securities have been in a continuous
unrealized loss position:
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities –
Residential
Mortgage-Backed Securities –
Commercial
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
Pooled Trust Preferred Collateralized Debt
Obligations
Less Than 12 Months
12 Months or More
Total
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
(dollars in thousands)
$
6,798
$
(20) $
— $
— $
6,798
$
(20)
16,596
(247)
—
—
16,596
(247)
436,011
(3,293)
263,119
(7,413)
699,130
(10,706)
15,009
12,316
7,208
—
(178)
(85)
(58)
—
—
—
—
—
—
15,009
12,316
7,208
(178)
(85)
(58)
—
29,957
(3,881) $ 293,076
$
(7,497)
29,957
(14,910) $ 787,014
$
(7,497)
(18,791)
Total Securities
$ 493,938
$
At December 31, 2015, pooled trust preferred collateralized debt obligations accounted for 40% of unrealized losses due to
changes in interest rates and the illiquid market for this type of investment. Fixed income securities issued by U.S.
Government-sponsored enterprises comprised 59% of total unrealized losses due to changes in market interest rates.
Obligations of state and political subdivisions account for the remaining 1% of total unrealized losses as a result of changes in
market interest rates. At December 31, 2015, there were 80 debt securities in an unrealized loss position. There were no equity
securities in an unrealized loss position at December 31, 2015.
68
The following table presents the gross unrealized losses and estimated fair value at December 31, 2014 for available-for-sale
and securities by investment category and time frame for which the securities had been in a continuous unrealized loss position:
Less Than 12 Months
12 Months or More
Total
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential
$
2,318
$
(3) $
— $
— $
2,318
$
(3)
Obligations of U.S. Government-Sponsored
Enterprises:
Mortgage-Backed Securities – Residential
Other Government-Sponsored Enterprises
Obligations of States and Political
Subdivisions
Pooled Trust Preferred Collateralized Debt
Obligations
Total Securities
111,646
112,473
3,146
(419)
(229)
(43)
368,706
130,401
(9,411)
(1,079)
480,352
242,874
(9,830)
(1,308)
—
—
3,146
(43)
—
$ 229,583
$
—
24,356
(694) $ 523,463
$
(13,236)
24,356
(23,726) $ 753,046
$
(13,236)
(24,420)
As of December 31, 2015, our corporate securities had an amortized cost and estimated fair value of $1.9 million and $2.3
million, respectively, and were comprised of single issue trust preferred securities issued primarily by money center and large
regional banks. At December 31, 2014, these securities had an amortized cost of $6.7 million and estimated fair value of $7.3
million. There were no corporate securities in an unrealized loss position as of December 31, 2015 and 2014. 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, 2015, the book value of our pooled trust preferred collateralized debt obligations totaled $42.2 million with
an estimated fair value of $35.7 million, which includes securities comprised of 275 banks and other financial institutions. All
of our pooled securities are mezzanine tranches, three 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, 2015, after taking into account management’s best
estimates of future interest deferrals and defaults, four of our securities had no excess subordination in the tranches we own and
five of our securities had excess subordination which ranged from 10% to 84% of the current performing collateral.
The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of
December 31, 2015:
Deal
Pre TSL IV
Pre TSL VII
Pre TSL VIII
Pre TSL IX
Pre TSL X
Pre TSL XII
Pre TSL XIII
Pre TSL XIV
MMCap I
Total
Class
Book
Value
Estimated
Fair
Value
Unrealized
Gain
(Loss)
Moody’s/
Fitch
Ratings
Number
of
Banks
(dollars in thousands)
Mezzanine
$
1,830
$
1,336
$
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
2,963
2,000
2,376
1,613
5,688
12,706
12,854
209
3,484
1,863
1,805
1,915
4,585
10,660
9,708
302
(494)
521
(137)
(571)
302
(1,103)
(2,046)
(3,146)
93
B1/BB
Ca/-
C/C
B1/C
Caa1/C
B3/C
Ba3/C
B1/CC
Ca/C
$
42,239
$
35,658
$
(6,581)
6
14
29
38
43
66
56
56
8
Deferrals
and
Defaults
as a % of
Current
Collateral
Excess
Subordination
as a % of
Current
Performing
Collateral
18.05%
59.91%
49.68
56.74
29.80
30.66
23.07
11.08
19.72
58.11
0.00
0.00
9.90
0.00
0.00
37.45
47.01
83.61
Lack of liquidity in the market for trust preferred collateralized debt obligations, below investment grade credit rating and
market uncertainties related to the financial industry are factors contributing to the impairment on these securities.
69
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 years ended December 31,
2015, 2014 and 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.
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, 2015. 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 issuer's 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 275 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, 2015, 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
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.
70
Our cash flow analysis as of December 31, 2015, indicates that no credit related other-than-temporary impairment has occurred
on our pooled trust preferred securities during the year ended December 31, 2015. Based upon the analysis performed by
management, it is probable that four 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 68 with 0% “Excess Subordination as a % of Current Performing Collateral.” For
the remaining securities in the table, our analysis as of December 31, 2015 indicates that 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, 2015, 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 the present value of estimated future principal and interest payments exceeding the securities'
current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from
20% to 133% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess
subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be
collected.
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
2015
2014
2013
(dollars in thousands)
$
26,246
$
27,543
$
43,274
—
—
—
—
—
—
(1,177)
(218)
24,851
$
(1,297)
—
26,246
$
(2,375)
(13,356)
27,543
$
(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, 2015, 2014 and 2013, 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, 2015 and 2014.
In the table above, the $13.4 million reduction in cumulative credit losses in 2013 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, 2015 and 2014, our FHLB stock totaled $63.0 million
and $44.5 million, respectively and is included in “Other investments” on the Consolidated Statements of Financial Condition.
71
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value.
First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will
be recovered. Accordingly, no impairment charge was recorded on these securities for the year ended December 31, 2015.
Note 10—Loans and Allowance for Credit Losses
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
2015
2014
(dollars in thousands)
1,150,906
220,736
1,224,465
1,479,000
608,643
4,683,750
$
$
1,052,109
120,785
1,226,344
1,405,256
652,814
4,457,308
$
$
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)
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.
Substandard
Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be
classified as substandard as a result of deterioration of the borrower’s financial condition and repayment
capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect
the Company may also be classified as substandard.
Doubtful
Loans with the characteristics of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of
credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on
an evaluation of the borrower’s cash flow and collateral. 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
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.
72
The following tables represent our credit risk profile by creditworthiness category for the years ended December 31:
2015
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential real
estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$ 1,074,858
$
220,267
$ 1,209,606
$ 1,436,714
$
608,342
$ 4,549,787
11,825
64,223
—
442
27
—
5,244
9,615
—
30,012
12,274
—
—
301
—
47,523
86,440
—
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
76,048
$ 1,150,906
$
469
220,736
14,859
$ 1,224,465
42,286
$ 1,479,000
$
301
608,643
133,963
$ 4,683,750
2014
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential real
estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$
983,357
$
112,536
$ 1,214,920
$ 1,353,773
$
652,596
$ 4,317,182
32,563
32,028
4,161
68,752
$ 1,052,109
$
8,013
236
—
8,249
120,785
2,315
9,109
—
11,424
$ 1,226,344
29,479
22,004
—
51,483
$ 1,405,256
$
—
218
—
218
652,814
72,370
63,595
4,161
140,126
$ 4,457,308
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
The change in the amount of OAEM and Substandard loans at December 31, 2015 compared to December 31, 2014 is primarily
the result of two commercial industrial borrowers that migrated from OAEM to non-accrual status during 2015. Additional
details on these loans are provided on page 75.
Portfolio Risks
The credit quality of our loan portfolio can potentially represent 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 years ended December 31, 2015 and 2014 were $18.9 million and $17.5 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, 2015. 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.
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.
