Annual Report 2017
(cid:3)
Dear Fellow Shareholders:
Last year was another productive and accomplished year for our company. In 2017, we benefited from a
strengthening U.S. economy and an improving interest rate environment, and we began to realize the return from
our investments in new lines of business and our recent expansion into Ohio.(cid:3)(cid:3)These favorable conditions, both
macro and micro, combined with the valuable contributions of our employees, produced another year of improved
financial performance and record earnings.(cid:3)
A Foundation for Growth
Our accomplishments over the past year provide ample cause for optimism.(cid:3) Perhaps the most significant
undertaking was the full integration of Delaware County Bank, through which we added $383 million in loans, $484
million in deposits, and 13 branches in and around the Columbus, Ohio region.(cid:3)(cid:3)
On January 10, 2018, we announced the signing of a definitive agreement to acquire Garfield Acquisition
Corporation, the parent company of Cincinnati, Ohio(cid:882)based Foundation Bank.(cid:3)(cid:3)Upon completion, this acquisition
will add $187 million in loans, $145 million in deposits, and five full(cid:882)service banking offices.(cid:3)(cid:3)We view this
expansion into the Cincinnati market as a logical extension of our Columbus and Cleveland, Ohio expansion
strategy. (cid:3)(cid:3)(cid:3)
Following the Foundation Bank acquisition, we will have approximately $1.4 billion in deposits and a similar
amount of loans in Ohio, concentrated in the three largest metropolitan markets in the state.(cid:3)(cid:3)(cid:3)(cid:3)
Our Ohio merger and acquisition activity has been supplemented by investments in separate commercial loan
production offices in downtown Cleveland and downtown Columbus, as well as two mortgage loan production
offices in Hudson and Dublin, Ohio.(cid:3)(cid:3)(cid:3)
The story unfolding in Ohio is positive, with resultant organic growth to complement the acquisitions.(cid:3) We believe
that these three Ohio metro markets complement our core Pittsburgh and Pennsylvania community market
franchise as demographic and cultural characteristics are both similar and Midwestern in texture.(cid:3)(cid:3)
I am very proud of the caliber of our team.(cid:3) We are attracting exceptional talent across all areas of the bank and
across all of our geographies.(cid:3) Our employees are bound together by a desire to help our customers realize their
financial goals, an unwavering commitment to the communities we serve, and a desire to win in all of our markets.(cid:3)(cid:3)(cid:3)
Record Results
Looking back on our financial performance during 2017, we grew spread and fee income, which contributed to
record revenue of $313.3 million.(cid:3) This revenue expansion more than offset the increase in noninterest expense
that came, in part, from our expansion into two new regions.(cid:3)
We also saw improvement in credit expenses in 2017, as years of prudent underwriting and portfolio
administration drove credit costs lower.(cid:3) In fact, our provision for loan loss of $5.1 million was $13.4 million less
than the previous year and represents the lowest level recorded by the bank since 1995, when the bank was much
smaller.
In 2017, we recognized $10.2 million in one(cid:882)time merger(cid:882)related expense and a $16.7 million write(cid:882)down of our
deferred tax asset (DTA) following the passing of the Tax Cuts and Jobs Act.(cid:3)(cid:3)The DTA is an asset that represents
(cid:3)
the ability to take tax deductions against future income, and with the enactment of a lower tax rate, our DTA—as
was the case for many banks—was worth significantly less than it had been before.
Adjusting for one(cid:882)time merger(cid:882)related expenses and the revaluation of our DTA, full year 2017 core net income of
$78.5 million enabled $0.82 of core earnings per share, which represents an increase of 19% year(cid:882)over(cid:882)year.(cid:3)
Similarly, our core return on average assets (ROA) of 1.09% beat our industry peer median and showed real
progression over the prior year.
In short, 2017 was a very good year for First Commonwealth.(cid:3)(cid:3)Our desire is to become one of the top(cid:882)performing
community banks in the country.
Focus on the Future
The financial services industry is changing very rapidly, driven by consumer preferences, new entrants and new
technologies.(cid:3) As our product offerings and delivery channels continue to evolve to keep up with these
environmental changes, so too do those of our competitors–particularly our non(cid:882)bank competition.(cid:3)
We remain committed to our investment in new technology; however, I remain convinced that the hallmarks of
the community bank way of doing business will continue to be relevant and successful.(cid:3) A strong Retail bank is vital
to the future of First Commonwealth.(cid:3) While our physical branch network will inevitably change over time, we
remain committed to our personal service to our customers and the communities we serve.(cid:3)(cid:3)
As we look forward to 2018, the recent tax legislation has substantially lowered our effective tax rate. Like all
companies, we are in the process of considering how best to deploy increased after(cid:882)tax income.(cid:3) Our first step was
to give some of the tax benefit back to our employees through a year(cid:882)end bonus, particularly on the heels of a
busy, productive year.
We will also rebuild our capital levels to replace the capital lost as a result of the DTA write(cid:882)down.(cid:3) Beyond that,
we continue to evaluate ways to balance rewarding you, the shareholder, with the need to reinvest in our
company to allow for future growth.(cid:3)
This past year was a memorable and productive year for our organization as we successfully executed several
critical initiatives.(cid:3) Perhaps more importantly, we demonstrated our ability to adapt and compete in a rapidly
changing banking environment.(cid:3)(cid:3)
We believe the future holds considerable promise for First Commonwealth.(cid:3) Financial strength, a strong team and
community bank brand, and attractive Tri(cid:882)state markets have positioned us to take advantage of new
opportunities.
On behalf of our Board of Directors, Executive Management Team, officers and employees, I would like to thank
you for your continued support as we lead First Commonwealth into its next chapter.
Sincerely,
T. Michael Price
President and Chief Executive Officer
First Commonwealth Financial Corporation
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, 2017
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
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
No
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
No
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
No
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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
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, 2017) was approximately $1,235,796,411.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of February 28, 2018, was 97,523,651.
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 24, 2018 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
20
20
20
20
21
22
24
25
46
47
111
111
115
116
116
116
117
117
118
120
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, 2017, we had total
assets of $7.3 billion, total loans of $5.4 billion, total deposits of $5.6 billion and shareholders’ equity of $888.1 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, 2017, the Bank operated 104 community banking offices
throughout western and central Pennsylvania, 29 community banking offices in central and northern Ohio, as well as corporate
banking centers in Pittsburgh, Pennsylvania, and central and northeast Ohio and mortgage offices in Columbus, Hudson and
Dublin, Ohio. The Bank also operates a network of 148 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, 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.
We have also focused on organic growth, improving the reach of our franchise and the breadth of our product offering. As part
of this strategy, we have opened fourteen de novo branches since 2005, all of which are in the greater Pittsburgh area. As a
result of our prior acquisitions and de novo strategy, FCB operates 59 branches and a corporate banking center in the Pittsburgh
metropolitan statistical area and currently ranks tenth in deposit market share.
In 2015, we expanded into central Ohio through the acquisition of First Community Bank with four branches in the Columbus
area. In 2016, we acquired 13 branches from FirstMerit Bank, National Association, in Canton-Massillon and Ashtabula, Ohio
and in 2017, we acquired DCB Financial Corp ("DCB") and its banking subsidiary The Delaware County Bank and Trust
Company with nine full-service banking offices in the Columbus, Ohio MSA. Additionally, since 2014, we have expanded our
presence in this Ohio market by opening a corporate loan production office in Columbus and Cleveland, Ohio, and three
mortgage loan offices in Hudson, Dublin, and Columbus, Ohio.
In January 2018, we announced the signing of a definitive merger agreement pursuant to which First Commonwealth will
acquire Garfield Acquisition Corp. and its banking subsidiary Foundation Bank with five full-service banking offices in the
Cincinnati, Ohio area. This transaction is subject to regulatory approval and is expected to close in the second quarter of 2018.
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.
4
Loan Portfolio
The Company’s loan portfolio includes several categories of loans that are discussed in detail below.
Commercial, Financial, Agricultural and Other
Commercial, financial, agricultural and other loans represent term loans used to acquire business assets or revolving lines of
credit used to finance working capital. These loans are generally secured by a first lien position on the borrower’s business
assets as a secondary source of repayment. The type and amount of the collateral varies depending on the amount and terms of
the loan, but generally may include accounts receivable, inventory, equipment or other assets. Loans also may be supported by
personal guarantees from the principals of the commercial loan borrowers.
Commercial loans are underwritten for credit-worthiness based on the borrowers’ financial information, cash flow, net worth,
prior loan performance, existing debt levels, type of business and the industry in which it operates. Advance rates on
commercial loans are generally collateral-dependent and are determined based on the type of equipment, the mix of inventory
and the quality of receivables.
Credit risk for commercial loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of
secured loans, from a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and
subsequent liquidation of collateral. The Company’s Credit Policy establishes loan concentration limits by borrower, geography
and industry.
Commercial Real Estate
Commercial real estate loans represent term loans secured by owner-occupied and non-owner occupied properties. Commercial
real estate loans are underwritten based on an evaluation of each borrower’s cash flow as the principal source of loan
repayment, and are generally secured by a first lien on the property as a secondary source of repayment. Our underwriting
process for non-owner occupied properties evaluates the history of occupancy, quality of tenants, lease terms, operating
expenses and cash flow. Commercial real estate loans are subject to the same credit evaluation as previously described for
commercial loans. Approximately 18%, by principal amount, of our commercial real estate loans involve owner-occupied
properties.
For loans secured by commercial real estate, at origination the Company obtains current and independent appraisals from
licensed or certified appraisers to assess the value of the underlying collateral. The Company’s general policy for commercial
real estate loans is to limit the terms of the loans to not more than 10 years with loan-to-value ratios not exceeding 80% on
owner-occupied and income producing properties. For non-owner occupied commercial real estate loans, the loan terms are
generally aligned with the property’s lease terms and are generally underwritten with a loan-to-value ratio not exceeding 75%.
Credit risk for commercial real estate loans can arise from economic conditions that could impact market demand, rental rates
and property vacancy rates and declines in the collateral value in relation to the outstanding loan balance in the event of a
default and subsequent liquidation of collateral.
Real Estate Construction
Real estate construction represents financing for real estate development. The underwriting process for these loans is designed
to confirm that the project will be economically feasible and financially viable and is generally conducted as though the
Company would be providing permanent financing for the project. Development and construction loans are secured by the
properties under development or construction, and personal guarantees are typically obtained as a secondary repayment source.
The Company considers the financial condition and reputation of the borrower and any guarantors and generally requires a
global cash flow analysis in order to assess the overall financial position of the developer.
Construction loans to residential builders are generally made for the construction of residential homes for which a binding sales
contract exists and for which the prospective buyers have been pre-qualified for permanent mortgage financing by either third-
party lenders or the Company. These loans are generally for a period of time sufficient to complete construction.
Residential construction loans to individuals generally provide for the payment of interest only during the construction phase.
At the end of the construction phase, substantially all of our loans automatically convert to permanent mortgage loans and can
either be retained in our loan portfolio or sold on the secondary market.
Credit risk for real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to
complete the project to specifications and economic conditions that could impact demand for or supply of the property being
constructed.
5
Residential Real Estate Loans
In 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.
Credit risk for residential real estate loans can arise from a borrower’s inability or unwillingness to repay the loan or a shortfall
in the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent
liquidation of the real estate collateral.
The residential real estate portfolio includes both conforming and non-conforming mortgage loans. Conforming mortgage loans
represent loans originated in accordance with underwriting standards set forth by the government-sponsored entities, including
the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National
Mortgage Association, which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage
lenders. These loans are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios
of 80% or less (or have mortgage insurance to insure down to 80%), and are made to borrowers in good credit standing. Non-
conforming mortgage loans represent loans that generally are not saleable in the secondary market to the government-sponsored
entities due to factors such as the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio,
or the size of the loan. The Company does not offer “subprime,” “interest-only” or “negative amortization” mortgages.
Home equity lines of credit and other home equity loans are originated by the Company for typically up to 90% of the
appraised value, less the amount of any existing prior liens on the property. Additionally, the Company’s credit policy requires
borrower FICO scores of not less than 661 and a debt-to-income ratio of not more than 43%.
Loans to Individuals
The Loans to Individuals category includes consumer installment loans, personal lines of credit, consumer credit cards and
indirect automobile 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 and consumer credit cards usually do
not exceed $35 thousand. Unsecured consumer loans usually have a term of no longer than 36 months.
Deposits
Deposits are our primary source of funds to support our revenue-generating assets. We offer traditional deposit products to
businesses and other customers with a variety of rates and terms. Deposits at our bank are insured by the FDIC up to statutory
limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business and
prudently managing our cost of funds. At December 31, 2017, we held $5.6 billion of total deposits, which consisted of $1.4
billion, or 25%, in non-interest bearing checking accounts, $3.5 billion, or 64%, in interest bearing checking accounts, money
market and savings accounts, and $0.6 billion, or 11%, in CDs and IRAs.
Our deposit base is diversified by client type. As of December 31, 2017, our top ten depositors represented only 0.5% of our
total deposits. The composition of our deposit mix continues to reflect an increased proportion of non-interest-bearing deposits
and other transaction accounts and a lower proportion of more expensive time deposits.
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.
6
Employees
At December 31, 2017, First Commonwealth and its subsidiaries employed 1,298 full-time employees and 178 part-time
employees.
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 below captioned "Prompt Corrective Action". A depository institution
subsidiary is considered well managed if it received a composite rating and management rating of at least satisfactory in its
most recent examination. A financial holding company’s status will also depend upon maintaining its status as well capitalized
and well managed under applicable FRB regulations. If a financial holding company ceases to meet these capital and
management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with
the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to
compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence
any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such
financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB
may require divestiture of the holding company’s depository institutions.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company
engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least satisfactory in its most recent examination under the CRA.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or
such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the
bank holding company.
7
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 and Securities has the authority to examine the books, records and affairs of any
Pennsylvania bank holding company or to require any documentation deemed necessary to ensure compliance with the
Pennsylvania Banking Code.
Source of Strength Doctrine. FRB policy has historically required bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”) codifies this policy as a statutory requirement. Under this requirement, First Commonwealth is expected to commit
resources to support FCB, including at times when First Commonwealth may not be in a financial position to provide such
resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to priority of payment.
Affiliate Transactions. Transactions between FCB, on the one hand, and First Commonwealth and its other subsidiaries, on the
other hand, are regulated under federal banking laws. The Federal Reserve Act imposes quantitative and qualitative
requirements and collateral requirements on covered transactions by FCB with, or for the benefit of, its affiliates, and generally
requires those transactions to be on terms at least as favorable to FCB as if the transaction were conducted with an unaffiliated
third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of
securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain
derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as
collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, any such
transaction by FCB (or its subsidiaries) must be limited to certain thresholds on an individual and aggregate basis and, for credit
transactions with any affiliate, must be secured by designated amounts of specified collateral.
SEC Regulations. First Commonwealth is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and
various state securities commissions for matters relating to the offer and sale of its securities and is subject to the SEC rules and
regulations relating to periodic reporting, proxy solicitation and insider trading.
Bank Regulation
FCB is a state bank chartered under the Pennsylvania Banking Code and is not a member of the FRB. As such, FCB is subject
to the supervision of, and is regularly examined by, both the Federal Deposit Insurance Corporation (“FDIC”) and the
Pennsylvania Department of Banking and Securities and is required to furnish quarterly reports to both agencies. The approval
of the Pennsylvania Department of Banking and Securities and FDIC is also required for FCB to establish additional branch
offices or merge with or acquire another banking institution.
Dividends 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.
A significant portion of our income comes from dividends from our bank, which is also the primary source of our liquidity. In
addition to the restrictions discussed above, our bank is subject to limitations under Pennsylvania law regarding the level of
dividends that it may pay to us. In general, dividends may be declared and paid only out of accumulated net earnings and may
not be declared or paid unless surplus is at least equal to capital. Dividends may not reduce surplus without the prior consent of
the Pennsylvania Department of Banking and Securities. FCB has not reduced its surplus through the payment of dividends. As
of December 31, 2017, FCB could pay dividends to First Commonwealth of $110.3 million without reducing its capital levels
below "well capitalized" levels and without the approval of the Pennsylvania Department of Banking and Securities.
As required by the Dodd-Frank Act, the FRB and the FDIC have issued rules which 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.
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.
8
To prepare for the application of these rules, we currently conduct annual stress tests utilizing the stress scenarios published by
the federal banking regulations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA") a bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best
suited to its particular community, consistent with the CRA. The CRA requires the applicable regulatory agency to assess an
institution’s record of meeting the credit needs of its community. The CRA requires public disclosure of an institution’s CRA
rating and requires that the applicable regulatory agency provide a written evaluation of an institution’s CRA performance
utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. For its most recent examination, FCB received a “satisfactory” rating.
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
9
minus average total equity. The insurance assessments are based upon a matrix that takes into account a bank’s capital level and
supervisory rating. The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. As an institution with less than $10 billion in assets, FCB’s assessment rates are
based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). For institutions with $10
billion or more in assets, assessment rates are calculated using a scorecard that combines the supervisory risk ratings of the
institution with certain forward-looking financial measures. These assessment rates are subject to adjustments based upon the
insured depository institution’s ratio of long-term unsecured debt to the assessment base, long-term unsecured debt issued by
other insured depository institutions to the assessment base, and brokered deposits to the assessment base. However, the
adjustments based on brokered deposits to the assessment base will not apply so long as the institution is well capitalized and
has a composite CAMELS rating of 1 or 2. The CAMELS rating system is a bank rating system where bank supervisory
authorities rate institutions according to six factors: capital adequacy, asset quality, management quality, earnings, liquidity, and
sensitivity to market risk. The FDIC may make additional discretionary assessment rate adjustments.
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. In August 2016, the FDIC announced that the DIF reserve ratio had
surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment ranges
for all institutions were adjusted downward such that the initial base deposit insurance assessment rate ranges from 3 to 30 basis
points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range
from 1.5 to 40 basis points on an annualized basis. In March 2016, the FDIC adopted a final rule increasing the reserve ratio for
the Deposit Insurance Fund to 1.35% of total insured deposits. The rule imposes a surcharge on the assessments of depository
institutions with $10 billion or more in assets beginning the third quarter of 2016 and continuing through the earlier of the
quarter that the reserve ratio first reaches or exceeds 1.35% and December 31, 2018. This surcharge does not currently impact
FCB.
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
10
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” over 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 will
face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized
through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1
to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
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 began on January 1, 2016 at the 0.625% level and will continue to 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.
Management believes that, as of December 31, 2017, 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 such 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. While not required, FCB nevertheless utilizes a modified version of the LCR as a helpful tool for
monitoring its liquidity position. In the second quarter of 2016, the federal banking regulators issued a proposed rule that
would implement the NSFR for certain U.S. banking organizations. The proposed rule would require certain U.S. banking
organizations to ensure they have access to stable funding over a one-year time horizon and has an effective date of January 1,
2018. The proposed rule would not apply to U.S. banking organizations with less than $50 billion in total consolidated assets
such as First Commonwealth or FCB.
11
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take
“prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA
includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels
compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital
measures are the total capital ratio, the CET1 capital ratio (a new ratio requirement under the Basel III Capital Rules), the Tier 1
capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital
ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any
capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1
capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is
not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1
capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv)
“significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less
than 3%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically
undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An
institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain
matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the
capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other
purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend)
or paying any management fee to its parent holding company if the depository institution would thereafter be
“undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital
restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration
plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with
such capital restoration plan and must also provide appropriate assurances of performance. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it
became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
In addition, the FDIA prohibits an insured depository institution from accepting brokered deposits or offering interest rates on
any deposits significantly higher than the prevailing rate in the bank's normal market area or nationally (depending upon where
the deposits are solicited), unless it is well capitalized or is adequately capitalized and receives a waiver from the FDIC. A
depository institution that is adequately capitalized and accepts brokered deposits under a waiver from the FDIC may not pay
an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates.