73
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
2015
Total past
due and
nonaccrual
Nonaccrual
(dollars in thousands)
Current
Total
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
$
$
364
280
4,175
781
2,998
8,598
$
$
49
—
1,055
—
774
1,878
$
$
129
—
1,315
65
946
2,455
$
$
23,653
28
6,500
6,223
301
36,705
$
$
24,195
308
13,045
7,069
5,019
49,636
$ 1,126,711
220,428
$ 1,150,906
220,736
1,211,420
1,471,931
1,224,465
1,479,000
603,624
$ 4,634,114
608,643
$ 4,683,750
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
2014
Total past
due and
nonaccrual
Nonaccrual
(dollars in thousands)
Current
Total
2,816
—
5,162
1,797
3,698
13,473
$
$
213
1
1,295
122
1,059
2,690
$
$
264
—
1,077
—
1,278
2,619
$
$
27,007
236
7,900
7,306
218
42,667
$
$
30,300
237
15,434
9,225
6,253
61,449
$ 1,021,809
120,548
1,210,910
1,396,031
646,561
$ 4,395,859
$ 1,052,109
120,785
1,226,344
1,405,256
652,814
$ 4,457,308
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
$
$
Nonaccrual Loans
The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status
when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been
charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or
more past due are placed on nonaccrual status, except for consumer loans which are placed 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.
74
There were no impaired loans held for sale at December 31, 2015 and December 31, 2014; sales of impaired loans during the
years ended December 31, 2015 and 2014 resulted in gains of $0.4 million and $77 thousand, respectively.
Significant nonaccrual loans as of December 31, 2015, included the following:
• A $7.5 million relationship of commercial industrial loans to an oil and gas well services company. These loans were
originated in 2014 and were placed in nonaccrual status during the fourth quarter of 2015. All collateral valuations were
completed in June or November of 2015.
• A $5.6 million relationship 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. Two of these loans were modified
resulting in TDR classification: one loan totaling $2.3 million was modified in 2012, and the other loan totaling $2.9
million was modified in 2014. During the year ended December 31, 2015, chargeoffs of $3.3 million related to this
relationship were recorded. A gas reserve study was obtained in March 2015 and was internally updated in December 2015
for adjustments to the pricing forecast and production estimates. All other collateral was valued in November 2015.
• A $3.9 million relationship of commercial industrial loans to an industrial manufacturer. These loans were originated in
2013 and were placed in nonaccrual status during the third quarter of 2015. Charge-offs of $2.0 million related to this
relationship were recognized during the fourth quarter of 2015. A valuation of the collateral was completed during the
fourth quarter of 2015.
• A $3.9 million relationship of commercial industrial loans to a manufacturer of sporting goods. These loans were
originated from 2012 to 2015 and were placed in nonaccrual status during the fourth quarter of 2015. A valuation of the
collateral was completed during the fourth quarter of 2015.
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, 2015 and 2014. 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, 2015, 2014 and 2013. 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.
Recorded
investment
Unpaid
principal
balance
2015
Related
allowance
(dollars in thousands)
Average
recorded
investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial, financial, agricultural and other
$
11,344
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With an allowance recorded:
28
9,952
7,562
421
29,307
15,673
117
11,819
9,449
507
37,565
$
17,692
$
95
10,635
7,890
338
36,650
Commercial, financial, agricultural and other
20,132
22,590
$
6,952
7,731
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
—
461
944
—
21,537
50,844
$
$
—
672
1,008
—
24,270
61,835
—
51
42
—
—
403
674
—
7,045
7,045
$
8,808
45,458
$
$
216
—
172
90
4
482
129
—
—
4
—
133
615
75
Recorded
investment
Unpaid
principal
balance
2014
Related
allowance
Average
recorded
investment
Interest
Income
Recognized
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
$
9,439
236
10,773
8,768
288
29,504
24,826
—
367
554
—
25,747
55,251
$
$
10,937
476
12,470
10,178
337
34,398
25,583
—
380
554
—
26,517
60,915
$
$
9,304
—
56
101
—
9,461
9,461
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
$
$
11,536
1,190
11,592
8,830
308
33,456
15,797
—
357
184
—
16,338
49,794
$
$
133
19
210
98
4
464
143
—
14
4
—
161
625
2013
Average
recorded
investment
Interest
Income
Recognized
(dollars in thousands)
$
$
14,454
5,923
9,280
27,881
255
57,793
16,479
515
3,200
188
—
20,382
78,175
$
$
73
47
211
250
3
584
64
—
31
—
—
95
679
Unfunded commitments related to nonperforming loans were $0.1 million and $46 thousand at December 31, 2015 and 2014,
respectively. After consideration of available collateral related to these commitments, a reserve of $13 thousand and $14
thousand was established for these off balance sheet exposures at December 31, 2015 and 2014, respectively.
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.
76
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
Unused lines of credit
2015
2014
2013
(dollars in thousands)
$
$
14,139
12,360
26,499
$
$
12,584
16,952
29,536
$
$
13,495
16,980
30,475
3,252
4,120
452
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:
Type of Modification
2015
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
12
32
1
16
61
$
$
1,751
—
—
3
(dollars in thousands)
$
3,195
296
—
167
$
4,527
1,414
464
35
$
9,473
1,710
464
205
$
8,823
1,575
389
169
1,330
2
—
—
$
1,754
$
3,658
$
6,440
$
11,852
$
10,956
$
1,332
Type of Modification
2014
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Other
(dollars in thousands)
Total
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
9
52
1
15
77
$
$
5,487
—
— $ 14,529
1,797
629
$
— $
—
$
20,016
2,426
$
13,785
2,062
4,665
—
—
—
$
5,487
$
—
103
732
8
47
—
—
8
150
6
114
—
—
$ 16,381
$
— $
22,600
$
15,967
$
4,665
77
Type of Modification
2013
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Other
(dollars in thousands)
Total
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
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
4,390
$
418
1,499
101
2,018
$
2,116
145
33
3,971
$
$
—
—
—
— $
2,881
2,215
144
10,379
$
2,316
2,184
109
7,713
$
906
161
34
—
1,101
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, 2015, 2014 and 2013, $3.7
million, $0.6 million and $2.0 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. The following
table provides information related to restructured loans that were considered to be in default during the as of December 31:
Residential real estate
Commercial real estate
Total
2015
2014
2013
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
3
—
3
$
$
97
—
97
(dollars in thousands)
2
1
3
$
$
7
6
13
1
—
1
$
$
19
—
19
78
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.
2015
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
Allowance for credit losses:
Beginning Balance
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
$
$
$
$
$
$
29,627
(11,429)
1,097
11,740
31,035
6,952
24,083
2,063
(8)
84
(1,252)
887
$
$
3,664
(1,539)
587
(106)
2,606
— $
51
$
$
$
11,881
(1,538)
229
1,352
11,924
42
$
$
$
$
4,816
(4,354)
684
3,214
52,051
(18,868)
2,681
14,948
4,360
$
50,812
— $
7,045
887
2,555
11,882
4,360
43,767
1,150,906
220,736
1,224,465
1,479,000
608,643
4,683,750
30,767
—
6,099
7,143
—
44,009
1,120,139
220,736
1,218,366
1,471,857
608,643
4,639,741
2014
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
Allowance for credit losses:
Beginning Balance
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
$
$
$
$
$
$
22,663
(8,911)
734
15,141
29,627
9,304
20,323
6,600
(296)
1,340
(5,581)
2,063
$
$
7,727
(3,153)
650
(1,560)
3,664
— $
56
$
$
$
11,778
(1,148)
612
639
11,881
101
$
$
$
$
5,457
(3,964)
766
2,557
54,225
(17,472)
4,102
11,196
4,816
$
52,051
— $
9,461
2,063
3,608
11,780
4,816
42,590
1,052,109
120,785
1,226,344
1,405,256
652,814
4,457,308
33,332
193
7,127
7,790
—
48,442
1,018,777
120,592
1,219,217
1,397,466
652,814
4,408,866
79
Allowance for credit
losses:
Beginning Balance
$
19,852
$
8,928
$
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Unallocated
Total
2013
(dollars in thousands)
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
5,457
$
5,926
$
—
—
(5,926)
$
— $
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
Note 11—Commitments and Letters of Credit
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, 2015 and 2014, 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
derivatives entered into by First Commonwealth.
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 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
80
2015
2014
(dollars in thousands)
$
1,643,187
$
1,635,948
17,843
26,497
1,672
36,075
25,915
2,611
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.
The notional amounts outstanding at December 31, 2015 include amounts issued in 2015 of $5.9 million in financial standby
letters of credit and $2.6 million in performance standby letters of credit. There were no commercial letters of credit issued
during 2015. A liability of $0.2 million and $0.2 million has been recorded as of December 31, 2015 and 2014, 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 $4.4 million and $3.1 million as of December 31, 2015 and 2014, respectively. This liability is reflected in “Other
liabilities” in the Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of
default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.
Note 12—Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Software
Subtotal
Indefinite
10-50 years
5-40 years
3-10 years
3-7 years
2015
(dollars in thousands)
$
$
2014
12,098
75,873
14,229
59,034
37,007
198,241
133,252
64,989
12,185
77,086
14,518
59,463
34,472
197,724
134,270
63,454
$
Less accumulated depreciation and amortization
Total premises and equipment
$
Depreciation related to premises and equipment included in noninterest expense for the years ended December 31, 2015, 2014
and 2013 amounted to $7.2 million, $13.2 million and $10.4 million, respectively.
First Commonwealth leases various premises and assorted equipment under non-cancellable agreements. Total future minimal
rental commitments at December 31, 2015, were as follows:
2016
2017
2018
2019
2020
Thereafter
Total
Premises
Equipment
(dollars in thousands)
$
3,339
$
3,004
2,809
2,531
1,981
10,360
24,024
$
$
66
53
9
—
—
—
128
Included in the lease commitments above is $262 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.
81
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 $2.9 million, $2.9 million and $4.2 million in 2015, 2014 and 2013, respectively.
Note 13—Goodwill and Other Amortizing Intangible 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, 2015 and 2014
was $164.5 million and $161.4 million, respectively. The $3.1 million increase in goodwill during the year ended December 31,
2015 is due to the First Community Bank acquisition. No impairment charges on goodwill or other intangible assets were
incurred in 2015, 2014 or 2013.
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 November 30, 2015 and December 31, 2015 and indicated that it is
more likely than not that the fair value of First Commonwealth's goodwill exceeds its carrying amount; therefore, the two step
goodwill impairment test was not considered necessary. The assessment of qualitative factors considered historical and
projected financial performance, macroeconomic factors such as the Company's access to capital, the general business climate
and changes in the banking industry as well as market considerations such as geographic expansion, new product offerings and
the regulatory environment.
As of December 31, 2015, goodwill was not considered impaired; however, changing economic conditions that may adversely
affect our performance, the fair value of our assets and liabilities, our stock price could result in impairment, which could
adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the
future.
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, 2015
Customer deposit intangibles
Customer list intangible
Total other intangible assets
December 31, 2014
Customer deposit intangibles
Customer list intangible
Total other intangible assets
Gross
Intangible
Assets
Accumulated
Amortization
(dollars in thousands)
Net
Intangible
Assets
$
$
$
$
$
$
19,142
984
20,126
22,470
984
23,454
$
$
$
$
$
$
(18,619) $
(276) $
(18,895) $
(21,773) $
(16) $
(21,789) $
523
708
1,231
697
968
1,665
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 9.8 years and a weighted average
amortization period of approximately 5.1 years. In the table above, the change in the gross customer deposit intangible from
December 31, 2014 to December 31, 2015 is a result of 2015 being the final year of amortization on $3.5 million from prior
acquisitions and the addition of $0.2 million from the First Community Bank acquisition. The customer list intangible
82
represents the estimated value of the customer base for an insurance agency acquired in 2014. These amounts are amortized
over their expected lives using expected cash flows based on retention of the customer base. The customer list intangible has a
remaining amortization period and a weighted average amortization period of 13.8 years. First Commonwealth recognized
amortization expense on other intangible assets of $0.6 million, $0.6 million, and $1.1 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
The following presents the estimated amortization expense of core deposit intangibles and the customer intangible list:
2016
2017
2018
2019
2020
Thereafter
Total
Core Deposit
Intangibles
Customer Intangible
List
(dollars in thousands)
Total
$
$
207 $
90
87
78
18
43
168 $
130
99
77
59
175
375
220
186
155
77
218
523 $
708 $
1,231
Note 14—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
2015
2014
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
$
$
$
(dollars in thousands)
86,365
2,390,607
602,233
3,079,205
81,851
2,402,288
842,345
3,326,484
$
Interest-bearing deposits at December 31, 2015 and 2014, include allocations from interest-bearing demand deposit accounts of
$580.8 million and $427.7 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, 2015 and 2014, were certificates of deposit in denominations of $100 thousand or
more of $157.7 million and $334.0 million, respectively.
Interest expense related to certificates of deposit in denominations of $100 thousand or greater amounted to $1.8 million in
2015, $3.7 million in 2014 and $4.7 million in 2013.
Included in time deposits at December 31, 2015, were certificates of deposit with the following scheduled maturities (dollars in
thousands):
2016
2017
2018
2019
2020 and thereafter
Total
83
$
$
354,324
113,391
45,744
54,276
34,498
602,233
Note 15—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
Ending
Balance
2015
Average
Balance
Average
Rate
Ending
Balance
2014
Average
Balance
Average
Rate
Ending
Balance
2013
Average
Balance
Average
Rate
(dollars in thousands)
Federal funds purchased
$
4,000
$
14,832
0.36% $
9,000
$
11,691
0.36% $
16,000
$
11,982
Borrowings from FHLB
1,400,000
1,117,522
0.42
945,000
644,651
0.31
478,100
335,449
Securities sold under
agreements to
repurchase
Total
Maximum total at any
month-end
Weighted average rate at
year-end
106,825
120,177
$ 1,510,825
$ 1,252,531
0.23
0.40
151,876
159,051
$ 1,105,876
$ 815,393
0.24
0.30
132,515
130,957
$ 626,615
$ 478,388
$ 1,510,825
$ 1,105,876
$ 626,615
0.53%
0.30%
0.36%
0.27
0.25
0.26
0.27%
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
Note 16—Subordinated Debentures
Subordinated Debentures outstanding at December 31 are as follows:
2015
2014
2013
(dollars in thousands)
$
$
54
4,684
280
5,018
$
$
42
2,019
388
2,449
$
$
43
893
326
1,262
Due
Amount
Rate
Amount
Rate
2015
2014
(dollars in thousands)
Owed to:
First Commonwealth Capital Trust II
First Commonwealth Capital Trust III
Total
2034
2034
$
$
30,929
41,238
72,167
LIBOR + 2.85
LIBOR + 2.85
$
$
30,929
41,238
72,167
LIBOR + 2.85
LIBOR + 2.85
First Commonwealth currently has two trusts, First Commonwealth Capital Trust II and First Commonwealth Capital Trust III,
of which 100% of the common equity is owned by First Commonwealth. The trusts were formed for the purpose of issuing
company obligated mandatorily redeemable capital securities to third-party investors and investing the proceeds from the sale
of the capital securities solely in junior subordinated debt securities (“subordinated debentures”) of First Commonwealth. The
subordinated debentures held by each trust are the sole assets of the trust.