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a
receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal
banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or
deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized
institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
First Commonwealth believes that, as of December 31, 2017, FCB was a “well-capitalized” bank as defined by the FDIA. 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.
12
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.
Depositor Preference
Under federal law, depositors (including the FDIC with respect to the subrogated claims of insured depositors) and certain
claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims
against such an institution in the liquidation or other resolution of such an institution by any receiver.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the FRB adopted rules establishing standards for assessing whether the
interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to
the costs incurred by issuers for processing such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay
to us and other card-issuing banks for processing electronic payment transactions. Under the final rules, the maximum
permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit
interchange transactions. The FRB also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud
prevention purposes if the issuer complies with certain fraud-related requirements required by the FRB. The FRB also has rules
governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or
prepaid product.
The Dodd-Frank Act contained an exemption from the interchange fee cap for any debit card issuer that, together with its
affiliates, has total assets of less than $10 billion as of the end of the previous calendar year. We currently qualify for this
exemption. We earned approximately $18.8 million in card related interchange income during the 2017 fiscal year. If we did
not qualify for this exemption, we estimate that our interchange income would have been approximately $11.2 million,
representing a $7.6 million reduction due to the cap on interchange fees. We would become subject to the interchange fee cap
beginning July 1 of the year following the time when 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.
13
Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers
and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to
outside vendors.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering
and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United
States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Financial institutions are
also prohibited from entering into specified financial transactions and account relationships and must use enhanced due
diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification
program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money
laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions
for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious
legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve
merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not
required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be
violating these obligations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade
sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign
countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Commonwealth is
responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting
unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to
comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk
management processes also address the risk posed by compromised customer credentials, including security measures to
reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a
financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid
recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A
financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and
address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type
of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including
financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations
and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology
to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and
provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding
the strength of our defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in
volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant
compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our
customers and third-party service providers are under constant threat and it is possible that we could experience a significant
event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future
due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking,
mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a
further discussion of risks related to cybersecurity.
14
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in
those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the
manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the
application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure
under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes,
require us to increase our regulatory capital and modify our business strategy, and limit our ability to pursue business
opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely
affected, perhaps materially, as a result.
Availability of Financial Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any
document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. Our SEC filings are also available to the public on the SEC website at www.sec.gov and on our website at
www.fcbanking.com.
We also make available on our website, www.fcbanking.com, and in print to any shareholder who requests them, our Corporate
Governance Guidelines, the charters for our Audit, Risk, Compensation and Human Resources, and Governance Committees,
and the Code of Conduct and Ethics that applies to all of our directors, officers and employees.
Our Chief Executive Officer has certified to the New York Stock Exchange (“NYSE”) that, as of the date of the certification, he
was not aware of any violation by First Commonwealth of NYSE’s corporate governance listing standards. In addition, our
Chief Executive Officer and Chief Financial Officer have made certain certifications concerning the information contained in
this report pursuant to Section 302 of the Sarbanes-Oxley Act. The Section 302 certifications appear as Exhibits 31.1 and 31.2
to this annual report on Form 10-K.
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
15
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, 2017, approximately 68% 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 37% 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.
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.
16
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, 2017, 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.
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.
FCB faces substantial competition in originating loans and attracting deposits. This competition comes principally from other
banks, savings institutions, mortgage banking companies and credit unions, as well as institutions offering uninsured
investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial
resources and higher lending limits, better brand recognition, a wider geographic presence, more accessible branch office
locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and
operating costs. These competitors may offer more favorable pricing through lower interest rates on loans or higher interest
rates on deposits, which could force us to match competitive rates and thereby reduce our net interest income.
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.
17
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 our ability to address the needs of our
customers by using technology to provide products and services that will satisfy customer demands, as well as to create
additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven products and services or be successful in
marketing these products and services to 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 the day-to-day operations of First
Commonwealth and FCB. In particular, we contracted with an external vendor for our core processing system used to maintain
customer and account records, reflect account transactions and activity, and support our customer relationship management
systems for substantially all of our deposit and loan customers. Accordingly, our operations are exposed to risk that these
vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an
external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes
in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for
any other reason, could be disruptive to First Commonwealth’s operations and financial reporting, which could have a material
adverse effect on First Commonwealth’s business and, in turn, First Commonwealth’s financial condition and results of
operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of FCB's loan portfolio is secured by real property. During the ordinary course of business, FCB 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 FCB’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 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
18
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.
• 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 economy in Pennsylvania and Ohio;
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
19
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.
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 in Indiana, Pennsylvania, each of which is
in close proximity to our principal office.
First Commonwealth Bank has 133 banking offices, of which 53 are leased and 80 are owned. We also lease three mortgage
loan production offices and three corporate loan production offices. During 2016, we acquired 13 banking offices from
FirstMerit Bank, National Association, in Canton-Massillon and Ashtabula, Ohio, of which eight are owned and five are leased.
During 2017, we acquired 13 banking offices with the DCB Financial acquisition in Delaware County, Ohio, of which eight are
leased and five are owned, as well as a leased administrative office center in Columbus, Ohio. Additionally, in 2017, we
purchased a previously leased property which included a branch and office space in Wexford, PA.
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, 2017 is set forth below:
Jane Grebenc, age 59, 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.
Brian Karrip, age 57, has served as Executive Vice President and Chief Credit Officer of First Commonwealth Bank since
September 2016. Prior to joining First Commonwealth, Mr. Karrip served as Executive Vice President, Specialized Lending for
FirstMerit Bank. Prior to joining FirstMerit Bank, Mr. Karrip served as Managing Director and Group Head of Loan
Syndications and Sales at KeyBanc Capital Markets. Mr. Karrip’s financial services career also includes 16 years with National
City Bank where he held a variety of roles in the commercial lending division and served as Regional President of Michigan
and Illinois.
Leonard V. Lombardi, age 58, 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 50, 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 55, has served as President and Chief Executive Officer of First Commonwealth Financial Corporation
and Chief Executive Officer of First Commonwealth Bank since March 2012. Mr. Price served as President of First
Commonwealth Bank from November 2007 to May 2013. 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 54, 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 48, 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 41, 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, 2017, there were approximately
6,297 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
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
Cash Dividends
Per Share
$
14.59
$
12.81
$
13.46
14.13
15.32
12.28
12.14
13.78
0.08
0.08
0.08
0.08
High Sale
Low Sale
Cash Dividends
Per Share
$
$
9.28
9.47
10.33
14.25
$
7.89
8.35
8.87
9.71
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 SNL U.S. Bank Index and the Russell 2000 Index. The stock
performance graph assumes $100 was invested on December 31, 2012, and the cumulative return is measured as of each
subsequent fiscal year end.
Index
First Commonwealth Financial Corporation
12/31/2012
100.00
12/31/2013
133.33
12/31/2014
143.98
12/31/2015
146.05
12/31/2016
235.39
12/31/2017
243.40
Russell 2000
SNL U.S. Bank Index
100.00
100.00
138.82
137.30
145.62
153.48
139.19
156.10
168.85
197.23
193.58
232.91
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 gains (losses)
Other income
Other expenses
Income before income taxes
Income tax provision
Net Income
Per Share Data—Basic
Net Income
Dividends declared
Average shares outstanding
Per Share Data—Diluted
Net Income
Periods Ended December 31,
2017
2016
2015
2014
2013
(dollars in thousands, except share data)
$
250,550
$
217,614
$
204,071
$
202,181
$
206,358
21,770
228,780
5,087
223,693
5,040
75,291
200,298
103,726
48,561
55,165
0.58
0.32
18,579
199,035
18,480
180,555
617
63,982
159,925
85,229
25,639
59,590
0.67
0.28
15,595
188,476
14,948
173,528
(153)
61,478
163,874
70,979
20,836
50,143
0.56
0.28
$
$
$
18,501
183,680
11,196
172,484
550
60,309
171,210
62,133
17,680
44,453
0.48
0.28
$
$
$
$
$
$
21,707
184,651
19,227
165,424
(1,158)
61,321
168,824
56,763
15,281
41,482
0.43
0.23
$
$
$
95,220,056
88,851,573
89,356,767
93,114,654
97,028,157
0.58
$
0.67
$
0.56
$
0.48
$
0.43
$
$
$
$
Average shares outstanding
95,331,037
88,851,573
89,356,767
93,114,654
97,029,832
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
$ 7,308,539
$ 6,684,018
$ 6,566,890
$ 6,360,285
$ 6,214,861
1,183,291
1,187,623
1,333,836
1,354,364
1,353,809
5,407,376
4,879,347
4,683,750
4,457,308
4,283,833
48,298
50,185
5,580,705
4,947,408
707,466
72,167
8,161
888,127
867,943
72,167
8,749
749,929
50,812
4,195,894
1,510,825
72,167
9,314
719,546
52,051
4,315,511
1,105,876
72,167
89,459
716,145
54,225
4,603,863
626,615
72,167
144,385
711,697
0.77%
0.89%
6.45
96.03
55.17
11.86
8.02
97.61
41.79
11.15
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
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”), FRAMAL and First
Commonwealth Financial Advisors, Inc. (“FCFA”), as of and for the years ended December 31, 2017, 2016 and 2015. 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, 2017, FCB operated 133 community banking offices throughout western Pennsylvania and central and northern
Ohio, as well as loan production offices in Pittsburgh, Pennsylvania, and Cleveland, Columbus, Dublin and Hudson, Ohio.
Our consumer services include Internet, mobile and telephone banking, an automated teller machine network, personal
checking accounts, interest-earning checking accounts, savings accounts, health savings accounts, insured money market
accounts, debit cards, investment certificates, fixed and variable rate certificates of deposit, mortgage loans, secured and
unsecured installment loans, construction and real estate loans, safe deposit facilities, credit cards, credit lines with overdraft
checking protection and IRA accounts. Commercial banking services include commercial lending, small and high-volume
business checking accounts, on-line account management services, ACH origination, payroll direct deposit, commercial cash
management services and repurchase agreements. We also provide a variety of trust and asset management services and a full
complement of auto, home and business insurance as well as term life insurance. We offer annuities, mutual funds and stock
and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. Most of our commercial
customers are small and mid-sized businesses in 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 have been incurred 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, that have similar risk characteristics, 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 incorporate 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 10 “Impairment of Investment
Securities” and Note 19 “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—2017 Compared to 2016
Net Income
Net income for 2017 was $55.2 million, or $0.58 per diluted share, as compared to net income of $59.6 million, or $0.67 per
diluted share, in 2016. The decline in net income can be attributed to a $16.7 million non-cash charge for the revaluation of
deferred tax assets recorded in connection with the passage of the Tax Cuts and Jobs Act and an increase of $7.0 million in
merger and acquisition related expense as a result of the acquisition of DCB Financial in April 2017.
Also impacting net income for 2017 was an increase in net interest income of $29.7 million, growth in noninterest income of
$15.7 million and a decrease in provision for credit losses of $13.4 million. These changes were partially offset by an increase
in noninterest expense, including merger and acquisition expense, of $40.4 million.
Our return on average equity was 6.5% and our return on average assets was 0.77% for 2017, compared to 8.0% and 0.89%,
respectively, for 2016. The previously mentioned charge related to the revaluation of deferred tax assets impacted 2017 return
on average equity and return on average assets by 195 and 23 basis points, respectively.
Average diluted shares for the year 2017 were 7% more than the comparable period in 2016 primarily due to the issuance of 8.4
million shares of common stock as a result of the acquisition of DCB Financial.
Net Interest Income
Net interest income, which is our primary source of revenue, is the difference between interest income from earning assets
(loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and long-term debt). The amount
of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-
earning assets and interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a
fully taxable equivalent basis, to average interest-earning assets. To compare the tax exempt asset yields to taxable yields,
amounts are adjusted to the pretax equivalent amounts based on the marginal corporate federal income tax rate of 35%. The
taxable equivalent adjustment to net interest income for 2017 was $4.2 million compared to $3.8 million in 2016. Net interest
income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income) at
74% and 75% for the years ended December 31, 2017 and 2016, respectively.
27
Net interest income, on a fully taxable equivalent basis, was $233.0 million for the year-ended December 31, 2017, a $30.1
million, or 15%, increase compared to $202.9 million for the same period in 2016. The net interest margin, on a fully taxable
equivalent basis, increased 25 basis points to 3.57% in 2017 from 3.32% in 2016. 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.
Growth in both the level of interest-earning assets and the rates earned on those assets contributed to the increase in the net
interest margin for the year ended December 31, 2017. Average earning assets for the year ended December 31, 2017 increased
$422.1 million, or 7%, compared to the year ended December 31, 2016. Interest-sensitive assets totaling $3.5 billion will either
reprice or mature over the next twelve months.
The taxable equivalent yield on interest-earning assets was 3.90% for the year ended December 31, 2017, an increase of 27
basis points from the 3.63% yield for the same period in 2016. This increase is largely due to the loan portfolio yield which
improved by 29 basis points when compared to the prior year. Contributing to this increase was the yield on our adjustable and
variable rate commercial loan portfolios, which increased 36 basis points largely due to the Federal Reserve increasing short
term interest rates three times in 2017. In addition, the yield on the investment portfolio increased 7 basis points in comparison
to the prior year. This increase can be attributed to the runoff or sale of lower yielding securities being replaced with higher
yielding investment securities. Investment portfolio purchases during the year ended December 31, 2017 have been primarily in
mortgage-related assets with approximate durations of 48-60 months, as well as municipal and corporate securities with
durations of approximately ten years. The mortgage-related investments have monthly principal payments that will provide for
reinvestment opportunities should interest rates rise.
Increases in the cost of interest-bearing liabilities partially offset the positive impact of higher yields on interest-earning assets.
The cost of interest-bearing liabilities was 0.44% for the year-ended December 31, 2017, compared to 0.39% for the same
period in 2016. This increase is primarily due to an 8 basis point increase in the cost of interest-bearing demand deposits, a 43
basis point increase in the cost of short-term borrowings and a 45 basis point increase in the cost of long-term debt. While
deposits acquired in our recent acquisitions contributed to a decline in average short-term borrowings of $520.3 million for the
year-ended December 31, 2017 compared to the same period in 2016, higher market interest rates resulted in an increase of 43
basis points in the cost of short-term borrowings in comparison to the same period in the prior year.
Comparing the year ended December 31, 2017 with the same period in 2016, changes in rates positively impacted net interest
income by $11.3 million. The higher yield on interest-earning assets favorably impacted net interest income by $16.4 million,
while a change in the mix of interest-bearing liabilities had a positive impact of $1.9 million on net interest income.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by
$18.8 million in the year ended December 31, 2017 compared to the same period in 2016. Higher levels of interest-earning
assets resulted in an increase of $17.0 million in interest income, while reductions in time deposits and short-term borrowings
contributed to a decrease in interest expense of $1.9 million.
Positively affecting net interest income was a $173.3 million increase in average net free funds at December 31, 2017 as
compared to December 31, 2016. 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 $209.9 million increase in average noninterest-bearing demand deposits. The increase in these deposits is
largely impacted by deposits acquired from 13 FirstMerit branches in December 2016 as well as deposits from the acquisition
of DCB Financial in April 2017. Average time deposits for the year ended December 31, 2017 decreased $6.3 million, or 1%,
compared to the comparable period in 2016, while the average rate paid on time deposits increased 2 basis points. Over the next
twelve months $376.2 million in certificates of deposits either mature or reprice.
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,
2017
2016
2015
(dollars in thousands)
Interest income per Consolidated Statements of Income
$
250,550
$
217,614
$
204,071
Adjustment to fully taxable equivalent basis
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
Interest expense
4,225
254,775
21,770
3,846
221,460
18,579
3,465
207,536
15,595
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
233,005
$
202,881
$
191,941
28
The following table provides information regarding the average balances and yields or rates on interest-earning assets and
interest-bearing liabilities for the periods ended December 31:
Average Balance Sheets and Net Interest Analysis
2017
2016
2015
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
$
11,621
$
121
1.04% $
5,799
$
27
0.46% $
8,640
$
14
0.16%
67,407
1,173,711
5,278,511
6,531,250
90,614
(51,187)
639,785
679,212
$ 7,210,462
2,495
30,277
221,882
254,775
3.70
2.58
4.20
3.90
62,632
1,221,961
4,818,759
6,109,151
70,408
(57,253)
538,310
551,465
$ 6,660,616
2,305
30,745
188,383
221,460
3.68
2.52
3.91
3.63
40,459
1,248,689
4,553,634
5,851,422
66,937
(49,776)
530,068
547,229
$ 6,398,651
1,534
30,241
175,747
207,536
3.79
2.42
3.86
3.55
$ 1,059,840
$
2,369,605
578,158
867,391
86,391
1,466
4,207
3,742
8,799
3,556
0.14% $
748,869
$
480
0.06% $
654,926
$
231
0.04%
0.18
0.65
1.01
4.12
1,910,333
584,429
1,387,737
81,197
3,370
3,673
8,076
2,980
0.18
0.63
0.58
3.67
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
4,961,385
21,770
0.44
4,712,565
18,579
0.39
4,571,005
15,595
0.34
1,356,125
37,818
855,134
2,249,077
1,146,189
58,918
742,944
1,948,051
1,052,886
56,036
718,724
1,827,646
$ 7,210,462
$ 6,660,616
$ 6,398,651
$
233,005
3.57%
$
202,881
3.32%
$
191,941
3.28%
Assets
Interest-earning assets:
Interest-bearing deposits with
banks
Tax-free investment securities
Taxable investment securities
Loans, net of unearned
income (b)(c)(e)
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
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
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.
Includes held for sale loans.
(e)
29
The following table sets forth certain information regarding changes in net interest income attributable to changes in the volume
of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated:
Analysis of Year-to-Year Changes in Net Interest Income
2017 Change from 2016
2016 Change from 2015
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)
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
$
94
$
27
$
$
13
$
(5) $
190
(468)
33,499
33,315
986
837
69
723
576
3,191
176
(1,216)
17,976
16,963
187
827
(40)
(3,018)
191
(1,853)
18,816
67
14
748
15,523
16,352
799
10
109
3,741
385
5,044
771
504
12,636
13,924
249
828
(1,028)
3,058
(123)
2,984
840
(647)
10,234
10,422
38
77
(713)
541
(990)
(1,047)
11,469
$
18
(69)
1,151
2,402
3,502
211
751
(315)
2,517
867
4,031
(529)
Net interest income
$
30,124
$
$
11,308
$
10,940
$
(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 incurred 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
2017
2016
Dollars
Percentage
Dollars
Percentage
$
$
(9,812)
302
1,164
10,800
2,633
5,087
(dollars in thousands)
(193)% $
6
23
212
52
100 % $
20,378
(872)
613
(6,257)
4,618
18,480
110%
(5)
4
(34)
25
100%
The provision for credit losses for the year 2017 totaled $5.1 million, a decrease of $13.4 million, or 72.5%, compared to the
year 2016. The level of provision expense for the year-ended December 31, 2017 is primarily a result of net charge-offs in
loans to individuals and commercial, financial, agricultural and other loans, as well as an increase in specific reserves related to
nonperforming loans of $0.6 million. Net charge-offs related to loans to individuals were $3.7 million for the year ended
December 31, 2017, including $2.4 million related to indirect auto loans and $0.8 million related to personal lines of credit.
Net charge-offs on commercial, financial, agricultural and other loans were $2.7 million for the same period. The level of
provision expense in the commercial, financial, agricultural and other category as well as in the commercial real estate category
was also impacted by the Company's periodic assessment of the allowance for loan methodology, the current lending
30
environment, and associated risks for each portfolio, which resulted in changes to certain qualitative factors, such as collateral
recovery rates and vacancy rates.