Interest on the debentures issued to First Commonwealth Capital Trust III is paid quarterly at a floating rate of LIBOR + 2.85%
which is reset quarterly. Subject to regulatory approval, First Commonwealth may redeem the debentures, in whole or in part, at
its option on any interest payment date at a redemption price equal to 100% of the principal amount of the debentures, plus
accrued and unpaid interest to the date of the redemption. Deferred issuance costs of $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
date of the redemption. Deferred issuance costs of $471 thousand are being amortized on a straight-line basis over the term of
the securities.
84
Note 17—Other Long-term Debt
Other long-term debt at December 31 follows:
2015
2014
Weighted
Average
Contractual
Rate
Weighted
Average
Effective
Rate
Amount
Weighted
Average
Contractual
Rate
Weighted
Average
Effective
Rate
Amount
(dollars in thousands)
$
80,142
0.82%
0.82%
$
$
563
585
607
631
659
6,269
9,314
3.82%
3.83
3.83
3.83
3.84
3.81
3.82%
3.83
3.83
3.83
3.84
3.81
563
585
607
631
6,931
89,459
$
3.82
3.83
3.83
3.84
3.81
3.82
3.83
3.83
3.84
3.81
Borrowings from FHLB due:
2015
2016
2017
2018
2019
2020
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 residential
mortgage backed securities, 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 16, “Subordinated Debentures.”
Note 18—Fair Values of Assets and Liabilities
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures for non-financial assets and non-
financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). All non-financial assets are included either as a separate line item on the 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.
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, loans held for sale, interest rate
derivatives (including interest rate swaps, interest rate caps and risk participation agreements), certain other real estate
owned and certain impaired loans.
85
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.”
Loans held for sale include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair
value for these loans was determined on the basis of rates obtained in the respective secondary market.
Interest rate derivatives are reported at estimated fair value utilizing Level 2 inputs and are included in Other assets and Other
liabilities in the Consolidated Statements of Financial Condition. These 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 from overnight to three months, Eurodollar futures contracts
and swap rates from three years to thirty years. 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 2015 and 2014, we have not
realized any losses due to a counterparty's 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
liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable
equity investments, 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 the 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
86
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.
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 uncollateralized position
on an interest rate swap. The full amount of this credit loss was provided for in prior periods.
In accordance with ASU 2011-4, the following table provides information related to quantitative inputs and assumptions used in
Level 3 fair value measurements.
Fair Value
(dollars in
thousands)
Valuation Technique
Unobservable Inputs
Range / (weighted
average)
Pooled Trust Preferred Securities
$
35,658
Discounted Cash Flow
Probability of default
0% - 100% (13.38%)
Equities
Impaired Loans
2,170
Par Value
2,859 (b)
Gas Reserve study
Other Real Estate Owned
2,963 (b) Discounted Cash Flow
8
Internal Valuation
Prepayment rates
0% - 73.28% (5.07%)
Discount rates
5.25% - 12.00% (a)
N/A
Discount rate
Gas per MCF
Oil per BBL/d
Discount Rate
N/A
N/A
10.00%
$2.34 - $3.71 (c)
$42.56 - $65.13 (c)
1.90% - 4.81%
N/A
(a)
(b)
incorporates spread over the risk free rate related primarily to credit quality and illiquidity of securities.
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.
(c) unobservable inputs are defined as follows: MCF—million cubic feet; BBL/d—barrels per day.
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. 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.
87
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis at December 31:
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
$
— $
22,092
$
— $
22,092
2015
Level 1
Level 2
Level 3
Total
(dollars in thousands)
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) Hedging and non-hedging interest rate derivatives
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
Other Investments
Loans Held for Sale
Other Assets (a)
Total Assets
Other Liabilities (a)
Total Liabilities
(a) Non-hedging interest rate derivatives
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
777,577
28
19,118
27,598
2,319
—
848,732
—
848,732
62,952
5,763
11,273
928,720
10,829
10,829
$
$
$
—
—
—
—
—
35,658
35,658
2,170
37,828
—
—
—
37,828
$
— $
— $
777,577
28
19,118
27,598
2,319
35,658
884,390
2,170
886,560
62,952
5,763
11,273
966,548
10,829
10,829
2014
Level 1
Level 2
Level 3
Total
(dollars in thousands)
— $
25,936
$
— $
25,936
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
950,881
74
267,877
27,377
7,255
—
1,279,400
—
1,279,400
44,545
2,502
11,186
1,337,633
10,671
10,671
$
$
$
—
—
—
—
—
28,999
28,999
1,420
30,419
—
—
—
30,419
$
— $
— $
950,881
74
267,877
27,377
7,255
28,999
1,308,399
1,420
1,309,819
44,545
2,502
11,186
1,368,052
10,671
10,671
88
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, 2015:
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
Pooled Trust
Preferred
Collateralized
Debt
Obligations
Equities
Loans
Held for
Sale
Total
(dollars in thousands)
$
28,999
$
1,420
$
— $
30,419
111
7,608
—
—
—
(1,060)
—
—
35,658
$
$
—
—
750
—
—
—
—
—
2,170
$
—
—
—
—
—
—
—
—
— $
111
7,608
750
—
—
(1,060)
—
—
37,828
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, 2015.
During the year ended December 31, 2015, there were no transfers between fair value Levels 1 2, and 3.
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, 2014:
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
Pooled Trust
Preferred
Collateralized
Debt
Obligations
Equities
Loans
Held for
Sale
(dollars in thousands)
Other
Assets
Total
$
23,523
$
1,420
$
— $
— $
24,943
—
7,162
—
—
—
(1,686)
—
—
28,999
$
—
—
—
—
—
—
—
—
1,420
$
$
77
—
—
—
(3,112)
—
—
3,035
— $
—
—
—
—
—
—
—
—
— $
77
7,162
—
—
(3,112)
(1,686)
—
3,035
30,419
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, 2014.
During 2014, there were no transfers between fair value Levels 1 and 2. However, $3.0 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 $0.1 million gain for the period.
89
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
2015
Level 1
Level 2
Level 3
Total
(dollars in thousands)
— $
—
— $
30,979
10,039
41,018
$
$
12,820
8
12,828
2014
Level 1
Level 2
Level 3
(dollars in thousands)
— $
—
— $
34,864
7,828
42,692
$
$
10,926
153
11,079
$
$
$
$
43,799
10,047
53,846
Total
45,790
7,981
53,771
$
$
$
$
$
$
$
$
Total
Gains
(Losses)
(9,098)
(1,693)
(10,791)
Total
Gains
(Losses)
(7,017)
(1,319)
(8,336)
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.
For real estate secured loans, First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve
months on all impaired loans with balances of $250 thousand and over. For real estate secured loans with balances under $250
thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party
valuations specific to the collateral type.
The fair value for other real estate owned determined by either an independent market based appraisal less estimated costs to
sell or an executed sales agreement is classified as Level 2. The fair value for other real estate owned determined using an
internal valuation is classified as Level 3. Other real estate owned has a current carrying value of $9.4 million as of
December 31, 2015 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, core deposit intangibles and customer list intangibles are measured at
fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to
fair value adjustments only in certain circumstances. Additional information related to this measurement is provided in Note 13
“Goodwill and Other Amortizing Intangible Assets.” There were no material other assets or liabilities measured at fair value on
a nonrecurring basis during 2015.
FASB ASC Topic 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments,” require disclosure of the fair value of financial assets and financial liabilities, including those financial
assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The
methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a
recurring or nonrecurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are
discussed below.
Cash and due from banks and interest bearing bank deposits: The carrying amounts for cash and due from banks and interest-
bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities 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 obligation
values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and
similar techniques, and are 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.
90
Loans held for sale: The estimated fair value of loans held for sale is based on market bids obtained from potential buyers.
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 $0.2 million at both December 31, 2015 and 2014.
See Note 11, “Commitments and Letters of Credit,” for additional information.
Deposit liabilities: The estimated fair value of demand deposits, savings accounts and money market deposits is the amount
payable on demand at the reporting date because of the customers' ability to withdraw funds immediately. The carrying value
of variable rate time deposit accounts and certificates of deposit approximate the fair value 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 estimate of the current market rate for similar types of borrowing arrangements.
91
The following table presents carrying amounts and estimated fair values of First Commonwealth’s financial instruments at
December 31:
$
$
$
$
Carrying
Amount
66,644
2,808
886,560
62,952
5,763
4,683,750
4,195,894
1,510,825
9,314
72,167
Carrying
Amount
72,276
2,262
1,309,819
44,545
2,502
4,457,308
4,315,511
1,105,876
89,459
72,167
2015
Fair Value Measurements Using:
Total
Level 1
Level 2
Level 3
(dollars in thousands)
66,644
2,808
886,560
62,952
5,763
4,690,852
4,198,817
1,510,718
9,834
62,794
$
$
66,644
2,808
— $
—
—
—
—
—
—
—
—
—
848,732
62,952
5,763
30,979
4,198,817
1,510,718
9,834
—
—
—
37,828
—
—
4,659,873
—
—
—
62,794
2014
Fair Value Measurements Using:
Total
Level 1
Level 2
Level 3
(dollars in thousands)
$
72,276
2,262
1,309,819
44,545
2,502
4,439,766
4,319,997
1,105,867
90,319
62,815
$
72,276
2,262
—
—
—
—
— $
—
1,279,400
44,545
2,502
34,864
—
—
30,419
—
—
4,404,902
—
—
—
—
4,319,997
1,105,867
90,319
—
—
—
—
62,815
Financial assets
Cash and due from banks
Interest-bearing deposits
Securities available for sale
Other investments
Loans held for sale
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 held for sale
Loans
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
92
Note 19—Income Taxes
The income tax provision 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
Total tax provision
2015
2014
2013
(dollars in thousands)
$
$
8,610
68
8,678
12,158
20,836
$
$
12,661
157
12,818
4,862
17,680
$
$
2,509
68
2,577
12,704
15,281
The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:
Tax at statutory rate
Increase (decrease) resulting from:
Income from bank owned life
insurance
Tax-exempt interest income, net
Tax credits
Other
Total tax provision
$
2015
2014
2013
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
$
24,843
35% $
(dollars in thousands)
21,747
35% $
19,867
35%
(1,894)
(2,232)
(61)
180
20,836
(3)
(3)
—
—
29% $
(1,926)
(2,133)
(134)
126
17,680
(3)
(4)
—
—
28% $
(1,939)
(2,600)
(144)
97
15,281
(3)
(5)
—
—
27%
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 29%, 28% and 27% for the years ended December 31,
2015, 2014 and 2013, respectively.
93
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
Litigation reserve
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
Accrued severance
Basis difference in assets acquired
Loan origination fees and costs
Deferred rent
Other
Total deferred tax assets
Deferred tax liabilities:
Basis difference in assets acquired
Loan origination fees and costs
Income from unconsolidated subsidiary
Other
Total deferred tax liabilities
Net deferred tax asset
2015
2014
(dollars in thousands)
$
17,784
$
18,218
641
5,065
0
1,291
1,087
2,113
1,452
89
879
1,629
1,557
808
417
141
1,258
1,105
37,316
—
—
(619)
(337)
(956)
36,360
$
$
679
8,627
3,000
2,463
603
2,246
1,059
9,239
1,127
1,594
1,078
160
—
—
969
1,194
52,256
(344)
(1,337)
(603)
(318)
(2,602)
49,654
The net deferred tax asset of $36.4 million as of December 31, 2015 includes a $5.1 million alternative minimum tax credit
carryforward with an indefinite life. The significant decrease in the deferred tax asset for other-than-temporary impairment of
securities is due to previously recorded impairment charges on trust preferred debt securities being deducted on the 2014 federal
tax return based on newly issued IRS guidance.
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, 2015, 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.
In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” the Company has no material
unrecognized tax benefits or accrued interest and penalties as of December 31, 2015. We do not expect the total amount of
unrecognized tax benefits to significantly increase in the next twelve months. The Company records interest and penalties on
unrecognized tax benefits as a component of noninterest expense.
94
First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service (“IRS”) as well as all states
in which we conduct business. During 2015, the IRS completed an examination of our 2013 federal tax return. The
examination was closed with no adjustments. Federal and state income tax years 2012 through 2014 are open for examination
as of December 31, 2015.
Note 20—Retirement Plans
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 $2.7 million in 2015, $2.6 million in 2014, and $2.6 million in 2013.
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.
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 2015, 2014 and 2013.
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.
Postretirement Benefits Other than Pensions from Prior Acquisitions
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
2015
2014
2013
(dollars in thousands)
$
$
— $
62
—
(4)
58
$
— $
62
—
(29)
33
$
—
62
—
(7)
55
95
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 loss (gain)
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
2015
2014
(dollars in thousands)
$
1,822
$
1,644
—
62
—
98
(167)
1,815
—
—
167
(167)
—
1,815
—
15
1,830
$
—
62
—
284
(168)
1,822
—
—
168
(168)
—
1,822
—
117
1,939
2015
2014
(dollars in thousands)
1,815
$
1,822
$
$
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
2015
2014
2013
(dollars in thousands)
$
$
(10) $
—
(10) $
(76) $
—
(76) $
(280)
—
(280)
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
96
2015
2014
2013
3.88%
6.25%
4.75%
2022
3.61%
6.50%
4.75%
2022
4.01%
6.75%
4.75%
2022
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
2015
2014
2013
3.61%
6.50%
4.75%
2022
10.00%
11.0
4.01%
6.75%
4.75%
2022
10.00%
10.0
3.31%
7.00%
4.75%
2022
10.00%
11.0
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, 2015, the projected benefit payments for the next ten years are as follows:
2016
2017
2018
2019
2020
2021 - 2025
One-Percentage-
Point Increase
One-Percentage-
Point Decrease
(dollars in thousands)
$
$
73
3
(66)
(2)
Projected Benefit
Payments
(dollars in thousands)
207
$
204
190
163
156
656
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 2016 are as
follows (dollars in thousands):
Postretirement
Benefits
Net gain
Transition obligation
Total
97
(dollars in thousands)
$
(4)
—
(4)
$
Note 21—Unearned ESOP 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.
On August 28, 2014, First Commonwealth received a determination letter from the IRS in relation to the termination of the
ESOP stating that the termination of the plan does not adversely affect the Plan's federal tax status. All participant funds were
distributed as of August 28, 2015.
Note 22—Incentive Compensation Plan
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 3,942,531 shares were still eligible for awards as of December 31, 2015.
Restricted Stock
The following provides detail on the restricted stock awards which were issued and outstanding in 2015, 2014 and 2013 in
order to retain and attract key employees. The grant date fair value of the restricted stock awards is equal to the price of First
Commonwealth’s common stock on grant date.
Grant Date
June 26, 2015
February 20, 2015
February 20, 2015
February 5, 2015
January 29, 2015
January 15, 2015
November 17, 2014
April 8, 2014
March 24, 2014
March 4, 2014
January 1, 2014
August 16, 2013
May 31, 2013
March 1, 2013
February 24, 2012
February 24, 2012
January 1, 2012
November 21, 2011
April 1, 2011
Shares issued
Grant Price
Vesting Date
Number of
Equal Vesting
Periods
1,000 $
10,000
34,200
50,000
20,170
20,000
3,500
27,500
46,000
5,000
12,626
3,000
45,000
10,000
34,000
90,000
100,000
10,000
25,000
9.84 June 26, 2018
8.45 February 20, 2018
8.45 December 31, 2015
8.55 February 5, 2018
7.93 December 31, 2015
8.38 January 15, 2017
9.26 November 17, 2017
8.89 April 8, 2017
9.18 March 24, 2017
8.75 March 4, 2017
8.82 December 31, 2014
7.57 August 16, 2016
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
1
1
1
1
1
1
1
3
1
1
1
1
3
1
1
1
4
1
1
Compensation expense related to restricted stock was $1.4 million, $1.0 million and $0.5 million in 2015, 2014 and 2013,
respectively. As of December 31, 2015, there was $2.5 million of unrecognized compensation cost related to unvested restricted
stock awards granted.