The majority of the 2016 provision expense is attributable to commercial, financial, agricultural and other loans as a result of
specific reserves established for two loan relationships, as well as increases in historical loss factors and increases in qualitative
factors related to certain recovery rates. The negative provision for commercial real estate loans is a result of declines in
historical loss factors related to this category. The provision for loans to individuals is related to charge-offs in the indirect
automobile portfolio as well as changes in qualitative factors that relate to the automobile industry.
The allowance for credit losses was $48.3 million, or 0.89%, of total loans outstanding and 0.96% of total originated loans at
December 31, 2017, compared to $50.2 million, or 1.03%, and 1.05%, respectively, at December 31, 2016. Nonperforming
loans as a percentage of total loans decreased to 0.78% at December 31, 2017 from 0.86% at December 31, 2016. The
allowance to nonperforming loan ratio was 114.3% as of December 31, 2017 and 120.0% at December 31, 2016. Net charge-
offs were $7.0 million for the year-ended December 31, 2017 compared to $19.1 million for the same period in 2016.
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, 2017.
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:
2017
2016
2015
2014
2013
(dollars in thousands)
$
$
$
5,407,376
5,278,511
50,185
$
$
$
4,879,347
4,818,759
50,812
$
$
$
4,683,750
4,553,634
52,051
$
$
$
4,457,308
4,356,566
54,225
$
$
$
4,283,833
4,255,593
67,187
6,634
—
1,287
340
4,248
12,509
3,901
470
371
278
515
5,535
6,974
5,087
$
48,298
$
19,603
—
1,189
570
4,943
26,305
4,164
562
481
1,522
469
7,198
19,107
18,480
50,185
$
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
Net charge-offs as a percentage of average
loans outstanding
Allowance for credit losses as a percentage of
end-of-period loans outstanding
0.13%
0.89%
0.40%
1.03%
0.36%
1.08%
0.31%
1.17%
0.76%
1.27%
31
Noninterest Income
The components of noninterest income for each year in the three-year period ended December 31 are as follows:
2017
2016
2015
$ Change
% Change
2017 compared to 2016
(dollars in thousands)
Noninterest Income:
Trust income
$
7,098
$
5,366
$
5,834
$
Service charges on deposit accounts
18,579
15,869
15,319
Insurance and retail brokerage
commissions
Income from bank owned life
insurance
Card related interchange income
Swap fee income
Other income
Subtotal
Net securities gains (losses)
Gain on sale of mortgage loans
Gain on sale of loans and other assets
Derivative mark to market
8,807
7,964
8,522
5,699
18,780
2,005
7,677
68,645
5,040
5,366
1,753
(473)
5,381
14,955
2,359
6,372
58,266
617
4,086
1,411
219
5,412
14,501
847
7,041
57,476
(153)
2,421
1,855
(274)
61,325
$
1,732
2,710
843
318
3,825
(354)
1,305
10,379
4,423
1,280
342
(692)
15,732
32%
17
11
6
26
(15)
20
18
717
31
24
(316)
24%
Total noninterest income
$
80,331
$
64,599
$
Noninterest income, excluding net securities gains (losses), gain on sale of loans and other assets and the derivatives mark to
market, increased $10.4 million, or 18%, in 2017. Service charges on deposit accounts increased $2.7 million, of which $2.0
million can be attributed to deposit accounts acquired in the December 2016 acquisition of 13 FirstMerit branches and the
acquisition of DCB in April 2017. Card-related interchange income increased $3.8 million, of which $2.9 million is attributable
to the acquisitions. Insurance and retail brokerage commissions increased $0.8 million due to higher annuity and mutual fund
sales. Trust income increased $1.7 million, of which $1.0 million can be attributed to accounts obtained in the DCB acquisition.
Offsetting these increases was a decrease in swap fee income of $0.4 million, due to a decline in interest rate swaps entered into
by our commercial loan customers.
Total noninterest income increased $15.7 million, or 24%, in comparison to the year ended December 31, 2016. The most
notable change is a $4.4 million increase in net securities gains (losses) due to the early redemption of two of our pooled trust
preferred securities. The majority of this increase is the result of a successful auction call completed on PreTSL XIII, a pooled
trust preferred security on which other-than-temporary impairment charges were recognized in 2009 and 2010. As a result, the
security was called at par resulting in a gain of $4.3 million. Additionally, the liquidation of PreTSL VII provided for a gain of
$0.7 million. The gain on sale of mortgage loans increased $1.3 million due to continued growth in mortgage loan originations
since the Company reentered the secondary mortgage market. The derivatives mark to market decreased $0.7 million. This
reflects a change in fair value due to movements in corporate bond spreads and not a realized loss on the swaps.
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 $7.6
million.
32
Noninterest Expense
The components of noninterest expense for each year in the three-year period ended December 31 are as follows:
Noninterest Expense:
Salaries and employee benefits
$
103,714
$
87,125
$
89,161
$
16,589
19%
2017
2016
2015
$ Change
% Change
2017 Compared to 2016
(dollars in thousands)
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
Merger and acquisition related
15,648
13,508
9,090
3,786
4,209
3,081
1,905
4,761
3,210
23,289
186,201
1,834
2,050
10,213
13,150
11,624
7,429
2,601
3,825
547
2,250
3,915
3,903
17,808
154,177
1,155
1,420
3,173
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
Total noninterest expense
$
200,298
$
159,925
$
163,874
$
2,498
1,884
1,661
1,185
384
2,534
(345)
846
(693)
5,481
32,024
679
630
7,040
40,373
19
16
22
46
10
463
(15)
22
(18)
31
21
59
44
222
25%
Noninterest expense, excluding the loss on sale or write-down of assets, litigation and operational losses, and merger and
acquisition related expense, increased $32.0 million, or 21%, for the year ended 2017 compared to 2016. Contributing to the
2017 increase is a $16.6 million increase in salaries and employee benefits primarily due to an increase of 98 full-time
equivalent employees at December 31, 2017 compared to December 31, 2016. The higher number of employees is a result of
the acquisition of 13 branches from FirstMerit in December 2016, the acquisition of DCB Financial in April 2017 and the
continued expansion of our mortgage and commercial banking businesses in Ohio. Also contributing to the increase in salaries
and employee benefits was $2.5 million of expense for a one-time bonus of $1,500 paid to all full and part-time employees
(other than the top five named executive officers) following the passage of the Tax Cuts and Jobs Act. The two noted
acquisitions also accounted for all of the $2.5 million increase in net occupancy expense, $1.0 million of the increase in
furniture and equipment expense and all of the $2.5 million increase in intangible amortization.
Other operating expense increased $5.5 million for the year 2017 compared to 2016, primarily due to a $1.4 million increase in
expense related to the reserve for unfunded loan commitments, a $1.7 million increase in data processing expense primarily
relates to additional volume associated with increased debit cards and card usage as well as an increase in usage of digital
channels.
Merger related expenses totaled $10.2 million and $3.2 million for the years 2017 and 2016, respectively. Expenses in 2017
reflect one-time expenses related to the acquisition of DCB Financial while expenses in 2016 reflect those expenses related to
the acquisition of 13 FirstMerit branches. Merger expense in 2015 relates to the acquisition of First Community Bank.
Income Tax
The provision for income taxes of $48.6 million in 2017 reflects an increase of $22.9 million compared to the provision for
income taxes in 2016. The majority of this change, $16.7 million, relates to a non-cash charge recorded for the revaluation of
deferred tax assets in connection with the passage of the Tax Cuts and Jobs Act. The remaining increase in the provision for
income taxes relates to the increase in the level of pretax income of $103.7 million and $85.2 million for 2017 and 2016,
respectively.
The effective tax rate was 47% and 30% for tax expense in 2017 and 2016, respectively. Excluding the $16.7 million charge
related to the revaluation of deferred tax assets, the effective tax rate for 2017 would have been 31%. 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.
33
Financial Condition
First Commonwealth’s total assets increased $624.5 million in 2017. Loans, including loans held for sale, increased $535.8
million, or 11%, while investments increased $2.3 million, or less than 1%.
Loan growth in 2017 was impacted by $383.1 million of loans acquired as part of the DCB Financial acquisition, including
$44.8 million in commercial, financial, agricultural and other, $25.2 million in real estate construction, $197.5 million in
residential real estate, $109.8 million in commercial real estate and $5.8 million in loans to individuals.
During 2017, approximately $343.5 million in investment securities were sold, 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,
$241.1 million in mortgage-backed securities, $10.0 million in corporate securities and $2.0 million in municipal securities
were purchased in 2017 to help increase earnings from the portfolio while maintaining a reduced risk profile.
First Commonwealth’s total liabilities increased $486.3 million, or 8%, in 2017. Deposits increased $633.3 million, or 13%,
largely due to $484.4 million in deposits obtained as part of the DCB Financial acquisition. Short-term debt decreased $160.5
million or 18%, based on liquidity needs, and long-term debt increased $7.0 million, or 9%, primarily due to the DCB Financial
acquisition.
Total shareholders' equity increased $138.2 million in 2017. Growth in shareholders' equity was a result of net income of $55.2
million and $110.7 million in common stock issued in relation to the DCB Financial acquisition, partially offset by $30.5
million in dividends declared, a $0.9 million increase in accumulated other comprehensive income and $1.5 million in stock
repurchases.
Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
2017
2016
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(dollars in thousands)
$ 1,163,383
22% $ 1,139,547
23% $ 1,150,906
25% $ 1,052,109
24% $ 1,021,056
24%
248,868
1,426,370
2,019,096
549,659
5
26
37
10
219,621
1,229,192
1,742,210
548,777
5
25
36
11
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
$ 5,407,376
100% $ 4,879,347
100% $ 4,683,750
100% $ 4,457,308
100% $ 4,283,833
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 $5.4 billion as of December 31, 2017, reflecting growth of $528.0 million, or 11%, compared to
December 31, 2016. Loan growth was experienced in all categories, with commercial real estate and residential real estate
categories providing the majority of the growth. Commercial real estate loans increased $276.9 million, or 15.9%, of which
$109.8 million was acquired as part of the DCB acquisition. The remaining $167.1 million increase in this category can be
largely attributed to growth in direct middle market lending in Pennsylvania and Ohio. Excluding the impact of the acquired
loans, the residential real estate portfolio remained relatively flat as new volumes basically replaced runoff as many of the loans
originated by our mortgage banking area are sold in the secondary market. Growth in commercial, financial, agricultural and
other and loans to individuals is largely due to balances acquired as part of the DCB acquisition. Growth acquired in the loans
to individuals category was largely offset by runoff of indirect auto loans as a result of increased pricing spreads for this
category.
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, the acquisition of First Community Bank of
Columbus, Ohio in the fourth quarter of 2015, the purchase of 13 FirstMerit Bank, NA branches in December 2016 and the
acquisition of DCB Financial in May 2017. As of December 31, 2017 and 2016, there were no concentrations of loans relating
to any industry in excess of 10% of total loans.
As of December 31, 2017, criticized loans (i.e., loans designated OAEM, substandard, impaired or doubtful) decreased $10.0
million, or 7%, from December 31, 2016. Criticized loans totaled $124.4 million at December 31, 2017 and represented 2% of
the total loan portfolio. Additionally, delinquencies on accruing loans decreased $0.5 million, or 4%, at December 31, 2017
34
compared to December 31, 2016. As of December 31, 2017, nonaccrual loans increased $2.7 million, or 9%, compared to
December 31, 2016.
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at
December 31, 2017 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
$
$
159,751
$
38,907
254,388
3,343
(dollars in thousands)
661,245
$
341,761
138,388
696,366
24,898
42,279
1,059,952
117,696
$
1,162,757
219,574
2,010,706
145,937
456,389
$
1,520,897
$
1,561,688
$
3,538,974
386,073
1,134,825
373,180
1,188,507
$
1,520,898
$
1,561,687
(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 $106.9 million to any one borrower or closely related group of borrowers, but
has established lower thresholds for credit risk management.
Nonperforming Loans
Nonperforming loans include nonaccrual loans and restructured loans. Nonaccrual loans represent loans on which interest
accruals have been discontinued. Restructured loans are those loans whose terms have been renegotiated to provide a reduction
or deferral of principal or interest as a result of the deteriorating financial position of the borrower under terms not available in
the market.
We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable
to fully collect principal or interest due according to the contractual terms of the loan. Consumer loans are placed in nonaccrual
status at 150 days past due. Other types of loans are typically placed in nonaccrual status when there is evidence of a
significantly weakened financial condition or principal and interest is 90 days or more delinquent. Interest received on a
nonaccrual loan is normally applied as a reduction to loan principal rather than interest income utilizing the cost recovery
methodology of revenue recognition.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable
risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral and the
present value of projected future cash flows. Losses are recognized when a loss is probable and the amount is reasonably
estimable.
35
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:
2017
2016
2015
2014
2013
(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis
$
19,455
$
16,454
$
24,345
$
25,715
$
28,908
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
$
$
$
—
11,222
11,563
42,240
1,854
2,765
$
$
$
—
11,569
13,790
41,813
2,131
6,805
$
$
$
—
12,360
14,139
50,844
2,455
9,398
$
$
$
—
16,952
12,584
55,251
2,619
7,197
$
$
$
—
16,980
13,495
59,383
2,505
11,728
Loans outstanding at end of period
$ 5,407,376
$ 4,879,347
$ 4,683,750
$ 4,457,308
$ 4,283,833
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
$ 5,278,511
$ 4,818,759
$ 4,553,634
$ 4,356,566
$ 4,255,593
0.78%
0.86%
1.09%
1.24%
1.39%
5,087
48,298
6,974
$
$
$
18,480
50,185
19,107
$
$
$
14,948
50,812
16,187
$
$
$
11,196
52,051
13,370
$
$
$
19,227
54,225
32,189
0.13%
0.40%
0.36%
0.31%
0.76%
72.94%
96.72%
92.35%
83.74%
59.73%
0.89%
1.03%
1.08%
1.17%
1.27%
114.34%
120.02%
99.94%
94.21%
91.31%
2,079
783
1,296
$
$
1,296
533
763
$
$
572
—
572
$
$
784
—
784
$
$
7,920
679
7,241
$
$
$
$
$
(a) End of period loans and nonperforming loans exclude loans held for sale.
Nonperforming loans increased $0.4 million to $42.2 million at December 31, 2017, compared to $41.8 million at
December 31, 2016. Nonperforming loans as a percentage of total loans decreased to 0.8% from 0.9% at December 31, 2017
compared to December 31, 2016. The December 31, 2017 nonaccrual loan balance includes $1.4 million in loans acquired from
DCB Financial in April 2017. Excluding acquired loans, nonperforming loans would have decreased $1.0 million compared to
December 31, 2016 as a result of payoffs totaling $8.5 million on loans related to four borrowers and the charge-off of two
commercial relationships totaling $0.7 million. Offsetting these decreases is the addition of two commercial relationships
totaling $9 million. Other real estate owned totaled $2.8 million at December 31, 2017, compared to $6.8 million at
December 31, 2016.
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 $2.6 million during 2017. For additional information on
TDRs please refer to Note 11 “Loans and Allowance for Credit Losses.”
Net charge-offs were $7.0 million in 2017 compared to $19.1 million for the year 2016. The most significant credit losses
recognized during the year include $3.4 million in charge-offs recognized on two commercial relationships, of which $1.9
million was recognized on a relationship that was transferred to held for sale and subsequently sold in April 2017. Also
36
impacting this category were recoveries of $3.1 million on two commercial relationships. Net charge-offs in the loans to
individual category totaled $3.7 million for 2017, with $2.4 million related to indirect auto loans and $0.8 million to personal
lines of credit. Additional detail on credit risk is included in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” under “Provision for Credit Losses,” “Allowance for Credit Losses" and "Credit Risk.”
Provision for credit losses as a percentage of net charge-offs decreased to 72.9% for the year ended December 31, 2017 from
96.7% for the year ended December 31, 2016.
Allowance for Credit Losses
Following is a summary of the allocation of the allowance for credit losses at December 31:
2017
2016
2015
2014
2013
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
(dollars in thousands)
$ 23,429
22% $ 35,974
23% $ 31,035
25% $ 29,627
24% $ 22,663
24%
1,349
2,759
17,357
3,404
5
26
37
10
577
2,511
6,619
4,504
5
25
36
11
887
2,606
11,924
4,360
5
26
31
13
2,063
3,664
11,881
4,816
3
27
31
15
6,600
7,727
11,778
5,457
2
30
30
14
$ 48,298
$ 50,185
$ 50,812
$ 52,051
$ 54,225
0.89%
1.03%
1.08%
1.17%
1.27%
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
Allowance for credit losses
as percentage of end-of-
period loans outstanding
(a) Represents the ratio of loans in each category to total loans.
The allowance for credit losses decreased $1.9 million from December 31, 2016 to December 31, 2017. The allowance for
credit losses as a percentage of end-of-period loans outstanding was 0.9% at December 31, 2017 compared to 1.0% at
December 31, 2016. The allowance for credit losses includes both a general reserve for performing loans and specific reserves
for impaired loans. Comparing December 31, 2017 to December 31, 2016, the general reserve for performing loans decreased
from 0.97% to 0.83% of total performing loans. General reserves as a percentage of non-impaired originated loans were 0.90%
at December 31, 2017 compared to 0.99% at December 31, 2016. Specific reserves increased from 7.5% of nonperforming
loans at December 31, 2016 to 8.9% of nonperforming loans at December 31, 2017. The allowance for credit losses as a
percentage of nonperforming loans was 114.3% and 120.0% at December 31, 2017 and 2016, respectively.
The allowance for credit losses represents management’s estimate of probable losses incurred 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.
Investment Portfolio
Marketable securities that we hold in our investment portfolio, which are classified as “securities available for sale,” may be a
source of liquidity; however, we do not anticipate liquidating the investments prior to maturity. As indicated in Note 19 “Fair
Values of Assets and Liabilities,” $25.3 million of available for sale securities at December 31, 2017, are classified as Level 3
assets because of inactivity in the market.
37
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
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 Debt Securities
Equities
2017
2016
2015
(dollars in thousands)
$
10,556
$
15,143
$
20,034
24,611
—
—
632,422
683,601
778,476
—
1,098
27,083
15,907
27,499
739,176
1,670
1
16,700
27,075
5,903
39,989
788,412
1,670
28
19,201
27,066
1,897
42,239
888,941
2,170
Total Securities Available for Sale
$
740,846
$
790,082
$
891,111
As of December 31, 2017, securities available for sale had a fair value of $731.4 million. Gross unrealized gains were $4.9
million and gross unrealized losses were $14.3 million.
The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2017.
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
$
1,215
$
5,513
162,616
499,343
States and
Political
Subdivisions
Other
Securities
Total
Amortized
Cost (a)
Weighted
Average
Yield (b)
(dollars in thousands)
— $
—
27,083
—
— $
13,989
—
29,417
1,215
19,502
189,699
528,760
739,176
1.65%
3.07
2.43
2.38
2.41%
$
668,687
$
27,083
$
43,406
$
(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 $49.2 million, or 6%, at December 31, 2017
compared to 2016. Contributing to this decline is the sale, call or maturity of $292.2 million in available for sale investments,
partially offset by $150.9 million in purchases. Additional liquidity provided from sales, calls and maturities was utilized to
fund growth in the loan portfolio.
Our available for sale investment portfolio includes an amortized cost of $27.5 million in pooled trust preferred collateralized
debt obligations at December 31, 2017. The valuation of these securities involves evaluating relevant credit and structural
aspects, determining appropriate performance assumptions and performing a discounted cash flow analysis.