98
A summary of the status of First Commonwealth’s 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
2015
2014
2013
Weighted
Average
Grant Date
Fair Value
7.08
8.41
6.87
—
8.01
$
Shares
265,000
135,370
(168,536)
—
231,834
Weighted
Average
Grant Date
Fair Value
6.07
9.03
6.18
5.96
7.08
Shares
271,000
$
94,626
(98,487)
(2,139)
265,000
Weighted
Average
Grant Date
Fair Value
5.71
7.25
5.46
5.96
6.07
Shares
253,000
$
58,000
(35,000)
(5,000)
271,000
The following provides detail on restricted stock awards estimated to be granted on a performance award basis during 2015,
2014 and 2013. These plans were previously approved by the Board of Directors.
Grant Date
January 17, 2011
February 24, 2012
January 28, 2013
January 27, 2014
January 26, 2015
December 30, 2015
Target
Share
Award
54,166
68,000
128,611
125,000
125,000
60,000
Performance
Period
(years)
3
3
3
3
3
5
Award if
threshold
met
Award if
targets are
met
Award if
superior
met
Award if
threshold not
achieved
40%
40%
40%
40%
40%
100%
100%
100%
100%
100%
200%
200%
200%
200%
200%
—%
—%
—%
—%
—%
Vesting After
Performance
Period (years)
1
1
1
0
0
0
Final vesting
January 17, 2014
December 31, 2015
December 31, 2016
December 31, 2016
December 31, 2017
December 31, 2020
The following table summarizes the estimated unvested target share awards for the Plans as of December 31:
Outstanding, beginning of the year
Granted
Issued
Forfeited
Outstanding, end of the year
2015
2014
2013
284,000
185,000
(34,200)
(114,095)
320,705
250,777
126,389
(12,626)
(80,540)
284,000
151,333
138,611
—
(39,167)
250,777
The estimated unvested target awards for the Plans have an estimated fair value of $9.07 per share for each year based on the
closing price of Company stock as of December 31, 2015.
Stock Option Plan
The First Commonwealth Financial Corporation 1995 Compensatory Stock Option Plan expired on October 15, 2005, and is
described below. As of December 31, 2015, there are no outstanding awards under this plan. 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.
99
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:
12/31/2015
12/31/2014
12/31/2013
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding, beginning of the year
15,000
$
14.55
27,000
$
14.49
Granted
Exercised
Forfeited
Balance, end of the year
Exercisable at the end of the year
—
—
(15,000)
—
—
—
—
14.55
—
—
—
—
(12,000)
15,000
15,000
—
—
14.41
14.55
14.55
There were no options exercised during the years ended December 31, 2015, 2014 or 2013.
Weighted
Average
Exercise
Price
$
11.64
—
—
11.19
14.49
14.49
Shares
196,322
—
—
(169,322)
27,000
27,000
Note 23—Contingent Liabilities
Legal proceedings
First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal
proceedings in which claims for monetary damages are asserted. As of December 31, 2015, management, after consultation
with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against
First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a
quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For
those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably
estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the
extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not
currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the
aggregate, beyond the existing recorded liability (if any), is between $0 and $5 million. Although First Commonwealth does
not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it
cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a
particular reporting period in the future.
First Commonwealth Financial Corporation and First Commonwealth Bank were named defendants in an action commenced
August 27, 2015 by eight named plaintiffs that is pending in the Court of Common Pleas of Jefferson County, Pennsylvania.
The plaintiffs allege that the Bank repossessed motor vehicles, sold the vehicles and sought to collect deficiency balances in a
manner that did not comply with the notice requirements of the Pennsylvania Uniform Commercial Code (UCC), charged
inappropriate costs and fees, including storage costs for dates that a repossessed vehicle was not in storage, and wrongly filed
forms with the Department of Motor Vehicles asserting that the Bank had complied with applicable laws relating to the
repossession of the vehicles. The plaintiffs seek to pursue the action as a class action on behalf of the named plaintiffs and other
similarly situated plaintiffs who had their automobiles repossessed and seek to recover damages under the UCC and the
Pennsylvania Fair Credit Extension Uniformity Act. First Commonwealth and the Bank contest the plaintiffs’ allegations and
intend to oppose class certification. The Bank has also asserted counterclaims for breach of contract, set-off and recoupment
against the plaintiffs, individually, and as representatives of the putative class. As set forth in the preceding paragraph, all
current litigation matters, including this action, are believed to be within the range of reasonably possible losses for such
matters in the aggregate set forth above.
Note 24—Related Party Transactions
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 similar transactions will be entered into in the future.
100
The following is an analysis of loans to related parties (dollars in thousands):
December 31, 2014
Advances
Repayments
December 31, 2015
$
$
722
740
(323)
1,139
Note 25—Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its subsidiary bank is limited by restrictions imposed on all depository
institutions by banking regulation that restricts and limits the payment of dividends and the ability of depository institutions to
engage in transactions, including lending transactions and asset purchases, with affiliates.
First Commonwealth and First Commonwealth Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators which, if undertaken, could have a direct material effect on First Commonwealth’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth
and First Commonwealth Bank must meet specific capital guidelines that involve quantitative measures of First
Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First
Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors.
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 an annual basis. This analysis is
subject to Board of Director review and approval. Our most recent capital stress test was completed in December 2015.
Effective January 1, 2015, the Company is subject to new regulatory risk-based capital rules adopted by the federal banking
agencies implementing Basel III. The most significant 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, resulting in an effective common equity Tier I risk-weighted asset minimum ratio of 7% on a fully
phased-in basis.
The Basel III rules also permitted banking organizations with less than $15.0 billion in assets to retain, through a one-time
election, the exclusion of accumulated other comprehensive income from regulatory capital. The Company elected to retain this
treatment, which reduces the volatility of regulatory capital levels.
101
As of December 31, 2015, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which
they are subject and was considered well-capitalized under the regulatory rules on a fully phased-in basis. To be considered
well-capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital, Tier I leverage ratio
and Common Equity tier I as set forth in the table below:
Actual
Minimum Capital
Required - Basel III
Phase-In Schedule
Minimum Capital
Required - Basel III
Fully Phased-In
Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
(dollars in thousands)
As of December 31, 2015
Total Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
Tier I Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
Tier I Capital to Average Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
Common Equity Tier I to Risk
Weighted Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
$ 682,199
656,244
12.25% $ 445,650
445,642
11.78
8.00% $ 584,915
584,905
8.00
10.50% $ 557,062
557,052
10.50
10.00%
10.00
$ 626,939
600,984
11.25% $ 334,237
334,231
10.79
6.00% $ 473,503
473,494
6.00
8.50% $ 445,650
445,642
8.50
8.00%
8.00
$ 626,939
600,984
9.85% $ 254,631
254,095
9.46
4.00% $ 254,631
254,095
4.00
4.00% $ 318,289
317,618
4.00
5.00%
5.00
$ 556,939
535,814
10.00% $ 250,678
250,673
9.62
4.50% $ 389,944
389,937
4.50
7.00% $ 362,091
362,084
7.00
6.50%
6.50
At December 31, 2014, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which
they were subject. The following table presents actual and required capital ratios as of December 31, 2014 under the regulatory
capital rules then in effect.
Actual
Regulatory Minimum
Well Capitalized
Regulatory Guidelines
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
(dollars in thousands)
As of December 31, 2014
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 662,733
First Commonwealth Bank
647,500
12.79% $ 414,460
415,217
12.48
8.00%
8.00
N/A
$ 519,021
N/A
10.00%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 607,602
First Commonwealth Bank
592,369
Tier I Capital to Average Assets
11.73% $ 207,230
4.00%
N/A
11.41
207,608
4.00
$ 311,413
First Commonwealth Financial Corporation $ 607,602
First Commonwealth Bank
592,369
9.85% $ 246,738
245,276
9.66
4.00%
4.00
N/A
$ 306,595
N/A
6.00%
N/A
5.00%
102
Note 26—Capital
On June 19, 2012 First Commonwealth announced a $50.0 million common stock repurchase program. On January 29, 2013,
January 28, 2014 and January 27, 2015, additional share repurchase programs were authorized for up to $25.0 million in shares
of the Company’s common stock for each of the three repurchase programs. As of May 31, 2015, all programs were completed
resulting in a total of 16,619,205 shares repurchased at an average price of $7.55 per share.
Note 27—Acquisition
On October 1, 2015, the Company completed the acquisition of Columbus, Ohio based First Community Bank for $14.75
million cash. Upon closing of the transaction, First Community Bank merged into First Commonwealth Bank. First Community
Bank operated four branch locations which after the merger operate under the First Commonwealth name. The acquisition
expanded the Company’s market into the central Ohio area.
The table below summarizes the net assets acquired (at fair value) and consideration transferred in connection with the First
Community acquisition:
Consideration Paid
Cash Paid to shareholders
Total consideration paid
Fair Value of Assets Acquired
Cash and cash equivalents
Investment Securities
FHLB Stock
Loans
Premises and other equipment
Core deposit intangible
Other real estate
Other assets
Total assets acquired
Fair Value of Liabilities Assumed
Deposits
Other Liabilities
Total liabilities assumed
Total Fair Value of Identifiable Net Assets
Goodwill
$
$
14,750
14,750
11,217
25,980
832
61,173
1,801
172
816
1,115
103,106
90,311
1,115
91,426
11,680
3,070
The Company determined that this acquisition constitutes a business combination as defined in FASB ASC Topic 805,
“Business Combinations.” Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and
liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in FASB ASC
Topic 820, “Fair Value Measurements and Disclosures.” Acquired loans were recorded at fair value with no carryover of the
related allowance for loan losses. Fair value is established by discounting the expected future cash flows with a market discount
rate for like maturities and risk instruments. At the date of acquisition, none of the loans were accounted for under the guidance
of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” We acquired $62.5
million in gross loans and recognized a net combined yield and credit market adjustment of $1.3 million.
The fair value of the acquired assets and liabilities noted in the table may change during the provisional period, which may last
up to twelve months subsequent to the acquisition date. The Company may obtain additional information to refine the valuation
of the acquired assets and liabilities and adjust the recorded fair value, although such adjustments are not expected to be
significant. Adjustments recorded to the acquired assets and liabilities will be applied prospectively in accordance with ASU
No. 2015-16, “Business Combinations.”
103
Costs related to the acquisition totaled $0.9 million. These amounts were expensed as incurred and are recorded as a merger and
acquisition related expense in the Consolidated Statements of Income.
Note 28—Condensed Financial Information of First Commonwealth Financial Corporation (parent company only)
Statements of Financial Condition
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
Total assets
Liabilities and Shareholders’ Equity
Accrued expenses and other liabilities
Subordinated debentures payable
Shareholders’ equity
Total liabilities and shareholders’ equity
Statements of Income
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 before equity in undistributed (loss) earnings of subsidiaries
Equity in undistributed earnings (loss) of subsidiaries
Net income
December 31,
2015
2014
(dollars in thousands)
10,003
22
719,073
2,182
8,978
3,780
441
714
47,631
792,824
1,111
72,167
719,546
792,824
$
$
$
$
10,402
24
712,610
2,182
8,749
4,287
—
—
50,988
789,242
930
72,167
716,145
789,242
$
$
$
$
For the years ended December 31,
2015
2014
2013
(dollars in thousands)
1
49,917
(2,357)
232
(4,989)
42,804
2,528
45,332
4,811
50,143
$
$
1
49,207
(2,335)
1,251
(6,766)
41,358
2,968
44,326
127
44,453
$
$
1
65,140
(3,128)
2,653
(8,820)
55,846
3,384
59,230
(17,748)
41,482
$
$
104
Statements of Cash Flow
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Net gain (loss) on sales of assets
(Increase) decrease in prepaid income taxes
Undistributed equity in subsidiaries
Other net
Net cash provided by operating activities
Investing Activities
Net change in loans
Purchases of premises and equipment
Proceeds from sale of other assets
Net cash (used in) provided by investing activities
Financing Activities
Repayments of subordinated debenture
Discount on dividend reinvestment plan purchases
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
For the years ended December 31,
2015
2014
2013
(dollars in thousands)
$
50,143
$
44,453
$
41,482
493
240
(6,993)
(4,811)
10,753
49,825
2
54
—
56
—
—
(25,089)
192
(25,383)
(50,280)
(399)
10,402
10,003
$
2,150
—
(487)
(127)
13,077
59,066
3
(47)
13
(31)
—
(65)
(26,174)
192
(30,956)
(57,003)
2,032
8,370
10,402
$
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
8,370
$
Cash dividends declared per common share were $0.28 for 2015, $0.28 for 2014 and $0.23 for 2013.
First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As
of December 31, 2015, there are no amounts outstanding on this line and we are in compliance with all debt covenants related
to the line of credit.
Note 29—Subsequent Event
On February 17, 2016, the Company announced that an additional share repurchase program was authorized by the Board of
Directors 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.
105
Quarterly Summary of Financial Data—Unaudited
The unaudited quarterly results of operations for the years ended December 31 are as follows:
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
2015
(dollars in thousands, except per share data)
$
50,501
50,150
$
$
52,335
4,086
48,249
6,130
42,119
(278)
15,560
43,129
3,816
46,685
4,621
42,064
—
15,505
40,257
3,780
46,370
3,038
43,332
20
16,327
40,634
51,085
3,913
47,172
1,159
46,013
105
14,086
39,854
14,272
4,211
10,061
0.11
0.11
88,849,957
88,850,049
$
$
17,312
4,898
12,414
0.14
0.14
88,807,294
88,813,746
$
$
19,045
5,598
13,447
0.15
0.15
88,922,392
88,939,003
$
$
20,350
6,129
14,221
0.16
0.16
90,875,724
90,889,035
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
2014
(dollars in thousands, except per share data)
$
$
$
50,420
4,267
46,153
2,575
43,578
500
13,387
47,359
51,089
4,536
46,553
2,073
44,480
48
15,002
41,568
50,166
4,783
45,383
3,317
42,066
2
17,000
42,396
10,106
2,377
7,729
0.08
$
$
17,962
5,466
12,496
0.13
$
$
16,672
4,744
11,928
0.13
$
$
50,506
4,915
45,591
3,231
42,360
—
14,920
39,887
17,393
5,093
12,300
0.13
0.08
91,591,554
91,598,411
0.13
92,567,503
92,578,701
0.13
93,794,589
93,811,543
0.13
94,543,420
94,568,059
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit 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 securities (losses) 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
$
$
$
$
$
$
106
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of
1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be
disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in applicable rules and forms of the Securities and Exchange Commission.
In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation
of our internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. No such
changes were identified in connection with this evaluation.
107
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
First Commonwealth is responsible for the preparation, the integrity, and the fair presentation of the Consolidated Financial
Statements included in this annual report. The Consolidated Financial Statements and notes to the financial statements have
been prepared in conformity with generally accepted accounting principles and include some amounts based upon
management’s best estimates and judgments.