38
Following is a detail schedule of the amortized cost of securities held to maturity as of December 31:
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
Debt Securities Issued by Foreign Governments
Total Securities Held to Maturity
2017
2016
2015
(dollars in thousands)
$
3,925
$
4,297
$
58,249
34,444
305,126
14,056
40,540
200
280,430
14,675
38,667
—
4,775
16,843
315,609
15,187
31,910
—
$
422,096
$
372,513
384,324
The following is a schedule of the contractual maturity distribution of securities held to maturity at December 31, 2017.
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
Weighted
Average
Yield
— $
—
14,056
367,300
(dollars in thousands)
0
87
$
$
3,463
35,361
1,629
200
0
—
381,356
$
40,540
$
200
$
$
$
87
1.88%
3,663
49,417
368,929
422,096
2.49
3.20
2.41
2.50%
See Note 9 “Investment Securities,” Note 10 “Impairment of Investment Securities” and Note 19 “Fair Values of Assets and
Liabilities” for additional information related to the investment portfolio.
Deposits
Total deposits increased $633.3 million, or 13%, in 2017, with $484.4 million of the growth resulting from the acquisition of
DCB Financial. Growth was experienced in all deposit categories.
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:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
2017
2016
2015
Amount
%
Amount
%
Amount
%
$
47,964
22,101
68,174
72,142
23% $
(dollars in thousands)
38,366
26% $
11
32
34
27,371
29,013
50,621
19
20
35
48,429
22,946
34,974
51,306
31%
15
22
32
$
210,381
100% $
145,371
100% $
157,655
100%
39
Short-Term Borrowings and Long-Term Debt
Short-term borrowings decreased $160.5 million, or 18%, from $867.9 million as of December 31, 2016 to $707.5 million at
December 31, 2017. The decline in short-term borrowings is a result of deposits obtained from the DCB Financial acquisition,
which provided a lower cost alternative funding source compared to these borrowings. Long-term debt increased $7.0 million,
or 9%, from $80.9 million at December 31, 2016 to $87.9 million at December 31, 2017 as a result of the DCB Financial
acquisition. For additional information concerning our short-term borrowings, subordinated debentures and other long-term
debt, please refer to Note 16 “Short-term Borrowings,” Note 17 “Subordinated Debentures” and Note 18 “Other Long-term
Debt” of the Consolidated Financial Statements.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below sets forth our contractual obligations to make future payments as of December 31, 2017. 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
18
17
13
$
$
607
$
1,287
$
1,389
$
4,878
$
—
4,595
—
7,547
—
5,580
72,167
12,851
8,161
72,167
30,573
5,202
$
8,834
$
6,969
$
89,896
$
110,901
The table above excludes our cash obligations upon maturity of certificates of deposit, which is set forth in Note 15 “Interest-
Bearing Deposits” of the Consolidated Financial Statements.
In addition, see Note 12 “Commitments and Letters of Credit” for detail related to our off-balance sheet commitments to extend
credit, financial standby letters of credit, performance standby letters of credit and commercial letters of credit as of
December 31, 2017. 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, 2017, a reserve for probable losses of $5.2 million was
recorded for unused commitments and letters of credit.
Liquidity
Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash
needs with cost-effective funding. Liquidity risk arises from the possibility that we may not be able to meet our financial
obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk,
our Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity and quantifies minimum liquidity requirements based on limits approved by our Board of
Directors. This policy designates our Asset/Liability Committee (“ALCO”) as the body responsible for meeting these
objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves
significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis
by our Treasury Department, which monitors it by using such measures as a 30 day liquidity stress analysis, liquidity gap ratios
and noncore funding ratios.
We generate funds to meet our cash flow needs primarily through the core deposit base of FCB and the maturity or repayment
of loans and other interest-earning assets, including investments. Core deposits are the most stable source of liquidity a bank
can have due to the long-term relationship with a deposit customer. The level of deposits during any period is sometimes
influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and
yields offered on competing investments, such as money market mutual funds. Deposits increased $633.3 million, or 13%,
during 2017, and comprised 87% of total liabilities at December 31, 2017, as compared to 83% at December 31, 2016. Proceeds
from the sale, maturity and redemption of investment securities totaled $343.5 million during 2017 and provided liquidity to
fund loans as well as the purchase of additional investment securities. On February 1, 2018, an auction call was successfully
completed on PreTSL XIV, a pooled trust preferred security on which other-than-temporary impairment charges were
recognized in 2009 and 2010. Based on the outcome of the auction, it is expected that this security will be called at par in the
first quarter of 2018. As of December 31, 2017, the security has a par value of $16.0 million and a book value of $13.1 million.
40
We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements,
advances from the Federal Home Loan Bank of Pittsburgh, borrowings through the discount window at the Federal Reserve
Bank of Cleveland and access to certificates of deposit through brokers. We have increased our borrowing capacity at the
Federal Reserve by establishing a Borrower-in-Custody of Collateral arrangement that enables us to pledge certain loans, not
being used as collateral at the Federal Home Loan Bank, as collateral for borrowings at the Federal Reserve. At December 31,
2017 our borrowing capacity at the Federal Reserve related to this program was $785.8 million and there were no amounts
outstanding. Additionally, as of December 31, 2017, 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 $0.6 billion in outstanding
borrowings.
We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an ALCO strategy to
increase and diversify funding sources. As of December 31, 2017, our maximum borrowing capacity under this program was
$1.1 billion and as of that date there was $14.8 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, 2017, our outstanding certificates of deposits from this program have an average weighted rate of 0.97%
and an average original term of 466 days.
We also have available unused federal funds lines with four correspondent banks. These lines have an aggregate commitment
of $195.0 million with no amounts outstanding as of December 31, 2017.
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 $38.3 million for the year ended
December 31, 2017, as well as any cash necessary to repurchase our shares, which totaled $1.5 million for the year ended
December 31, 2017. 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 $16.4 million at
December 31, 2017. At the end of 2017, the Parent Company had a $15.0 million short-term, unsecured revolving line of credit
with another financial institution. As of December 31, 2017, 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 0.73 and 0.75 at December 31, 2017 and 2016, respectively. A ratio of less than one indicates a higher
41
level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is
largely driven by the modeling of interest-bearing nonmaturity deposits, which are included in the analysis as repricing within
one year.
Following is the gap analysis as of December 31:
2017
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
$ 2,662,906
$
214,139
$
359,790
$ 3,236,835
$ 1,633,236
$
521,478
79,484
8,668
2,751,058
139,920
3,549,121
779,875
45,983
—
260,122
71,178
—
244
84,001
—
443,791
165,083
—
495
209,468
8,668
525,391
434,919
—
—
3,454,971
2,158,627
956,397
376,181
3,549,121
780,614
235,037
—
4,468
3,595
—
10,302
4,468,916
71,422
165,578
$(1,717,858)
$
188,700
$
278,213
0.62
23.50%
3.64
2.58%
2.68
3.81%
4,705,916
$(1,250,945)
0.73
17.12%
239,505
13,897
$ 1,919,122
$
942,500
9.01
26.26%
68.82
12.90%
2016
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
$ 2,510,367
$
184,386
$
315,397
$ 3,010,150
$ 1,446,035
$
402,282
85,756
24,644
2,620,767
110,584
3,086,791
940,254
44,417
—
228,803
92,765
—
146
89,838
—
405,235
115,949
—
296
4,137,629
92,911
116,245
$(1,516,862)
$
135,892
$
288,990
0.63
22.69%
2.46
2.03%
3.49
4.32%
220,011
24,644
546,056
406,743
—
—
3,254,805
1,992,091
809,025
319,298
3,086,791
940,696
4,346,785
$(1,091,980)
0.75
16.34%
268,680
—
2,584
271,264
3,854
—
5,579
9,433
$ 1,720,827
$
799,592
7.34
25.75%
85.77
11.96%
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.
42
The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in
interest rates over a 12 month time frame as compared with net interest income if rates remained unchanged and there are no
changes in balance sheet categories.
Net interest income change (12 months)
-200
-100
+100
+200
December 31, 2017 ($)
December 31, 2017 (%)
December 31, 2016 ($)
December 31, 2016 (%)
$
$
(15,810)
(6.51)%
(11,180)
$
$
(dollars in thousands)
(6,181)
$
5,856
(2.55)%
2.41%
(5,495)
$
4,643
(5.41)%
(2.66)%
2.25%
$
$
11,315
4.66%
9,027
4.37%
The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates
versus if rates remained unchanged and there are no changes in balance sheet categories.
December 31, 2017 ($)
December 31, 2017 (%)
December 31, 2016 ($)
December 31, 2016 (%)
Net interest income change (12 months)
-200
-100
+100
+200
(dollars in thousands)
$
$
(33,734)
(13.90)%
(17,526)
$
$
(8.48)%
(16,356)
(6.74)%
(9,132)
(4.42)%
$
$
$
$
14,427
5.94%
8,379
4.06%
27,815
11.46%
16,286
7.88%
The analysis and model used to quantify the sensitivity of our net interest income becomes less meaningful in a decreasing 200
basis point scenario given the current interest rate environment. Results of the 100 and 200 basis point interest rate decline
scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1%, with an assumed floor of
zero in the model. For the years 2017 and 2016, the cost of our interest-bearing liabilities averaged 0.44% and 0.39%,
respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.90% and
3.63%, 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.
In 2015 and 2014, the Company entered into cash flow interest rate swaps in which we extended the duration of $150.0 million
of the $1.3 billion LIBOR based loans in our loan portfolio at that time into fixed interest rates for a period of three or four
years. These swaps added approximately two basis points of protection to the net interest margin as a hedge against a
prolonged low-rate environment. Please refer to Note 8, "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 for 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 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 $5.2 million at December 31, 2017 and is classified in “Other liabilities” on the
Consolidated Statements of Financial Condition.
43
Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent
loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose terms have
been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of
the borrower, who could not obtain comparable terms from alternate financing sources. In 2017, 41 loans totaling $11.1 million
were identified as troubled debt restructurings, resulting in specific reserves of $0.6 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 on nonaccrual status at 150 days past due.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable
risk of loss on these loans is evaluated by comparing the loan balance to the 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 $48.3 million at December 31, 2017 or 0.89% of loans outstanding, compared to $50.2
million or 1.03% of loans outstanding at December 31, 2016. Credit measures as of December 31, 2017 compared to
December 31, 2016 reflect a decrease in the level of criticized loans of $10.0 million from $134.4 million at December 31, 2016
to $124.4 million at December 31, 2017. Classified assets decreased $19.7 million from $92.7 million at December 31, 2016 to
$73.0 million at December 31, 2017. The decline is the result of an upgrade of a $9.2 million loan for one borrower and the
payoff of $8.5 million in nonaccrual loans as previously noted. Delinquency on accruing loans decreased $0.5 million, or 4%,
while the level of nonperforming loans increased $0.4 million for the same period.
The allowance for credit losses as a percentage of nonperforming loans was 114.3% at December 31, 2017 and 120.0% as of
December 31, 2016. The allowance for credit losses includes specific allocations of $3.7 million related to nonperforming
loans covering 9% of the total nonperforming balance at December 31, 2017 and specific allocations of $3.1 million covering
8% of the total nonperforming balance at December 31, 2016. 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 incurred in the loan
portfolio at December 31, 2017.
The following table provides information on net charge-offs and nonperforming loans by loan category:
For the Period Ended December 31, 2017
As of December 31, 2017
% 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
$
2,733
(470)
916
62
3,733
39.19%
(6.74)
13.13
0.89
53.53
(dollars in thousands)
0.05% $
(0.01)
0.02
—
0.07
22,850
—
11,840
7,186
364
54.10%
0.42%
—
28.03
17.01
0.86
—
0.22
0.13
0.01
$
6,974
100.00%
0.13% $
42,240
100.00%
0.78%
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 loans were the most
significant portions of the nonperforming loans as of December 31, 2017. See discussions related to the provision for credit
losses and loans for more information.
44
Results of Operations—2016 Compared to 2015
Summary of 2016 Results
Net income for 2016 was $59.6 million, or $0.67 per diluted share, as compared to a net income of $50.1 million, or $0.56 per
diluted share, in 2015. Net income in 2016 was positively impacted by an increase in net interest income of $10.6 million,
offset by decreases in noninterest expense of $3.9 million and noninterest income of $3.3 million.
Our return on average equity was 8.02% and our return on average assets was 0.89% for 2016, compared to 6.98% and 0.78%,
respectively, for 2015.
Average diluted shares for the year 2016 were 1% less than the comparable period in 2015 primarily due to the common stock
buyback program authorized during 2015.
Net interest income, on a fully taxable equivalent basis, for 2016 was $10.9 million, or 6%, higher than 2015, primarily due to
growth in interest earning assets as well as growth in rates on interest earning assets. Positively affecting net interest income in
2016 was a $116.2 million increase in average net free funds. Average net free funds are the excess of demand deposits, other
noninterest-bearing liabilities and shareholders’ equity over nonearning assets. The net interest margin, on a fully taxable
equivalent basis, was 3.32% in 2016 compared to 3.28% in 2015.
During the year-ended December 31, 2016, growth in both the level of interest-earning assets and the rates on those assets
positively impacted the net interest margin. Yields and spreads on new loan volumes in 2016 exceeded runoff levels,
specifically for variable and adjustable rate commercial loans, home equity loans and indirect auto loans. Average earning
assets increased $257.7 million, or 4%, compared to the comparable period in 2015.
The taxable equivalent yield on interest-earning assets was 3.63% for the year-ended December 31, 2016, an increase of 8 basis
points from the 3.55% yield for the same period in 2015. This increase can be attributed to higher replacement yields on loan
portfolio runoff and maturities as a result of improvements in pricing spreads. Additionally, the investment portfolio yield
increased by 11 basis points. 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. Reductions in the cost of interest-bearing liabilities partially offset the
impact of higher yields on interest-earning assets. The cost of interest-bearing liabilities was 0.39% for the year-ended
December 31, 2016, compared to 0.34% for the same period in 2015.
Comparing the year-ended December 31, 2016 with the same period in 2015, changes in interest rates negatively impacted net
interest income by $0.5 million. The higher yield on interest-earning assets favorably impacted net interest income by $3.5
million, while a change in the mix of interest-bearing liabilities and an increase in short-term borrowing rates had a negative
impact of $4.0 million on net interest income. The growth in net interest income for the year-ended December 31, 2016, can be
primarily attributed to growth in the loan portfolio and changes in the mix of our investment portfolio.
While changes in rates had a slight negative impact on the net interest margin, increases in average interest-earning assets more
than offset the effect on net interest income. Changes in the volume of interest-earning assets and interest-bearing liabilities
positively impacted net interest income by $11.5 million in the year ended December 31, 2016 compared to the same period in
2015. Higher levels of interest-earning assets resulted in an increase of $10.4 million in interest income, while reductions in
time deposits and long-term borrowings, partially offset by increased short-term borrowings, decreased interest expense by $1.0
million.
Noninterest income, excluding net securities gains (losses), gains on sale of assets and derivative mark to market, increased
$0.8 million, or 1%, in 2016, due to a $1.5 million increase in swap fee income that resulted from growth in interest rate swaps
entered into by our commercial loan customers.
Total noninterest income increased $3.3 million, or 5%, in 2016 in comparison to the year ended 2015. The most notable
change includes a $1.7 million increase in gain on the sale of mortgage loans due to continued growth in mortgage loan
originations since the Company reentered the secondary mortgage market in 2014. Net securities gains (losses) increased $0.8
million, primarily due to the early redemption in 2016 of one of our pooled trust preferred securities.
Total noninterest expense for the year 2016 decreased $3.9 million in comparison to the year 2015. Contributing to the 2016
decrease is a $2.0 million decline in salaries and employee benefits, primarily due to $2.1 million in one-time severance charges
recognized in 2015 as a result of the realignment of our consumer banking area.
Other operating expense decreased $1.4 million for the year 2016 compared to 2015, primarily due to a $1.7 million decline in
expense related to the reserve for unfunded loan commitments. Pennsylvania shares tax expense decreased $0.9 million in 2016
compared to 2015 due to a $0.7 million settlement paid in 2015 for a disputed tax assessment. Loss on the sale or write-down of
assets decreased $2.0 million for the year 2016 compared to 2015. The loss in 2015 includes $1.5 million in write-downs on
45
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. Offsetting these decreases is a $1.3 million increase in data processing expense related to the issuance of chip
debit cards in 2016.
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.
46
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 $418,249 at December 31, 2017 and $368,618
at December 31, 2016)
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
Capital lease obligation
Total long-term debt
Other liabilities
Total liabilities
Shareholders’ Equity
December 31,
2017
2016
(dollars in thousands, except
share data)
$
98,624
$
8,668
731,358
422,096
29,837
14,850
91,033
24,644
778,612
372,513
36,498
7,052
5,407,376
4,879,347
(48,298)
(50,185)
5,359,078
4,829,162
81,339
2,765
255,353
15,007
212,099
77,465
67,534
6,805
186,483
12,013
187,021
84,648
$
7,308,539
$
6,684,018
$
1,416,771
$
1,268,786
4,163,934
5,580,705
707,466
72,167
8,161
7,590
87,918
44,323
3,678,622
4,947,408
867,943
72,167
8,749
—
80,916
37,822
6,420,412
5,934,089
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
—
—
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 and 105,563,455
shares issued as of December 31, 2017 and 2016, respectively; and 97,456,478 and 89,007,077 shares
outstanding at December 31, 2017 and 2016, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net
Treasury stock (16,458,424 and 16,556,378 shares at December 31, 2017 and 2016, respectively)
Total shareholders’ equity
Total liabilities and shareholders’ equity
113,915
470,123
437,416
(6,173)
(127,154)
888,127
105,563
366,426
412,764
(7,027)
(127,797)
749,929
$
7,308,539
$
6,684,018
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2017
Years Ended December 31,
2016
(dollars in thousands, except share data)
2015
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
Interest on capital lease obligation
Total interest expense
Net Interest Income
Provision for credit losses
Net Interest Income after Provision for Credit Losses
Noninterest Income
Net securities gains (losses)
Trust income
Service charges on deposit accounts
Insurance and retail brokerage commissions
Income from bank owned life insurance
Gain on sale of mortgage loans
Gain on sale of other loans and assets
Card related interchange income
Derivative mark to market
Swap fee 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
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
$
218,530
$
185,344
$
172,819
28,608
1,622
1,669
121
250,550
9,415
8,799
3,000
323
233
21,770
228,780
5,087
223,693
5,040
7,098
18,579
8,807
5,699
5,366
1,753
18,780
(473)
2,005
7,677
80,331
27,919
1,498
2,826
27
217,614
7,523
8,076
2,635
345
—
18,579
199,035
18,480
180,555
617
5,366
15,869
7,964
5,381
4,086
1,411
14,955
219
2,359
6,372
64,599
103,714
15,648
13,508
9,090
3,786
4,209
3,081
1,905
4,761
3,210
1,834
2,050
10,213
23,289
200,298
103,726
48,561
55,165
95,220,056
95,331,037
0.58
0.58
0.32
$
$
$
$
87,125
13,150
11,624
7,429
2,601
3,825
547
2,250
3,915
3,903
1,155
1,420
3,173
17,808
159,925
85,229
25,639
59,590
88,851,573
88,851,573
0.67
0.67
0.28
$
$
$
$
$
$
$
$
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
2,421
1,855
14,501
(274)
847
7,041
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
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
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 (gains) losses on securities
included in net income
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the
period
Reclassification adjustment for losses on derivatives included in
net income
Unrealized gains (losses) for postretirement obligation:
Net gain (loss)
Total other comprehensive income (loss), before income tax
expense (benefit)
Income tax expense (benefit) related to items of other comprehensive
income (loss)
Years Ended December 31,
2017
2016
2015
(dollars in thousands)
$
55,165
$
59,590
$
50,143
7,023
(6,304)
(5,040)
(617)
2,798
153
450
(49)
(102)
(479)
(70)
331
(7,139)
3,250
(2,498)
54,949
$
1,137
52,256
(901)
119
94
1,295
441
Comprehensive Income
$
56,019
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
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, 2016
89,007,077
$
105,563
$
366,426
$
412,764
$
(7,027) $
(127,797) $
749,929
Net income
Total other comprehensive income
Cash dividends declared ($0.32 per share)
Treasury stock acquired
Treasury stock reissued
Restricted stock
Common stock issued
(104,257)
181,211
21,000
8,351,447
—
8,352
1,170
138
102,389
55,165
(30,513)
—
—
854
(1,458)
1,387
714
Balance at December 31, 2017
97,456,478
$
113,915
$
470,123
$
437,416
$
(6,173) $
(127,154) $
55,165
854
(30,513)
(1,458)
2,557
852
110,741
888,127
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, 2015
88,961,268
$
105,563
$
365,981
$
378,081
$
(2,386) $
(127,693) $
719,546
Net income
Total other comprehensive loss
Cash dividends declared ($0.28 per share)
Treasury stock acquired
Treasury stock reissued
Restricted stock
(98,687)
23,148
121,348
—
39
406
59,590
(24,907)
—
—
(4,641)
59,590
(4,641)
(24,907)
(864)
216
989
(864)
177
583
Balance at December 31, 2016
89,007,077
$
105,563
$
366,426
$
412,764
$
(7,027) $
(127,797) $
749,929
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
The accompanying notes are an integral part of these Consolidated Financial Statements.
50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2017
2016
2015
(dollars in thousands)
$
55,165
$
59,590
$
50,143
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 on securities and other assets
Net amortization of premiums and discounts on securities
Income from increase in cash surrender value of bank owned life insurance
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
Increase in interest receivable
Increase (decrease) in interest payable
Decrease (increase) 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
Purchase of other assets
Purchases of premises and equipment
Net cash (used in) provided by investing activities
Financing Activities
Net decrease in federal funds purchased
Net (decrease) increase in other short-term borrowings
Net increase (decrease) in deposits
Repayments of other long-term debt
Repayments of capital lease obligations
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
5,087
20,825
8,997
(9,942)
3,532
(5,699)
(164,212)
163,125
(1,314)
426
1,318
10,997
88,305
51,239
(102,420)
143,660
148,561
(150,892)
(45,301)
55,212
898
14,807
5,568
3,188
(165,726)
(1,213)
(10,378)
(52,797)
—
(160,477)
149,175
(588)
(260)
(30,513)
228
(1,458)
(43,893)
(8,385)
115,677
107,292
$
18,480
5,713
7,116
(5,257)
4,524
(5,325)
(133,278)
136,037
(577)
(272)
(589)
3,111
89,273
54,057
(45,188)
55,744
168,237
(128,916)
(37,326)
63,780
467
18,612
7,765
479,469
(135,436)
(430)
(7,061)
493,774
(4,000)
(638,882)
132,180
(565)
—
(24,907)
216
(864)
(536,822)
46,225
69,452
115,677
$
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
Net cash (used in) 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
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
51
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 and an insurance agency, 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 and northern 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.
52
Mortgage Loans Held for Sale
Certain residential mortgage loans are originated for sale in the secondary mortgage loan market with the majority sold with
servicing rights released. These loans are classified as loans held for sale and are carried at the lower of cost or estimated
market value on an aggregate basis. Market value is determined on the basis of rates obtained in the respective secondary
market for the type of loan held for sale. Loans are generally sold at a premium or discount from the carrying amount of the
loan. Such premium or discount is recognized at the date of sale. Gain or loss on the sale of loans is recorded in non-interest
income at the time consideration is received and all other criteria for sales treatment have been met.
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
collectability 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.
Acquired loans are recorded at estimated fair value on the date of acquisition with no carryover of the related allowance for
credit losses. The fair value of acquired loans is determined by estimating the principal and interest cash flows expected to be
collected on the loans and discounting those cash flows at a market rate of interest. The estimated fair value considers factors
such as loan term, internal risk rating, delinquency status, prepayment rates, estimated value of the underlying collateral and the
current interest rate environment.
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.
53
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.
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 11,
"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 in an amount 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 net 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, lending practices, ability and experience of the credit staff, the overall
lending environment and external factors such as the regulatory environment and competition. 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.
Loans acquired with evidence of credit deterioration were evaluated and not considered to be significant. The premium or
discount estimated through the loan fair value calculation is recognized into interest income on a level yield or straight-line
basis over the remaining contractual life of the loans. Additional credit deterioration on acquired loans, in excess of the original
credit discount embedded in the fair value determination on the date of acquisition, will be recognized in the allowance for
credit losses through the provision for loan losses.
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.
54
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 $3.9 million and $3.3 million as of December 31,
2017 and 2016, 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.
Software costs are amortized on a straight-line basis over a period not to exceed seven years.
Business Combinations
Business combinations are accounted for by using the acquisition method of accounting. Under the acquisition method,
identifiable assets acquired and liabilities assumed at the acquisition date are measured at their fair values as of that date, and
are recognized separately from goodwill. The difference between the purchase price and the fair value of the net assets acquired
is recorded as goodwill. Results of operations of the acquired entities are included in the consolidated statement of income from
the date of acquisition. Acquisition costs are expensed when incurred.
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.
55
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.
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, 2017, First Commonwealth has interest derivative
positions that are not designated as hedging instruments. See Note 8, “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.
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.
56
• 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, loans held for sale, 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
liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, nonmarketable equity
investments, certain other real estate owned and certain impaired loans.
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon pricing models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied consistently over time. See Note 19 “Fair Values of
Assets and Liabilities” for additional information.
Note 2—New Accounting Pronouncements
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. The
Company adopted this ASU on January 1, 2018 using the modified retrospective method. A significant component of the
Company’s revenues, net interest income on financial assets and liabilities, is excluded from the scope of the amended
guidance. The Company has completed its overall assessment of additional revenue streams, including trust and asset
management fees, brokerage and annuity sales, deposit related fees, interchange fees, and merchant income and has concluded
that the Company’s revenue recognition for these revenue streams will not change significantly. Management’s evaluation of
the impact of the new standard on revenue generated from insurance commissions and fees, as well as all related processes and
procedures, will be completed before the end of the first quarter of 2018. Until the evaluation of the insurance commissions and
fees is completed, the Company cannot conclude whether the new standard has a material impact on the insurance commission
revenue stream or the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," in order to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. Lessor accounting under the new guidance remains largely unchanged as it is
substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged
leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting
guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue
recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense.
Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of
financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require
enough information to supplement the amounts recorded in the financial statements so that users can understand more about the
nature of an entity’s leasing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or
are entered into after the beginning of the earliest comparative period in the financial statements. Entities have the option to use
certain relief; full retrospective application is prohibited. We are currently evaluating the potential impact of ASU 2016-02 on
our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss”
methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss
methodology. The guidance requires the use of the modified retrospective transition method by means of a cumulative-effect
57
adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the
Company as of January 1, 2020. The Company has formed a cross-functional implementation team to evaluate the provisions of
the amendment, data requirements and determination of necessary modifications to its existing methodologies, systems and
processes. The Company continues to evaluate the impact of the amended guidance on First Commonwealth’s financial
condition or results of operations.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which provides guidance on eight
specific cash flow issues: 1. debt prepayment or extinguishment costs; 2. settlement of zero-coupon debt instruments or other
debt instruments with coupon interest rates; 3. contingent consideration payments made after a business combination; 4.
proceeds from the settlement of insurance claims; 5. proceeds from the settlement of corporate-owned life insurance policies,
including bank-owned life insurance policies; 6. distributions received from equity method investees; 7. beneficial interests in
securitizations transactions; and 8. separately identifiable cash flows and application of the predominance principle. This ASU
provides additional guidance for these eight issues, reducing current and potential diversity in practice. This standard is
effective for the Company as of January 1, 2018. The adoption of this ASU is not expected to have a material impact on First
Commonwealth’s financial condition or results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805), Clarifying the Definition of a
Business" which provides a screen to determine when a set of assets and activities (a "set") is not a business. The screen
requires that when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not a business. This screen thereby reduces the number of
transactions that need to be further evaluated. If the screen is not met, this ASU: 1. requires that to be considered a business, a
set must include, at a minimum, an input and substantive process that significantly contributes to the ability to create output;
and 2. removes the evaluation of whether a market participant could replace the missing elements. The amendment provides a
framework to assist entities in evaluating whether both an input and substantive process is present. The framework includes
two sets of criteria to consider that depend on whether a set has outputs. This ASU also narrows the definition of the term
output so that the term is consistent with how outputs are described in Topic 606. This standard is effective for interim and
annual periods for fiscal years beginning after December 15, 2017. The adoption of this ASU is not expected to have a material
impact on First Commonwealth’s financial condition or results of operations, but may impact future business combinations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for
Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount. Impairment should be recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill
allocated to the reporting unit. Income tax effects from any tax deductible goodwill should be taken into consideration of the
carrying amount of the reporting unit when measuring for goodwill impairment, if applicable. An entity still has the option to
perform the qualitative assessment for the reporting unit to determine if the quantitative impairment test is necessary. This
standard is effective for interim and annual periods for fiscal years beginning after December 15, 2019. The adoption of this
ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815), Targeted Improvements to
Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships to better
portray the economic results of risk management activities in its financial statements. The main provisions of this ASU update
the hedge accounting model to expand the ability to hedge risk, reduce complexity, and ease certain documentation and
assessment requirements. It also eliminates the requirement to separately measure and report hedge ineffectiveness, and
generally requires the change in fair value of a hedging instrument to be presented in the same income statement line as the
hedged item. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that
fiscal year. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or
results of operations.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220),
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address
the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of
backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came
about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the corporate income tax rate from
35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from
accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15,
2018 although early adoption is permitted. The Company will early adopt ASU 2018-02 in the first quarter of 2018. This ASU
is not expected to have a material impact on First Commonwealth's financial condition or results of operations.
58
Note 3—Acquisition
On April 3, 2017, the Company completed its acquisition of DCB Financial Corporation ("DCB") and its banking subsidiary,
The Delaware County Bank and Trust Company, for consideration of $21.2 million in cash and 8.4 million shares of the
Company's common stock. Through the acquisition, the Company obtained nine full-service banking offices and four limited
service locations which are operating under the First Commonwealth name. This acquisition expands the Company's presence
in the central Ohio market and added $383.1 million in loans and $484.4 million in deposits to the Company's balance sheet.
The table below summarizes the net assets acquired (at fair value) and consideration transferred in connection with the DCB
Financial acquisition (dollars in thousands):
Consideration Paid
Cash paid to shareholders
Shares issued to shareholders (8,356,882 shares)
Total consideration paid
$
$
21,232
110,812
$
132,044
Fair Value of Assets Acquired
Cash and cash equivalents
Investment Securities
FHLB Stock
Loans
Premises and other equipment
Core deposit intangible
Other real estate
Bank owned life insurance
Other assets
Total assets acquired
Fair Value of Liabilities Assumed
Deposits
Capital lease obligation
Other Liabilities
Total liabilities assumed
24,420
88,986
3,250
383,083
12,113
5,998
68
20,522
16,450
554,890
484,366
7,851
1,182
493,399
Total Fair Value of Identifiable Net Assets
Goodwill
61,491
$
70,553
The goodwill of $70.6 million arising from the acquisition represents the value of synergies and economies of scale expected
from combining the operations of the Company with DCB Financial Corporation.
The Company determined that this acquisition constitutes a business combination as defined in FASB ASC Topic 805,
“Business Combinations.” Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and
liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in FASB ASC
Topic 820, “Fair Value Measurements and Disclosures.” Acquired loans were recorded at fair value with no carryover of the
related allowance for loan losses. Fair value is established by discounting the expected future cash flows with a market discount
rate for like maturities and risk instruments. At the date of acquisition, none of the loans were accounted for under the guidance
of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” We acquired
$390.8 million in total loans and recognized a net combined yield and credit market adjustment of $7.7 million.
The fair value of the 8,356,882 common shares issued was determined based on the market price of the Company's common
shares on the acquisition date.
Costs related to the acquisition totaled $10.2 million. These amounts were expensed as incurred and are recorded as a merger
and acquisition related expense in the Consolidated Statements of Income.
59
As a result of the full integration of the operations of DCB, it is not practicable to determine revenue or net income included in
the Company's operating results relating to DCB since the date of acquisition as DCB’s results cannot be separately identified.
On December 2, 2016, the Company completed the acquisition of 13 branches from FirstMerit Bank, NA receiving $476.6
million in cash. This acquisition further expands the Company's market into northern Ohio and included the purchase of $105.6
million in loans and $619.7 million in deposits.
The table below summarizes the net assets acquired (at fair value) and consideration transferred in connection with the
FirstMerit Bank, NA acquisition (dollars in thousands):
Consideration Received
Cash received
Total consideration received
Fair Value of Assets Acquired
Cash and cash equivalents
Loans
Premises and other equipment
Core deposit intangible
Other assets
Total assets acquired
Fair Value of Liabilities Assumed
Deposits
Other Liabilities
Total liabilities assumed
$
(476,555)
$
(476,555)
2,914
102,097
6,072
11,330
353
122,766
619,729
70
619,799
Total Fair Value of Identifiable Net Assets
Goodwill
(497,033)
$
20,478
The goodwill of $20.5 million arising from the acquisition consists largely of the synergies and economies of scale expected
from combining the operations of the Company with the branches acquired from FirstMerit Bank, NA. The goodwill for this
transaction is expected to be deducted over a 15 year period for income tax purposes.
We acquired $105.6 million in total loans and recognized a net combined yield and credit market adjustment of $3.5 million.
Costs related to the acquisition totaled $3.2 million. These amounts were expensed as incurred and are recorded as a merger and
acquisition related expense in the Consolidated Statements of Income.
The Company determined this acquisition constitutes a business combination as defined in FASB ASC Topic 805, “Business
Combinations.” Accordingly, as of the date of the acquisition, assets acquired and liabilities assumed were recorded at fair
value. Fair values were determined 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.”
60
Note 4—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 (losses)” 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.
2017
2016
2015
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 (gains) losses on
securities included in net
income
Total unrealized gains
(losses) on securities
Unrealized gains (losses) on
derivatives:
Unrealized holding (losses)
gains on derivatives arising
during the period
Reclassification adjustment
for losses (gains) on
derivatives included in net
income
Total unrealized (losses)
gains on derivatives
Unrealized gains (losses) for
postretirement obligations:
Net gain (loss)
Total unrealized gains
(losses) for
postretirement
obligations
Total other
comprehensive
income (loss)
$
7,023
$ (2,458) $
4,565
$ (6,304) $
2,206
$ (4,098) $
2,798
$
(978) $
1,820
(5,040)
1,764
(3,276)
(617)
216
(401)
153
(54)
99
1,983
(694)
1,289
(6,921)
2,422
(4,499)
2,951
(1,032)
1,919
(901)
315
(586)
(479)
168
(311)
450
(158)
292
119
(42)
77
(70)
(782)
273
(509)
(549)
24
192
(46)
(49)
17
(32)
(357)
401
(141)
260
94
(20)
74
331
(116)
215
(102)
94
(20)
74
331
(116)
215
(102)
36
36
(66)
(66)
$
1,295
$
(441) $
854
$ (7,139) $
2,498
$ (4,641) $
3,250
$ (1,137) $
2,113
61
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
2017
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)
(7,455) $
203
$
225
$
(7,027)
4,565
(3,276)
1,289
(6,166) $
(586)
77
(509)
(306) $
2016
3,979
(3,199)
74
854
74
74
299
$
(6,173)
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)
(2,956) $
560
$
10
$
(4,098)
(401)
(4,499)
(7,455) $
(311)
(46)
(357)
203
$
2015
215
215
225
$
(2,386)
(4,409)
(447)
215
(4,641)
(7,027)
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)
(4,875) $
300
$
76
$
1,820
99
1,919
(2,956) $
292
(32)
260
560
$
(66)
(66)
10
$
(4,499)
2,112
67
(66)
2,113
(2,386)
62
Note 5—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 sales transferred to loans
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 (decrease) increase in market value adjustment to derivatives
Investments redeemed, not settled
Investments committed to purchase, not settled
Net assets (liabilities) acquired through acquisition
Proceeds from death benefit on bank-owned life insurance not received
Treasury shares issued
Note 6—Earnings per Share
2017
2016
(dollars in thousands)
2015
$
21,552
$
19,208
$
27,902
19,950
3,067
1,891
15,102
4,824
—
18,758
1,983
(6,919)
(783)
—
—
37,070
245
2,258
(549)
3,769
—
(501,516)
437
—
15,818
8,331
8,257
—
3,196
2,949
401
—
694
463
—
—
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 deferred compensation shares
Average unearned nonvested shares
Weighted average common shares and common stock equivalents used
to calculate basic earnings per share
Additional common stock equivalents (nonvested stock) used to calculate
diluted earnings per share
Additional common stock equivalents (deferred compensation) used to
calculated diluted earnings per share
Weighted average common shares and common stock equivalents used
to calculate diluted earnings per share
2017
111,809,880
(16,463,079)
(37,411)
(89,334)
2016
105,563,455
(16,605,461)
—
(106,421)
2015
105,563,455
(16,045,900)
—
(160,788)
95,220,056
88,851,573
89,356,767
73,570
37,411
—
—
—
—
95,331,037
88,851,573
89,356,767
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.
12/31/2017
Price Range
12/31/2016
Price Range
12/31/2015
Price Range
Shares
From
To
Shares
From
To
Shares
From
To
Restricted Stock
18,173
$
8.55
$
13.96
67,920
$
8.38
$
13.96
92,002
$
6.82
$
9.84
63
Note 7—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 $10.3
million during 2017 and $5.1 million during 2016 with the Federal Reserve Bank.
Note 8—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 36 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 nine 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 three interest rate swap contracts which were designated as cash flow hedges. The interest rate
swaps have a total notional amount of $150.0 million, $35.0 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 $150.0 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, 2017, 2016 and 2015, interest income was increased by
$0.5 million, $1.6 million and $2.0 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, 2017, 2016 and
2015 and changes in the fair value attributed to hedge ineffectiveness were not material.
The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are
commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have
locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement
occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor.
Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities
(“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Other noninterest
expense" in the Consolidated Statements of Income. The impact to noninterest expense for the years ended December 31, 2017
was a decrease of $19 thousand. There were no interest rate lock commitments in 2016 or 2015.
64
Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of
interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not
actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by
measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the
probability that the rate lock commitments will close or will be funded. At December 31, 2017, the underlying funded
mortgage loan commitments had a carrying value of $14.3 million and a fair value of $14.7 million, while the underlying
unfunded mortgage loan commitments had a notional amount of $13.8 million.
In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial
borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those
operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the
Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar.
The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Consolidated
Statements of Income. The impact on other noninterest expense for the year ended December 31, 2017 totaled $4 thousand. At
December 31, 2017 and December 31, 2016, the underlying loans had a carrying value of $10.0 million and $4.7 million,
respectively, and a fair value of $10.1 million and $4.7 million, respectively.
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
Interest rate swaps:
Fair value adjustment
Notional Amount
Interest rate forwards:
Fair value adjustment
Notional Amount
Foreign exchange forwards:
Fair value adjustment
Notional Amount
2017
2016
(dollars in thousands)
$
(791) $
(317)
401,304
46,444
197,660
(46,170)
345,102
14,762
174,213
(40,281)
459
150,000
(443)
200,000
19
17,000
(70)
10,077
—
—
(8)
4,749
65
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
Hedging interest rate forwards:
Decrease in other expense
Hedging interest rate derivatives:
Increase (decrease) in other expense
2017
2016
2015
(dollars in thousands)
$
(473) $
219
$
(274)
452
119
(19)
4
1,627
2,049
70
—
(5)
64
—
—
The fair value of our derivatives is included in a table in Note 19, “Fair Values of Assets and Liabilities,” in the line items
“Other assets” and “Other liabilities.”