First Commonwealth’s management is responsible for establishing and maintaining effective internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f), that is designed to produce reliable financial statements in
conformity with generally accepted accounting principles. Under the supervision and with the participation of management,
including First Commonwealth’s principal executive officer and principal financial officer, First Commonwealth conducted an
evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
All internal control systems, no matter how well designed, have inherent limitations, including the possibility that a control can
be circumvented and that misstatements due to error or fraud may occur without detection. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Based on First Commonwealth’s evaluation based on criteria established in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that
internal control over financial reporting was effective as of December 31, 2015. The effectiveness of First Commonwealth’s
internal control over financial reporting as of December 31, 2015 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
February 29, 2016
/S/ T. Michael Price
T. Michael Price
President and Chief Executive Officer
/S/ James R. Reske
James R. Reske
Executive Vice President, Chief Financial Officer and Treasurer
108
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
First Commonwealth Financial Corporation:
We have audited First Commonwealth Financial Corporation’s (the Company) internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) 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 Over
Financial Reporting. 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, 2015, based on criteria established in Internal Control - Integrated Framework (2013)
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, 2015 and 2014, 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, 2015, and our report
dated February 29, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
February 29, 2016
109
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated February 29, 2016 expressed an unqualified opinion on the
effectiveness of First Commonwealth Financial Corporation’s internal control over financial reporting.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
February 29, 2016
110
ITEM 9B.
Other Information
None.
111
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance
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 26, 2016 (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.
As previously disclosed, the Board of Directors of First Commonwealth approved amendments to First Commonwealth’s
bylaws to extend by 30 days the period of advance notice that shareholders must provide for director nominations and other
business to be brought before the annual meeting. As amended, notice must be given not earlier than the 180th day and not
later than the 150th day prior to the first anniversary of the preceding year’s annual meeting of shareholders. These amendments
were approved on January 26, 2016 and will not affect the timing of notices or other nomination procedures disclosed in First
Commonwealth’s definitive proxy statement in connection with the 2015 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.
ITEM 11.
Executive Compensation
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.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 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, 2015:
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
320,705
N/A
320,705
Weighted average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
N/A
N/A
N/A
3,942,531
N/A
3,942,531
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
112
The number of securities to be issued upon exercise of outstanding option, warrants and rights represent the maximum number
of shares that may be issued pursuant to outstanding performance units.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
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.
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.
ITEM 14.
Principal Accountant Fees and Services
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.
113
PART IV
ITEM 15.
Exhibits, Financial Statements and Schedules
(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
Description
Indebtedness to Related Parties
Guarantees of Securities of Other Issuers
(3)
Exhibits
Page
N/A
N/A
Description
Amended and Restated Articles of Incorporation of
First Commonwealth Financial Corporation
Incorporated by Reference 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 February 1, 2016
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
2015 Annual Incentive Plan
2013-2015 Long-Term Incentive Plan
2014-2016 Long-Term Incentive Plan
2015-2017 Long-Term Incentive Plan
Annex I to Proxy Statement filed March 19,
2015 relating to the 2015 Annual Meeting of
Shareholders
Exhibit 10.1 to the quarterly report on
Form 10-Q filed May 8, 2015
Exhibit 10.2 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 9, 2014
Exhibit 10.2 to the quarterly report on Form
10-Q filed May 8, 2015
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
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
Change of Control Agreement dated December 30,
2011 entered into between FCFC and Matthew C.
Tomb
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
Exhibit 10.14 to the annual report on Form
10-K filed March 5, 2012
Schedule
Number
I
II
Exhibit
Number
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
114
Description
Performance Unit Agreement dated December 30, 2015
between First Commonwealth Financial Corporation
and T. Michael Price
Incorporated by Reference to
Filed herewith
Employment Agreement dated April 10, 2014 between
First Commonwealth Financial Corporation and James
R. Reske
Exhibit 10.1 to the current report on Form
8-K filed April 10, 2014
Change of Control Agreement dated April 10, 2014
between First Commonwealth Financial Corporation
and James R. Reske
Restricted Stock Agreement dated April 10, 2014
between First Commonwealth Financial Corporation
and James R. Reske
Change of Control Agreement dated March 1, 2013
entered into between FCFC and Norman J.
Montgomery
Exhibit 10.3 to the current report on Form
8-K filed April 10, 2014
Exhibit 10.2 to the current report on Form
8-K filed April 10, 2014
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
Amended and Restated Director Retainer Plan
Exhibit 10.24 to the annual report on Form
10-K filed March 3, 2014
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
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Exhibit
Number
10.13
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
115
Incorporated by Reference to
Filed herewith
Exhibit
Number
101.00
Description
The following materials from First Commonwealth
Financial Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2015, formatted in
XBRL (Extensible Business Reporting Language): (i)
the Consolidated Balance Sheets at December 31, 2015
and December 31, 2014, (ii) the Consolidated
Statements of Income for the years ended December
31, 2015, 2014 and 2013, (iii) the Consolidated
Statements of Comprehensive Income for the years
ended December 31, 2015, 2014 and 2013, (iv) the
Consolidated Statements of Changes in Shareholders’
Equity for the years ended December 31, 2015, 2014
and 2013, (v) the Consolidated Statements of Cash
Flows for the years ended December 31, 2015, 2014
and 2013, and (vi) the Notes to Consolidated Financial
Statements.
116
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.
SIGNATURES
FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant)
By:
/S/ T. Michael Price
T. Michael Price
President and Chief Executive Officer
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.
Signature
Capacity
Date
Dated: February 29, 2016
/S/ James G. Barone
Director
James G. Barone
/S/ Julie A. Caponi
Director
Julie A. Caponi
/S/ Ray T. Charley
Director
Ray T. Charley
/S/ Gary R. Claus
Director
Gary R. Claus
David S. Dahlmann
Director, Chairman
/S/ Johnston A. Glass
Director
Johnston A. Glass
/S/ Jon L. Gorney
Director
Director
Director
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
President and Chief Executive Officer
(Principal Executive Officer)
February 29, 2016
Executive Vice President, Chief
Financial Officer, and Treasurer
Director
Director
February 29, 2016
February 29, 2016
February 29, 2016
Jon L. Gorney
/S/ David W. Greenfield
David W. Greenfield
/S/ Luke A. Latimer
Luke A. Latimer
/S/ T. Michael Price
T. Michael Price
/S/ James R. Reske
James R. Reske
/S/ Laurie S. Singer
Laurie S. Singer
/S/ Robert J. Ventura
Robert J. Ventura
117
Exhibit 21.1 Subsidiaries of First Commonwealth Financial Corporation
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%
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
The Board of Directors of First Commonwealth Financial Corporation:
We consent to the incorporation by reference of our reports dated February 29, 2016, with respect to the consolidated statements
of financial condition of First Commonwealth Financial Corporation and subsidiaries as of December 31, 2015 and 2014, 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, 2015, and the effectiveness of internal control over financial reporting as
of December 31, 2015, which reports appear in the December 31, 2015 annual report on Form 10-K of First Commonwealth
Financial Corporation in the following documents:
• Registration statement No. 333-206191 on Form S-3 of First Commonwealth Financial Corporation’s Shelf
Registration of Common Stock;
• 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. 333-111735 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
February 29, 2016
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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.
February 29, 2016
Date
/S/ T. Michael Price
Signature
President and Chief Executive Officer
Title
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James R. Reske, 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.
February 29, 2016
Date
/S/ James R. Reske
Signature
Executive Vice President, Chief Financial Officer and Treasurer
Title
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
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,
2015, 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: February 29, 2016
/S/ T. Michael Price
T. Michael Price
President and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, James R. Reske, Executive Vice President, Chief Financial Officer and Treasurer 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, 2015, 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: February 29, 2016
/S/ James R. Reske
James R. Reske
Executive Vice President, Chief Financial Officer and Treasurer
Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders will be held at:
First Commonwealth Place
654 Philadelphia Street, Indiana, PA
on Tuesday, April 26, 2016 beginning at 2:00 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, 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