66
Note 9—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:
2017
2016
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
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 Debt
Securities
$
10,556
$
789
$
(7) $
11,338
$
15,143
$
1,481
$
(7) $
16,617
24,611
—
(462)
24,149
—
—
—
—
632,422
2,622
(9,489)
625,555
683,601
4,557
(11,305)
676,853
—
1,098
27,083
15,907
—
—
327
590
—
—
1
(1)
1,097
16,700
—
(4)
27,410
16,493
27,075
5,903
—
—
195
416
—
1
(69)
16,631
(41)
—
27,229
6,319
27,499
526
(4,379)
23,646
39,989
427
(7,124)
33,292
Equities
1,670
—
—
1,670
1,670
739,176
4,854
(14,342)
729,688
788,412
7,076
—
(18,546)
—
776,942
1,670
Total
Securities
Available for
Sale
$ 740,846
$
4,854
$ (14,342) $ 731,358
$ 790,082
$
7,076
$ (18,546) $ 778,612
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.
67
The amortized cost and estimated fair value of debt securities available for sale at December 31, 2017, 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
Mortgage-Backed Securities (a)
Total Debt Securities
Amortized
Cost
Estimated
Fair Value
(dollars in thousands)
$
1,098
$
13,989
27,083
29,417
71,587
667,589
$
739,176
$
1,097
14,020
27,410
26,119
68,646
661,042
729,688
(a) Mortgage Backed Securities include an amortized cost of $35.2 million and a fair value of $35.5 million for Obligations of U.S.
Government agencies issued by Ginnie Mae and an amortized cost of $632.4 million and a fair value of $625.6 million for
Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to
securities available for sale were as follows for the 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
$
$
2017
2016
2015
(dollars in thousands)
143,660
$
55,744
$
88,054
$
359
(316)
43
5,057
(60)
—
4,997
$
305
(277)
28
589
—
—
589
617
$
—
(284)
(284)
131
—
—
131
(153)
Net gains and impairment
$
5,040
$
Proceeds from the sales of investments for the year ended December 31, 2017 includes the liquidation of the DCB investment
portfolio and the sale of small positions in CMO and MBS investments. During 2017, gross gains from maturities and
impairment resulted from the early redemption of two pooled trust preferred securities. The successful auction call of PreSTL
XIII provided a gain of $4.3 million and the liquidation of PreSTL VII by senior note holders resulted in a gain of $0.7 million.
Proceeds from the sales of investments in 2016 were related to sales of small positions in CMO's and MBS's. During 2016, a
gain of $0.6 million was recognized as a result of the early redemption of a pooled trust preferred security with a book value of
$3.1 million. This security was redeemed due to an election by the senior note holders to liquidate the trust.
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.
Securities available for sale with an approximate fair value of $569.0 million and $445.8 million were pledged as of
December 31, 2017 and 2016, respectively, to secure public deposits and for other purposes required or permitted by law.
68
Securities Held to Maturity
Below is an analysis of the amortized cost and fair values of debt securities held to maturity at December 31:.
2017
2016
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
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
Debt Securities Issued
by Foreign
Governments
Total Securities
Held to Maturity
$
3,925
$
— $
(14) $
3,911
$
4,297
$
— $
(4) $
4,293
58,249
—
(1,394)
56,855
34,444
—
(561)
33,883
305,126
14,056
10
—
(71)
13,985
14,675
(2,552)
302,584
280,430
5
(2,527)
277,908
40,540
335
(161)
40,714
38,667
200
—
—
200
—
—
55
—
(142)
14,533
(721)
38,001
—
—
$ 422,096
$
345
$
(4,192) $ 418,249
$ 372,513
$
60
$
(3,955) $ 368,618
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2017, 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)
87
$
3,663
35,361
1,629
40,740
381,356
422,096
$
87
3,660
35,534
1,633
40,914
377,335
418,249
$
$
(a) Mortgage Backed Securities include an amortized cost of $62.2 million and a fair value of $60.8 million for Obligations of U.S.
Government agencies issued by Ginnie Mae and an amortized cost of $319.2 million and a fair value of $316.6 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 $338.3 million and $119.2 million were pledged as of December 31, 2017
and 2016, respectively, to secure public deposits for other purposes required or permitted by law.
69
Note 10—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,
2017, 2016 and 2015, 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
and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional
bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust
preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in
securitized financial assets within the scope of FASB ASC Topic 325, “Investments—Other,” and are therefore evaluated for
other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows
determine it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be
recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary
impairment charges in the future. See Note 19, “Fair Values of Assets and Liabilities,” for additional information.
The following table presents the gross unrealized losses and estimated fair values at December 31, 2017 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
Corporate Securities
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)
$
5,584
$
(21) $
— $
— $
5,584
$
(21)
48,322
(962)
32,683
(894)
81,005
(1,856)
351,222
(2,295)
400,984
(9,746)
752,206
(12,041)
13,985
997
7,144
3,993
—
(71)
(1)
(32)
(4)
—
99
3,653
—
—
—
(129)
—
13,985
1,096
10,797
3,993
(71)
(1)
(161)
(4)
—
19,120
(3,386) $ 456,539
$
(4,379)
19,120
(15,148) $ 887,786
$
(4,379)
(18,534)
Total Securities
$ 431,247
$
At December 31, 2017, pooled trust preferred collateralized debt obligations accounted for 24% 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 65% of total unrealized losses due to changes in market interest rates.
Government agencies and obligations of state and political subdivisions each account for 10% of total unrealized losses as a
result of changes in market interest rates. At December 31, 2017, there were 98 debt securities in an unrealized loss position, 30
of which related to residential mortgage-backed securities with an unrealized loss of 12 months or more. There were no equity
securities in an unrealized loss position at December 31, 2017.
70
The following table presents the gross unrealized losses and estimated fair value at December 31, 2016 for both available for
sale and held to maturity 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
$
4,898
$
Mortgage-Backed Securities – Commercial
33,883
(11) $
(561)
— $
—
— $
4,898
$
—
33,883
(11)
(561)
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
Total Securities
670,708
14,534
16,632
(11,630)
(142)
(69)
33,277
(762)
—
—
—
56,200
(2,202)
726,908
—
—
14,534
16,632
(13,832)
(142)
(69)
—
33,277
(762)
—
$ 773,932
$
—
(13,175) $
28,952
85,152
$
(7,124)
28,952
(9,326) $ 859,084
$
(7,124)
(22,501)
As of December 31, 2017, our corporate securities had an amortized cost and estimated fair value of $15.9 million and $16.5
million, respectively, and were comprised of debt for large regional banks. At December 31, 2016, these securities had an
amortized cost of $5.9 million and estimated fair value of $6.3 million. There was one corporate security in an unrealized loss
position as of December 31, 2017 and no corporate securities in a loss position as of December 31, 2016. 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, 2017, the book value of our pooled trust preferred collateralized debt obligations totaled $27.5 million with
an estimated fair value of $23.6 million, which includes securities comprised of 206 banks and other financial institutions. All
of our pooled securities are mezzanine tranches, two 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, 2017, after taking into account management’s best
estimates of future interest deferrals and defaults, two of our securities had no excess subordination in the tranches we own and
five of our securities had excess subordination which ranged from 2% to 72% of the current performing collateral.
The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of
December 31, 2017:
Class
Book
Value
Estimated
Fair
Value
Unrealized
Gain
(Loss)
Moody’s/
Fitch
Ratings
Number
of
Banks
Mezzanine
$
1,817
$
1,405
$
(412)
Ba1/BB
(dollars in thousands)
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
Mezzanine
2,043
2,448
1,863
6,097
13,136
95
2,228
2,052
2,125
5,209
10,453
174
185
(396)
262
(888)
C/C
B1/C
Caa1/C
B3/C
(2,683)
Ba2/CCC
79
Ca/C
$
27,499
$
23,646
$
(3,853)
6
26
37
41
63
49
7
Deferrals
and
Defaults
as a % of
Current
Collateral
Excess
Subordination
as a % of
Current
Performing
Collateral
18.05%
72.13%
38.52
27.83
27.93
23.35
12.95
69.35
0.00
19.46
1.62
0.00
39.26
69.99
Deal
PreTSL IV
PreTSL VIII
PreTSL IX
PreTSL X
PreTSL XII
PreTSL XIV
MMCap I
Total
71
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.
In the fourth quarter of 2017, an auction call was successfully completed on PreTSL XIII. This resulted in the security being
called at par providing a gain of $4.3 million. The book value of PreTSL XIII before redemption was $13.2 million. In
October 2016, the Senior note holders of PreTSL VII elected to liquidate all assets of the trust. The sale of the assets occurred in
the fourth quarter of 2016 and the redemption was completed in the first quarter of 2017. Our book value before redemption of
PreTSL VII was $3.1 million and, at the time of redemption, a gain of $0.6 million was recognized in 2016 and an additional
gain of $0.7 million was recorded in the first quarter of 2017.
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,
2017, 2016 and 2015 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, 2017. 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 206 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, 2017, default probabilities for performing
collateral ranged from 0.33% to 50%.
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
72
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.
Our cash flow analysis as of December 31, 2017, indicates that no credit related other-than-temporary impairment has occurred
on our pooled trust preferred securities during the year ended December 31, 2017. Based upon the analysis performed by
management, it is probable that two 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 previous table with 0% “Excess Subordination as a % of Current Performing Collateral.” For the
remaining securities in the table, our analysis as of December 31, 2017 indicates that it is probable that we will collect all
contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL X, 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, 2017, 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
18% to 104% 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
2017
2016
2015
(dollars in thousands)
$
17,056
$
24,851
$
26,246
—
—
—
—
—
—
(890)
(3,958)
12,208
$
(1,124)
(6,671)
17,056
$
(1,177)
(218)
24,851
$
(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, 2017, 2016 and 2015, 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, 2017 and 2016.
In the table above, the $4.0 million reduction in cumulative credit losses in 2017 and the $6.7 million reduction in 2016 related
to the early redemption of PreTSL XIII and PreTSL VII, respectively.
73
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, 2017 and 2016, our FHLB stock totaled $29.8 million
and $36.5 million, respectively and is included in “Other investments” on the Consolidated Statements of Financial Condition.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value.
First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will
be recovered. Accordingly, no impairment charge was recorded on these securities for the year ended December 31, 2017.
Note 11—Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types as of December 31:
Originated
Loans
2017
Acquired
Loans
Total Loans
Originated
Loans
(dollars in thousands)
2016
Acquired
Loans
Total Loans
$ 1,122,741
$
40,642
$ 1,163,383
$ 1,131,148
$
8,399
$ 1,139,547
242,905
1,206,119
1,892,185
543,411
5,963
220,251
126,911
6,248
248,868
217,840
1,426,370
1,165,851
2,019,096
1,717,043
549,659
546,589
1,781
63,341
25,167
2,188
219,621
1,229,192
1,742,210
548,777
$ 5,007,361
$
400,015
$ 5,407,376
$ 4,778,471
$
100,876
$ 4,879,347
Commercial, financial, agricultural
and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans
Credit Quality Information
As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are
used in grading our loans:
Pass
Acceptable levels of risk exist in the relationship. Includes all loans not classified as OAEM, substandard
or doubtful.
Other Assets
Especially
Mentioned
(OAEM)
Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in
deterioration of the repayment prospects or weaken the 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 assist 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.
74
The following tables represent our credit risk profile by creditworthiness category for the years ended December 31:
2017
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential real
estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$ 1,061,147
$
242,905
$ 1,194,352
$ 1,855,253
$
543,175
$ 4,896,832
26,757
30,431
4,406
61,594
—
—
—
—
1,435
10,332
—
11,767
13,326
23,606
—
36,932
—
236
—
236
41,518
64,605
4,406
110,529
Originated Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
$ 1,122,741
$
242,905
$ 1,206,119
$ 1,892,185
$
543,411
$ 5,007,361
Acquired Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
$
34,573
$
5,963
$
217,824
$
121,536
$
6,231
$
386,127
5,567
502
—
6,069
—
—
—
—
798
1,629
—
2,427
3,517
1,858
—
5,375
—
17
—
17
9,882
4,006
—
13,888
Total
$
40,642
$
5,963
$
220,251
$
126,911
$
6,248
$
400,015
2016
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential real
estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$ 1,038,844
$
217,565
$ 1,152,511
$ 1,691,220
$
546,316
$ 4,646,456
27,387
64,917
—
92,304
275
—
—
275
5,923
7,417
—
13,340
7,596
18,227
—
25,823
—
273
—
273
41,181
90,834
—
132,015
Originated Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
$ 1,131,148
$
217,840
$ 1,165,851
$ 1,717,043
$
546,589
$ 4,778,471
Acquired Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
75
$
7,591
$
1,781
$
62,919
$
24,043
$
2,185
$
98,519
486
322
—
808
—
—
—
—
—
422
—
422
—
1,124
—
1,124
—
3
—
3
486
1,871
—
2,357
$
8,399
$
1,781
$
63,341
$
25,167
$
2,188
$
100,876
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, 2017 and 2016 were $12.5 million and $26.3 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, 2017. 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.
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
2017
Total past
due and
nonaccrual
Nonaccrual
(dollars in thousands)
Current
Total
Originated Loans
Commercial, financial,
agricultural and other
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
378
199
4,618
2,198
1,899
$
$
61
—
1,025
28
769
40
—
1,076
6
623
$
18,741
$
19,220
$ 1,103,521
$ 1,122,741
—
6,225
3,240
236
199
242,706
242,905
12,944
1,193,175
1,206,119
5,472
3,527
1,886,713
1,892,185
539,884
543,411
Total
$
9,292
$
1,883
$
1,745
$
28,442
$
41,362
$ 4,965,999
$ 5,007,361
Acquired Loans
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
$
6
$
—
148
—
36
Total
$
190
$
7
—
9
—
20
36
$
— $
—
83
—
26
$
436
—
705
1,077
17
449
—
945
1,077
99
$
40,193
$
40,642
5,963
219,306
125,834
6,149
5,963
220,251
126,911
6,248
$
109
$
2,235
$
2,570
$
397,445
$
400,015
76
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
2016
Total past
due and
nonaccrual
Nonaccrual
(dollars in thousands)
Current
Total
Originated Loans
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
$
2,380
$
171
$
183
4,133
265
1,640
—
1,089
327
776
75
—
995
57
970
$
17,928
$
20,554
$ 1,110,594
$ 1,131,148
—
5,792
3,443
273
183
217,657
217,840
12,009
1,153,842
1,165,851
4,092
3,659
1,712,951
1,717,043
542,930
546,589
Total
$
8,601
$
2,363
$
2,097
$
27,436
$
40,497
$ 4,737,974
$ 4,778,471
Acquired Loans
Commercial, financial,
agricultural and other
Real estate construction
$
Residential real estate
Commercial real estate
Loans to individuals
$
486
—
148
—
1
Total
$
635
$
— $
—
39
—
7
46
$
Nonaccrual Loans
— $
—
— $
—
34
—
—
34
422
162
3
$
486
—
643
162
11
$
7,913
1,781
62,698
25,005
2,177
8,399
1,781
63,341
25,167
2,188
$
587
$
1,302
$
99,574
$
100,876
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 in doubt.
Impaired Loans
Management considers loans to be impaired when, based on current information and events, it is determined that the Company
will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination
of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is
measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when
the sole source 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.
There were no impaired loans held for sale at December 31, 2017 and December 31, 2016. Total gains of $21 thousand were
recognized on sales of impaired loans during the year ended December 31, 2017. No gains were recognized on sales of
impaired loans during the year ended December 31, 2016.
77
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, 2017 and 2016. 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, 2017, 2016 and 2015. 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
2017
Related
allowance
(dollars in thousands)
Average
recorded
investment
Interest
Income
Recognized
Originated Loans:
With no related allowance recorded:
Commercial, financial, agricultural and other
$
5,548
$
12,153
$
10,282
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With an allowance recorded:
—
10,625
5,155
347
21,675
—
12,470
5,489
383
30,495
—
11,366
6,469
353
28,470
Commercial, financial, agricultural and other
16,866
21,094
$
3,478
9,391
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
Acquired Loans:
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
$
$
9,701
38,171
$
100
1,451
$
$
—
456
954
—
—
478
954
—
18,276
22,526
39,951
$
53,021
$
—
107
128
—
3,713
3,713
436
$
—
666
940
17
2,059
—
—
93
137
—
230
449
—
965
1,842
17
3,273
— $
—
122
150
—
272
—
—
4
29
—
33
33
—
167
143
—
476
$
25
535
2,135
6
3,177
—
—
74
155
—
229
$
2,289
$
3,545
$
$
3,406
$
394
—
355
583
19
1,351
96
—
—
4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
78
Recorded
investment
Unpaid
principal
balance
2016
Related
allowance
(dollars in thousands)
Average
recorded
investment
Interest
Income
Recognized
Originated Loans:
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
Acquired Loans:
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
$
$
$
9,549
—
10,873
5,765
382
26,569
13,423
—
424
810
—
14,657
41,226
$
$
— $
—
406
162
3
571
—
—
16
—
—
16
587
$
15,369
—
13,004
6,905
507
35,785
19,226
—
475
810
—
20,511
56,296
$
$
2,530
—
164
434
—
3,128
3,128
—
—
480
162
3
645
— $
—
16
—
—
16
661
$
—
—
16
—
—
16
16
$
$
$
$
23,146
4
10,957
6,718
409
41,234
13,885
—
241
555
—
14,681
55,915
$
$
— $
—
406
162
3
571
—
—
16
—
—
16
587
$
576
44
312
170
15
1,117
99
—
4
25
—
128
1,245
—
—
—
—
—
—
—
—
—
—
—
—
—
79
2015
Average
recorded
investment
Interest
Income
Recognized
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other
$
17,692
$
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
95
10,635
7,890
338
36,650
7,731
—
403
674
—
8,808
$
45,458
$
216
—
172
90
4
482
129
—
—
4
—
133
615
Unfunded commitments related to nonperforming loans were $2.4 million and $1.8 million at December 31, 2017 and 2016,
respectively. After considering the collateral related to these commitments, a reserve of $178 thousand and $12 thousand was
established for these off balance sheet exposures at December 31, 2017 and 2016, 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.
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:
2017
2016
2015
(dollars in thousands)
$
$
$
$
$
11,563
11,222
22,785
60
54
114
$
$
$
$
$
13,790
11,569
25,359
$
$
— $
358
358
$
$
14,139
12,360
26,499
—
3,252
3,252
Troubled debt restructured loans
Accrual status
Nonaccrual status
Total
Commitments
Letters of credit
Unused lines of credit
Total
80
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
2017
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
6
20
5
10
41
$
6,768
$
1,806
$
134
179
—
261
—
28
987
573
269
49
$
9,561
$
6,946
$
968
448
77
851
412
65
$
7,081
$
2,095
$
1,878
$
11,054
$
8,274
$
566
1
29
—
596
Type of Modification
2016
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
5
39
8
13
65
$
23
$
6,318
$
3,854
$
10,195
$
6,210
$
107
1,368
23
214
—
82
2,619
25
25
2,940
1,393
130
2,698
1,271
96
$
1,521
$
6,614
$
6,523
$
14,658
$
10,275
$
317
124
59
—
500
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
(dollars in thousands)
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
12
32
1
16
61
$
1,751
$
3,195
$
4,527
$
9,473
$
8,823
$
1,330
—
—
3
296
—
167
1,414
464
35
1,710
464
205
1,575
389
169
2
—
—
$
1,754
$
3,658
$
6,440
$
11,852
$
10,956
$
1,332
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, 2017, 2016 and 2015, $0.3
million, $6.6 million and $3.7 million, respectively, of total rate modifications represent loans with modifications to the rate as
well as payment due to reamortization.
81
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 year ending
December 31:
Residential real estate
Loans to individuals
Total
2017
2016
2015
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
— $
1
1
$
—
2
2
(dollars in thousands)
4
—
4
$
$
313
—
313
3
—
3
$
$
97
—
97
The following tables provide detail related to the allowance for credit losses for the years ended December 31.
2017
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$
35,974
$
577
$
(6,176)
3,900
(10,280)
23,418
—
465
307
1,349
— $
— $
$
$
$
(458)
1
468
11
$
$
23,429
3,478
19,951
2,492
(1,261)
304
1,218
2,753
19
(26)
67
(54)
6
$
$
$
$
$
6,619
(340)
274
10,775
17,328
$
4,504
(4,220)
460
2,660
3,404
50,166
(11,997)
5,403
4,680
48,252
— $
—
4
25
29
— $
(28)
55
(27)
—
19
(512)
132
407
46
17,357
157
$
$
3,404
$
48,298
— $
3,746
—
5
(5)
—
1,349
$
2,759
— $
111
1,349
2,648
17,200
3,404
44,552
1,163,383
248,868
1,426,370
2,019,096
549,659
5,407,376
22,450
—
6,698
6,003
—
35,151
1,140,933
248,868
1,419,672
2,013,093
549,659
5,372,225
Allowance for credit losses:
Originated Loans:
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Acquired Loans:
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Total 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
82
2016
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 on originated loans
Ending balance on acquired loans (1)
Total ending balance
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
$
$
Loans:
Ending balance
Ending balance: individually evaluated
for impairment
$
31,035
$
887
$
(19,603)
4,164
20,378
35,974
—
35,974
2,530
33,444
$
$
—
562
(872)
577
—
577
$
— $
577
$
$
$
2,606
(1,189)
481
594
2,492
19
2,511
180
2,331
$
$
$
11,924
(570)
1,522
(6,257)
6,619
—
6,619
434
6,185
$
4,360
(4,943)
469
4,618
4,504
—
50,812
(26,305)
7,198
18,461
50,166
19
4,504
$
50,185
— $
3,144
4,504
47,041
1,139,547
219,621
1,229,192
1,742,210
548,777
4,879,347
22,325
—
5,875
5,468
—
33,668
Ending balance: collectively evaluated
for impairment
4,845,679
(1) Amount reflects provision expense and ending allowance balance for loans acquired in 2016 as part of the purchase of FirstMerit branches.
1,736,742
1,223,317
1,117,222
548,777
219,621
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
4,360
$
52,051
(18,868)
2,681
14,948
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
Note 12—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.
83
As of December 31, 2017 and 2016, 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 8, “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
2017
2016
(dollars in thousands)
$
1,840,180
$
1,733,820
17,946
20,472
1,149
18,108
26,630
1,301
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, 2017 include amounts issued in 2017 of $1.5 million in financial standby
letters of credit and $5.1 million in performance standby letters of credit. There were $0.3 million commercial letters of credit
issued during 2017. A liability of $0.2 million has been recorded as of both December 31, 2017 and 2016, 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 $5.2 million and $4.1 million as of December 31, 2017 and 2016, 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.
84
Note 13—Premises and Equipment
Premises and equipment are described as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Software
Subtotal
Less accumulated depreciation and amortization
Total premises and equipment
Estimated
Useful Life
2017
(dollars in thousands)
$
15,389
$
Indefinite
10-50 years
5-40 years
3-7 years
3-7 years
88,386
17,812
64,609
37,434
223,630
142,291
$
81,339
$
2016
13,679
80,364
15,871
61,324
36,077
207,315
139,781
67,534
Depreciation related to premises and equipment included in noninterest expense for the years ended December 31, 2017, 2016
and 2015 amounted to $9.0 million, $7.5 million and $7.2 million, respectively.
First Commonwealth leases various premises and assorted equipment under non-cancellable agreements. Total future minimal
rental commitments at December 31, 2017, were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Premises
Equipment
(dollars in thousands)
$
4,459
$
136
4,106
3,348
2,929
2,646
12,851
78
15
5
—
—
$
30,339
$
234
Included in the lease commitments above is $141 thousand in lease payments to be paid under a sale-leaseback arrangement.
The sale-leaseback transaction occurred in 2005 and resulted in a gain of $297 thousand on the sale of a branch that is being
recognized over the 15 year lease term through 2020.
Increases in utilities and taxes that may be passed on to the lessee under the terms of various lease agreements are not reflected
in the above table. However, certain lease agreements provide for increases in rental payments based upon historical increases
in the consumer price index or the lessor’s cost of operating the facility, and are included in the minimum lease commitments.
Additionally, the table above includes rent expense that is recognized for rent holidays and during construction periods. Total
lease expense amounted to $2.7 million, $3.7 million and $2.9 million in 2017, 2016 and 2015, respectively.
Note 14—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, 2017 and 2016
was $255.4 million and $186.5 million, respectively. The $68.9 million increase in goodwill during the year ended
December 31, 2017 is a result of $70.6 million recognized as a result of the acquisition of DCB Financial in 2017 offset by a
$1.6 million decrease related to adjustments to the fair value of assets acquired as part of the branch acquisition in 2016. No
impairment charges on goodwill or other intangible assets were incurred in 2017, 2016 or 2015.
85
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, 2017 and December 31, 2017 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, 2017, goodwill was not considered impaired; however, changing economic conditions that may adversely
affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could
adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the
future.
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:
December 31, 2017
Customer deposit intangibles
Customer list intangible
Total other intangible assets
December 31, 2016
Customer deposit intangibles
Customer list intangible
Total other intangible assets
Gross
Intangible
Assets
Accumulated
Amortization
(dollars in thousands)
Net
Intangible
Assets
$
$
$
$
$
$
19,471
2,283
21,754
30,471
984
31,455
$
$
$
$
$
$
(6,071) $
(751) $
(6,822) $
(18,998) $
(444) $
(19,442) $
13,400
1,532
14,932
11,473
540
12,013
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 9.3 years and a weighted average
amortization period of approximately 8.9 years. The customer list intangible represents the estimated value of the customer
base for an insurance agency acquired in 2014 and the wealth management business acquired as part of the DCB acquisition in
2017. 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 of 11.7 years and a weighted average amortization
period of 9.9 years. In the table above, the change in the gross customer deposit intangible and customer list intangibles from
December 31, 2016 to December 31, 2017 is due to the acquisition of DCB Financial resulting in $4.7 million of core deposit
intangibles and $1.3 million of customer list intangibles. In addition, $15.7 million of customer deposit intangibles resulting
from an acquisition in 2006 were completely amortized in 2016. In addition to customer deposit intangibles and customer list
intangibles, First Commonwealth has $75 thousand in mortgage servicing rights related to the sale of 1-4 family residential
mortgages for which we retain servicing. First Commonwealth recognized amortization expense on other intangible assets of
$3.1 million, $0.5 million, and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.
86
The following presents the estimated amortization expense of core deposit and customer list intangibles:
2018
2019
2020
2021
2022
Thereafter
Total
Core Deposit
Intangibles
Customer List
Intangible
Total
(dollars in thousands)
2,714 $
318 $
2,414
2,062
1,768
1,473
2,969
271
230
193
159
361
3,032
2,685
2,292
1,961
1,632
3,330
13,400 $
1,532 $
14,932
$
$
Note 15—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
2017
2016
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
(dollars in thousands)
187,281
$
114,043
$
3,361,840
614,813
2,972,747
591,832
$
4,163,934
$
3,678,622
Interest-bearing deposits at December 31, 2017 and 2016, include allocations from interest-bearing demand deposit accounts of
$919.1 million and $779.2 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, 2017 and 2016, were certificates of deposit in denominations of $100 thousand or
more of $210.4 million and $145.4 million, respectively.
Interest expense related to certificates of deposit in denominations of $100 thousand or greater amounted to $1.5 million in
2017, $1.2 million in 2016 and $1.8 million in 2015.
Included in time deposits at December 31, 2017, were certificates of deposit with the following scheduled maturities (dollars in
thousands):
$
376,181
144,091
43,463
35,530
15,548
$
614,813
2018
2019
2020
2021
2022 and thereafter
Total
87
Note 16—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
Ending
Balance
2017
Average
Balance
Average
Rate
Ending
Balance
2016
Average
Balance
Average
Rate
Ending
Balance
2015
Average
Balance
Average
Rate
(dollars in thousands)
Federal funds purchased
$
— $
6,225
1.24% $
— $
6,887
0.60% $
4,000
$
14,832
Borrowings from FHLB
567,500
710,932
1.18
748,000
1,265,932
0.61
1,400,000
1,117,522
Securities sold under
agreements to
repurchase
Total
Maximum total at any
month-end
Weighted average rate at
year-end
139,966
150,234
$ 707,466
$ 867,391
0.24
1.01
119,943
114,918
$ 867,943
$ 1,387,737
0.23
0.58
106,825
120,177
$ 1,510,825
$ 1,252,531
$ 967,259
$ 1,530,678
$ 1,510,825
1.27%
0.63%
0.36%
0.42
0.23
0.40
0.53%
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 17—Subordinated Debentures
Subordinated Debentures outstanding at December 31 are as follows:
2017
2016
2015
(dollars in thousands)
77
$
41
$
8,360
362
7,765
270
8,799
$
8,076
$
$
$
54
4,684
280
5,018
Due
Amount
Rate
Amount
Rate
2017
2016
(dollars in thousands)
Owed to:
First Commonwealth Capital Trust II
2034
$
First Commonwealth Capital Trust III
2034
Total
$
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.
88
Note 18—Other Long-term Debt
Other long-term debt at December 31 follows:
Borrowings from FHLB due:
2017
2018
2019
2020
2021
2022
Thereafter
Total
2017
2016
Amount
Weighted
Average
Contractual
Rate
Amount
(dollars in thousands)
Weighted
Average
Contractual
Rate
$
$
607
631
656
681
708
4,878
8,161
3.83%
3.83
3.84
3.84
3.85
3.80
$
$
586
609
633
658
684
5,579
8,749
3.83%
3.83
3.84
3.84
3.84
3.81
The weighted average contractual rate reflects the rate due to creditors. There are no purchase accounting adjustments related to
long-term debt in 2017 or 2016. Therefore, the weighted average effective rate of long-term debt is equal to the weighted
average contractual rate of long-term debt.
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 17, “Subordinated Debentures.”
Note 19—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 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.
89
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 10, “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. This category also
includes the Small Business Administration guaranteed portion of small business loans. The estimated fair value of these loans
is based on the contract with the third party investor.
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 one year, Eurodollar futures contracts and
swap rates from one year to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate
derivatives are further described in Note 8, “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 2017 and 2016, we have not
realized any losses due to a counterparty's inability to pay any net uncollateralized position.
Interest rate derivatives also include interest rate forwards entered into to hedge residential mortgage loans held for sale and the
related interest-rate lock commitments. This includes forward commitments to sell mortgage loans. The fair value of these
derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of
mortgage loans for rate lock commitments.
In addition, the Company hedges foreign currency risk through the use of foreign exchange forward contracts. The fair value of
foreign exchange forward contracts is based on the differential between the contract price and the market-based forward rate.
The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market based
appraisal less estimated costs to sell or an executed sales agreement.
• Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including option
pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or
broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any,
market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3
valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or
liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable
equity investments, certain interest rate derivatives, certain 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 United States. 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 10 “Impairment of Investment Securities.” The
90
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 monitoring the
performance of the underlying collateral, discussing the discount rate, cash flow assumptions and general market trends with
the specialized third party and 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.
The estimated fair value of limited partnership investments included in Level 3 is based on par value.
For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood
of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).
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
$
23,646
Discounted Cash Flow
Probability of default
0.00% - 100% (8.98%)
Prepayment rates
0.00% - 72.02% (4.46%)
Discount rates
5.00% - 11.50% (a)
Equities
Impaired Loans
1,670
Par Value
N/A
1,336 (b)
Gas Reserve study
Discount rate
N/A
10.00%
Limited Partnership Investments
2,143
Par Value
6,820 (b) Discounted Cash Flow
Gas per MMBTU
$2.87 - $3.61 (c)
Oil per BBL/d
Discount Rate
N/A
$56.05 - $57.65 (c)
1.90% - 4.68%
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: MMBTU—one million British thermal units; 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 prices would result in an increase in the estimated fair value of the loans, while a
decrease in these prices would result in a lower fair value measurement.
91
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis at December 31:
2017
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
— $
11,338
$
— $
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 Debt Securities
Equities
Total Securities Available for Sale
Other Investments
Loans Held for Sale
Other Assets (a)
Total Assets
Other Liabilities (a)
Total Liabilities
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
— $
— $
— $
24,149
625,555
—
1,097
27,410
16,493
—
706,042
—
706,042
29,837
14,850
1,778
752,507
3,079
3,079
—
—
—
—
—
—
23,646
23,646
1,670
25,316
—
—
2,143
11,338
24,149
625,555
—
1,097
27,410
16,493
23,646
729,688
1,670
731,358
29,837
14,850
3,921
$
$
$
27,459
$
779,966
— $
— $
3,079
3,079
(a) Hedging and non-hedging interest rate derivatives and limited partnership investments
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential
$
— $
16,617
$
— $
16,617
2016
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
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
676,853
1
16,631
27,229
6,319
—
743,650
—
743,650
36,498
7,052
6,089
793,289
5,972
5,972
$
$
$
—
—
—
—
—
33,292
33,292
1,670
34,962
—
—
930
35,892
$
— $
— $
676,853
1
16,631
27,229
6,319
33,292
776,942
1,670
778,612
36,498
7,052
7,019
829,181
5,972
5,972
$
$
$
(a) Hedging and non-hedging interest rate derivatives and limited partnership investments
92
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, 2017:
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
Other
Assets
(dollars in thousands)
Total
$
33,292
$
1,670
$
930
$
35,892
4,329
3,725
—
—
—
(17,700)
—
—
—
—
—
—
—
—
—
—
—
—
1,213
—
—
—
—
—
$
23,646
$
1,670
$
2,143
$
4,329
3,725
1,213
—
—
(17,700)
—
—
27,459
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, 2017.
During the year ended December 31, 2017, there were no transfers between fair value Levels 1, 2 or 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, 2016:
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
Other
Assets
(dollars in thousands)
Total
$
35,658
$
2,170
$
— $
37,828
589
850
—
—
—
(3,805)
—
—
—
—
36
—
—
—
(536)
—
$
33,292
$
1,670
$
—
—
394
—
—
—
—
536
930
$
589
850
430
—
—
(3,805)
(536)
536
35,892
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, 2016.
During the year ended December 31, 2016, $0.5 million in investments in limited partnerships were moved from other equity
securities to other assets constituting the transfers into and out of Level 3. There were no transfers between fair value Levels 1
and 2.
93
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
2017
Level 1
Level 2
Level 3
Total
(dollars in thousands)
— $
—
— $
23,249
3,264
26,513
$
$
15,245
—
15,245
2016
Level 1
Level 2
Level 3
(dollars in thousands)
— $
—
— $
18,679
7,566
26,245
$
$
19,990
—
19,990
$
$
$
$
38,494
3,264
41,758
Total
38,669
7,566
46,235
$
$
$
$
$
$
$
$
Total
Gains
(Losses)
(1,548)
(1,099)
(2,647)
Total
Gains
(Losses)
(9,032)
(703)
(9,735)
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 $2.8 million as of
December 31, 2017 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 14
“Goodwill and Other Amortizing Intangible Assets.” There were no other assets or liabilities measured at fair value on a
nonrecurring basis during 2017.
FASB ASC Topic 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial
assets and financial liabilities that are not measured and reported at fair value on a recurring basis or 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 available for sale and held to maturity 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
94
instrument. The carrying value of other investments, which includes FHLB stock, is considered a reasonable estimate of fair
value.
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, 2017 and 2016,
respectively. See Note 12, “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.
Subordinated debt, long-term debt and capital lease obligation: 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.
95
The following table presents carrying amounts and estimated fair values of First Commonwealth’s financial instruments at
December 31:
2017
Fair Value Measurements Using:
Carrying
Amount
Total
Level 1
Level 2
Level 3
(dollars in thousands)
$
98,624
$
98,624
$
98,624
$
8,668
731,358
422,096
29,837
14,850
8,668
731,358
418,249
29,837
14,850
5,407,376
5,443,434
5,580,705
707,466
8,161
72,167
7,590
5,580,812
707,263
8,548
65,785
7,590
8,668
—
—
—
—
—
—
—
—
—
—
— $
—
706,042
418,249
29,837
14,850
23,249
5,580,812
707,263
8,548
—
7,590
—
—
25,316
—
—
—
5,420,185
—
—
—
65,785
—
2016
Fair Value Measurements Using:
Carrying
Amount
Total
Level 1
Level 2
Level 3
(dollars in thousands)
$
91,033
$
91,033
$
91,033
$
24,644
778,612
372,513
36,498
7,052
4,879,347
4,947,408
867,943
8,749
72,167
24,644
778,612
368,618
36,498
7,052
4,878,254
4,949,714
867,667
9,169
65,656
24,644
—
—
—
—
—
—
—
—
—
— $
—
743,650
368,618
36,498
7,052
18,679
4,949,714
867,667
9,169
—
—
—
34,962
—
—
—
4,859,575
—
—
—
65,656
Financial assets
Cash and due from banks
Interest-bearing deposits
Securities available for sale
Securities held to maturity
Other investments
Loans held for sale
Loans
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
Capital lease obligation
Financial assets
Cash and due from banks
Interest-bearing deposits
Securities available for sale
Securities held to maturity
Other investments
Loans held for sale
Loans
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
96
Note 20—Income Taxes
The income tax provision for the years ended December 31 is as follows:
Current tax provision
Federal
State
Total current tax provision
Deferred tax provision (benefit):
Federal
State
Total deferred tax provision
Total tax provision
2017
2016
2015
(dollars in thousands)
$
29,071
$
19,879
$
274
29,345
19,237
(21)
19,216
154
20,033
5,846
(240)
5,606
$
48,561
$
25,639
$
8,610
68
8,678
12,158
—
12,158
20,836
The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:
2017
2016
2015
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
Tax at statutory rate
$
36,304
35% $
Increase (decrease) resulting from:
(dollars in thousands)
29,830
35% $
24,843
35%
State income tax, net of federal
benefit
Income from bank owned life
insurance
Tax-exempt interest income, net
Tax credits
Enactment of federal tax reform
Other
164
(1,995)
(2,709)
(11)
16,709
99
—
(2)
(3)
—
17
—
(56)
(1,883)
(2,434)
—
—
182
—
(2)
(3)
—
—
—
44
(1,894)
(2,232)
(61)
—
136
—
(3)
(3)
—
—
—
Total tax provision
$
48,561
47% $
25,639
30% $
20,836
29%
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 30% and 29% for the years ended December 31, 2016 and
2015, respectively. The annual effective tax rate is 47% for the year ended December 31, 2017, which is greater than the 35%
statutory rate due to the enactment of federal tax reform.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act
reduces the corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result we are required to re-measure,
through income tax expense, our deferred tax assets and liabilities using the enacted rate at which we expect them to be
recovered or settled. The re-measurement of our net deferred tax asset resulted in additional income tax expense of $16.7
million.
Also on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No.
118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Act
in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to
complete this accounting in the reporting period that includes the enactment date. SAB 118 allows for a measurement period
not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.
We recorded provisional amounts of deferred income taxes using reasonable estimates in three areas where information
necessary to complete the accounting was not available, prepared, or analyzed: 1) Our deferred tax liability for temporary
97
differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under
the Act which allows for full expensing of qualified property purchased and placed in service after September 27, 2017. 2) Our
deferred tax asset for temporary differences associated with accrued compensation will be finalized with payments made on or
before March 15, 2018 and deducted on the 2017 income tax returns. 3) Our deferred tax assets and liabilities acquired from
DCB Financial are awaiting completion of the final short period tax return from outside preparers, which is necessary to
confirm the final acquired temporary differences.
In a fourth area, we made no adjustments to deferred tax assets representing future deductions for accrued compensation that
may be subject to new limitations under Internal Revenue Code 162(m) which, generally, limits the annual deduction for certain
compensation paid to employees to $1 million. There is uncertainty in applying the newly-enacted rules to existing contracts,
and we are seeking further clarifications before completing our analysis.
The tax effects of temporary differences between the financial statement carrying amounts and the tax bases of assets and
liabilities that represent significant portions of the deferred tax assets and liabilities at December 31 are presented below:
Deferred tax assets:
Allowance for credit losses
Postretirement benefits other than pensions
Alternative minimum tax credit carryforward
Unrealized loss on securities available for sale
Net operating loss carryforward
Writedown of other real estate owned
Deferred compensation
Accrued interest on nonaccrual loans
Accrued incentives
Unfunded loan commitments & other reserves
Deferred rent
Other
Total deferred tax assets
Deferred tax liabilities:
Income from unconsolidated subsidiary
Depreciation of assets
Other
Total deferred tax liabilities
Net deferred tax asset
2017
2016
(dollars in thousands)
$
10,223
$
17,616
345
201
2,091
6,145
878
1,514
1,017
1,277
1,098
801
1,224
611
—
3,905
—
1,266
1,966
1,701
2,627
1,452
1,285
1,966
26,814
34,395
(380)
(587)
(338)
(1,305)
25,509
$
(623)
(28)
(429)
(1,080)
33,315
$
The Company has approximately $29.0 million of federal net operating losses and $0.2 million of AMT carryforwards which
are subject to an annual limitation under IRC Section 382. The net operating losses expire in 2030 and the Company expects to
utilize the losses prior to expiration.
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. Based on our evaluation, as of December 31, 2017, 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 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, 2017. 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.
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
98
examination was closed with no adjustments. Generally, tax years prior to the year ended December 31, 2014 are no longer
open to examination by federal and state taxing authorities.
Note 21—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 $2.8 million in 2017, $2.5 million in 2016, and $2.7 million in 2015.
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 2017, 2016 and 2015.
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
2017
2016
2015
(dollars in thousands)
— $
— $
49
—
(21)
28
$
67
—
(7)
60
$
—
62
—
(4)
58
$
$
99
The following table sets forth the change in the benefit obligation and plan assets as of December 31:
Change in Benefit Obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial gain
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
2017
2016
(dollars in thousands)
$
1,394
$
1,815
—
49
—
(116)
(133)
1,194
—
—
133
(133)
—
1,194
—
440
1,634
$
—
67
—
(337)
(151)
1,394
—
—
151
(151)
—
1,394
—
345
1,739
2017
2016
(dollars in thousands)
1,194
$
1,394
$
$
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
2017
2016
2015
(dollars in thousands)
$
$
(347) $
—
(347) $
(225) $
—
(225) $
(10)
—
(10)
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
100
2017
2016
2015
3.37%
6.00%
4.75%
2023
3.74%
6.00%
4.75%
2022
3.88%
6.25%
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
2017
2016
2015
3.74%
6.00%
4.75%
2022
10.00%
11.0
3.88%
6.25%
4.75%
2022
10.00%
11.0
3.61%
6.50%
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, 2017, the projected benefit payments for the next ten years are as follows:
2018
2019
2020
2021
2022
2023 - 2027
One-Percentage-
Point Increase
One-Percentage-
Point Decrease
(dollars in thousands)
$
$
29
2
(27)
(2)
Projected Benefit
Payments
(dollars in thousands)
152
$
128
122
115
107
422
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 2018 are as
follows (dollars in thousands):
Postretirement
Benefits
Net gain
Transition obligation
Total
(dollars in thousands)
$
(35)
—
(35)
$
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.
101
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 3,365,572 shares were still eligible for awards as of December 31, 2017.
Restricted Stock
The following provides detail on the restricted stock awards which were issued and outstanding in 2017, 2016 and 2015 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
March 24, 2017
March 24, 2017
March 24, 2017
March 24, 2017
December 19, 2016
September 30, 2016
September 19, 2016
June 7, 2016
March 1, 2016
March 1, 2016
March 1, 2016
February 18, 2016
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
5,000 $
12.99 March 24, 2020
7,000
7,000
7,000
15,000
10,000
33,000
10,000
10,000
5,000
20,000
18,348
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
12.99 August 31, 2017
12.99 March 24, 2020
12.99 August 31, 2017
13.96 December 19, 2019
10.09 September 30, 2019
10.02 September 19, 2019
9.34 June 7, 2019
8.84 March 1, 2019
8.84 March 1, 2019
8.84 August 31, 2017
8.43 December 31, 2016
9.84 June 26, 2018
8.45 August 31, 2017
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
Number of
Equal Vesting
Periods
1
1
1
1
3
1
3
1
1
1
1
1
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 $3.8 million, $3.2 million and $1.4 million in 2017, 2016 and 2015,
respectively. As of December 31, 2017, there was $3.0 million of unrecognized compensation cost related to unvested restricted
stock awards granted.
102
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
2017
2016
2015
Weighted
Average
Grant Date
Fair Value
9.34
12.99
9.49
8.55
9.99
$
Shares
247,668
26,000
(151,668)
(5,000)
117,000
Weighted
Average
Grant Date
Fair Value
8.01
9.88
7.04
—
9.34
$
Shares
231,834
121,348
(105,514)
—
247,668
Weighted
Average
Grant Date
Fair Value
7.08
8.41
6.87
—
8.01
$
Shares
265,000
135,370
(168,536)
—
231,834
The following provides detail on restricted stock awards estimated to be granted on a performance award basis during 2017,
2016 and 2015. These plans were previously approved by the Board of Directors.
Grant Date
February 24, 2012
January 28, 2013
January 27, 2014
January 26, 2015
December 30, 2015
February 18, 2016
February 23, 2017
Target
Share
Award
68,000
128,611
125,000
125,000
60,000
160,650
93,500
Performance
Period
(years)
3
3
3
3
5
3
3
Award if
threshold
met
Award if
targets are
met
Award if
superior
met
Award if
threshold not
achieved
40%
40%
40%
40%
40%
40%
100%
100%
100%
100%
100%
100%
200%
200%
200%
200%
200%
200%
—%
—%
—%
—%
—%
—%
Vesting After
Performance
Period (years)
1
1
0
0
0
0
0
Final vesting
December 31, 2015
December 31, 2016
December 31, 2016
December 31, 2017
December 31, 2020
December 31, 2018
December 31, 2019
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
2017
2016
2015
426,596
276,442
(171,637)
(6,356)
525,045
320,705
176,936
(18,348)
(52,697)
426,596
284,000
185,000
(34,200)
(114,095)
320,705
The unvested target awards for the Plans have an estimated fair value of $14.32 per share for the January 26, 2015 and February
18, 2016 grants based on the closing price of Company stock as of December 31, 2017. The December 30, 2015 grant has a
fair value of $9.18 based the closing stock price when the shares were granted. Based on a Monte Carlo simulation, the
February 23, 2017 grant has a fair value of $13.29 per share for 75% of the grant and$15.09 per share for 25% of the grant.
103
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, 2017, 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 $7 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. The Bank and counsel for the plaintiffs reached
an agreement-in-principle to settle the litigation during the second quarter of 2016. The parties are negotiating the terms of a
definitive settlement agreement which would be subject to court approval and other customary conditions. The estimated cost
of the settlement to the Bank was recorded as a liability in the second quarter of 2016. 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 set forth in
the preceding paragraph.
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 collectability nor do they present other unfavorable
features. It is anticipated that similar transactions will be entered into in the future.
The following is an analysis of loans to related parties (dollars in thousands):
December 31, 2016
Advances
Repayments
Other
December 31, 2017
$
$
1,164
740
(1,127)
4,871
5,648
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
104
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 September 2017.
Effective January 1, 2015, the Company became 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 a new common equity Tier I capital ratio was established 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 permit 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.
105
As of December 31, 2017 and 2016, First Commonwealth and First Commonwealth Bank met all capital adequacy
requirements to which they are subject and was considered well-capitalized under the regulatory rules, all on a fully phased-in
basis. To be considered well-capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based
capital, Tier I leverage ratio and Common equity tier I risk-based capital as set forth in the table below:
Actual
Minimum Capital
Required - 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, 2017
Total Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
$ 745,473
12.34% $ 558,728
9.25% $ 634,232
10.50% $ 604,030
10.00%
First Commonwealth Bank
712,341
11.83
556,872
9.25
632,124
10.50
602,023
10.00
Tier I Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
Tier I Capital to Average Assets
First Commonwealth
Financial Corporation
$ 691,993
658,861
11.46% $ 437,922
436,467
10.94
7.25% $ 513,426
511,720
7.25
8.50% $ 483,224
481,619
8.50
8.00%
8.00
$ 691,993
9.74% $ 284,100
4.00% $ 284,100
4.00% $ 355,125
5.00%
First Commonwealth Bank
658,861
9.30
283,344
4.00
283,344
4.00
354,180
5.00
Common Equity Tier I to Risk
Weighted Assets
First Commonwealth
Financial Corporation
$ 623,252
10.32% $ 347,317
5.75% $ 422,821
7.00% $ 392,620
6.50%
First Commonwealth Bank
658,861
10.94
346,163
5.75
421,416
7.00
391,315
6.50
106
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, 2016
Total Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
$ 687,554
12.28% $ 483,034
8.63% $ 588,042
10.50% $ 560,040
10.00%
First Commonwealth Bank
617,076
11.06
481,248
8.63
585,867
10.50
557,969
10.00
Tier I Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
$ 633,262
11.31% $ 371,026
6.63% $ 476,034
8.50% $ 448,032
8.00%
First Commonwealth Bank
562,784
10.09
369,654
6.63
474,273
8.50
446,375
8.00
Tier I Capital to Average Assets
First Commonwealth
Financial Corporation
$ 633,262
9.83% $ 257,776
4.00% $ 257,776
4.00% $ 322,220
5.00%
First Commonwealth Bank
562,784
8.79
256,214
4.00
256,214
4.00
320,268
5.00
Common Equity Tier I to Risk
Weighted Assets
First Commonwealth
Financial Corporation
$ 563,262
10.06% $ 287,020
5.13% $ 392,028
7.00% $ 364,026
6.50%
First Commonwealth Bank
562,784
10.09
285,959
5.13
390,578
7.00
362,680
6.50
Note 26—Capital
In 2012, First Commonwealth announced a $50.0 million common stock repurchase program. Additional share repurchase
programs were authorized for up to $25.0 million in shares of the Company’s common stock for each year from 2013 to 2016.
The repurchase program was suspended in July 2016 as a result of the acquisition of thirteen branches in northern Ohio which
management believes represents a better use of capital for shareholder. Repurchases under all programs resulted in a total of
16,665,735 shares repurchased at an average price of $7.55 per share.
107
Note 27—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
December 31,
2017
2016
(dollars in thousands)
$
16,432
$
30,387
17
19
927,765
770,214
2,186
9,191
3,715
—
—
4,996
964,302
4,008
72,167
888,127
$
$
964,302
$
2,185
9,042
3,793
33
4,662
2,453
822,788
692
72,167
749,929
822,788
$
$
$
For the years ended December 31,
2017
2016
2015
(dollars in thousands)
$
1
$
1
$
52,586
(3,000)
17
(4,767)
44,837
2,557
47,394
7,771
55,510
(2,635)
83
(4,700)
48,259
2,515
50,774
8,816
1
49,917
(2,357)
232
(4,989)
42,804
2,528
45,332
4,811
50,143
Net income
$
55,165
$
59,590
$
108
Statements of Cash Flow
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
For the years ended December 31,
2017
2016
2015
(dollars in thousands)
$
55,165
$
59,590
$
50,143
Depreciation and amortization
Net (gains) losses 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
Proceeds from dissolution of subsidiary
Acquisition of affiliate, net of cash received
Investment in subsidiaries
Net cash (used in) provided by investing activities
Financing Activities
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
322
(3)
(550)
(7,771)
8,767
55,930
2
(207)
3
0
(250)
(37,690)
(38,142)
(30,513)
228
(1,458)
(31,743)
(13,955)
30,387
355
—
7,380
(8,816)
7,759
66,268
3
—
(332)
27,017
—
(47,017)
(20,329)
(24,907)
216
(864)
(25,555)
20,384
10,003
$
16,432
$
30,387
$
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
Cash dividends declared per common share were $0.32 for 2017 and $0.28 in 2016 and 2015.
First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As
of December 31, 2017, there are no amounts outstanding on this line and we are in compliance with all debt covenants related
to the line of credit.
Note 28—Subsequent Event
On January 10, 2018, the Company announced the acquisition of Garfield Acquisition Corp., the parent company of Cincinnati,
Ohio based Foundation Bank, in a cash and stock transaction valued at approximately $58 million. The acquisition of
Foundation Bank includes approximately $215 million in assets, $182 million in loans, $148 million in deposits and five full-
service banking offices. This transaction is subject to regulatory approval.
109
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
2017
(dollars in thousands, except per share data)
$
65,411
63,120
$
$
65,840
6,270
59,570
2,253
57,317
4,345
20,360
51,909
30,113
26,132
3,981
0.04
0.04
$
$
5,848
59,563
1,214
58,349
92
19,698
47,361
30,778
9,495
21,283
0.22
0.22
$
$
5,303
57,817
(1,609)
59,426
(49)
18,953
58,263
20,067
6,054
14,013
0.14
0.14
$
$
56,179
4,349
51,830
3,229
48,601
652
16,280
42,765
22,768
6,880
15,888
0.18
0.18
97,363,471
97,507,465
97,402,816
97,457,470
97,183,599
97,232,288
88,929,892
88,987,671
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
2016
(dollars in thousands, except per share data)
$
54,479
53,850
$
$
55,932
4,413
51,519
(1,826)
53,345
589
17,743
45,675
26,002
8,088
17,914
0.20
0.20
$
$
4,861
49,618
3,408
46,210
—
16,994
38,696
24,508
7,312
17,196
0.19
0.19
$
$
4,759
49,091
10,372
38,719
28
15,530
37,410
16,867
4,860
12,007
0.14
0.14
$
$
53,353
4,546
48,807
6,526
42,281
—
13,715
38,144
17,852
5,379
12,473
0.14
0.14
88,879,658
88,887,387
88,854,448
88,858,204
88,831,758
88,838,614
88,840,088
88,845,201
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Net securities gains (losses)
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 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
$
$
$
$
$
$
110
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.
111
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, 2017. The effectiveness of First Commonwealth’s
internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their attestation report which is included herein.
First Commonwealth Financial Corporation
Indiana, Pennsylvania
March 1, 2018
/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
112
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
First Commonwealth Financial Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited First Commonwealth Financial Corporation and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial
statements), and our report dated March 1, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s 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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 1, 2018
113
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
First Commonwealth Financial Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of First Commonwealth Financial
Corporation and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and
2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2017, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 1, 2018 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that responds to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have served as the Company's auditor since 2006.
Pittsburgh, Pennsylvania
March 1, 2018
/s/ KPMG LLP
114
ITEM 9B.
Other Information
None.
115
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 24, 2018 (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.
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, 2017:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
525,045
N/A
525,045
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
3,365,572
N/A
3,365,572
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.
116
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.
117
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 10.1 to the current report on Form 8-
K filed December 21, 2017
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
2017 Annual Incentive Plan
2015-2017 Long-Term Incentive Plan
2016-2018 Long-Term Incentive Plan
2017-2019 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 9, 2017
Exhibit 10.2 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 9, 2016
Exhibit 10.2 to the quarterly report on Form
10-Q filed May 9, 2017
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 Leonard V.
Lombardi
Change of Control Agreement dated December 30,
2011 entered into between FCFC and Matthew C.
Tomb
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
Performance Unit Agreement dated December 30, 2015
between First Commonwealth Financial Corporation
and T. Michael Price
Exhibit 10.13 to the annual report on Form
10-K filed February 29, 2016
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
118
Description
Employment Agreement dated April 10, 2014 between
First Commonwealth Financial Corporation and James
R. Reske
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
Incorporated by Reference to
Exhibit 10.1 to the current report on Form
8-K filed April 10, 2014
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
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
Employment Agreement dated September 19, 2016
entered into between FCFC and Brian Karrip
Exhibit 10.1 to the quarterly report on Form
10-Q filed November 9, 2016
Change of Control Agreement dated September 19,
2016 entered into between FCFC and Brian Karrip
Exhibit 10.2 to the quarterly report on Form
10-Q filed November 9, 2016
Restricted Stock Agreement dated September 19, 2016
entered into between FCFC and Brian Karrip
Exhibit 10.3 to the quarterly report on Form
10-Q filed November 9, 2016
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Amended and Restated Director Retainer Plan
Subsidiaries of the Registrant
Consent of KPMG LLP Independent Registered Public
Accounting Firm
Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from First Commonwealth
Financial Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2017, formatted in
XBRL (Extensible Business Reporting Language): (i)
the Consolidated Balance Sheets at December 31, 2017
and December 31, 2016, (ii) the Consolidated
Statements of Income for the years ended December
31, 2017, 2016 and 2015, (iii) the Consolidated
Statements of Comprehensive Income for the years
ended December 31, 2017, 2016 and 2015, (iv) the
Consolidated Statements of Changes in Shareholders’
Equity for the years ended December 31, 2017, 2016
and 2015, (v) the Consolidated Statements of Cash
Flows for the years ended December 31, 2017, 2016
and 2015, and (vi) the Notes to Consolidated Financial
Statements.
Exhibit
Number
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
21.1
23.1
31.1
31.2
32.1
32.2
101.00
119
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: March 1, 2018
/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
Director
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
President and Chief Executive Officer
(Principal Executive Officer)
March 1, 2018
Executive Vice President, Chief
Financial Officer, and Treasurer
Director
Director
Director
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
Jon L. Gorney
/S/ David W. Greenfield
David W. Greenfield
/s/ Bart E. Johnson
Bart E. Johnson
/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
/s/ Stephen A. Wolfe
Stephen A. Wolfe
120
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 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
DCB Title Services, LLC (Inactive)
110 Riverbend Avenue
Lewis Center, OH 43035
Incorporated under the laws of Ohio
100%
100%
100%
100%
100%
100%
100%
50%
100%
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
The Board of Directors
First Commonwealth Financial Corporation:
We consent to the incorporation by reference in the registration statements (No. 333-206191 and No. 333-187288) on Form
S-3, in the registration statements (No. 033-55687 and No. 333-159090) on Form S-8 and in the registration statement (No.
333-214703) on Form S-4 of First Commonwealth Financial Corporation of our reports dated March 1, 2018, with respect to
the consolidated statements of financial condition of First Commonwealth Financial Corporation as of December 31, 2017 and
2016, 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, 2017, and the related notes (collectively, the
“consolidated financial statements”), and the effectiveness of internal control over financial reporting as of December 31, 2017,
which reports appear in the December 31, 2017 annual report on Form 10-K of First Commonwealth Financial Corporation.
Pittsburgh, Pennsylvania
March 1, 2018
/s/ KPMG LLP
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.
March 1, 2018
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.
March 1, 2018
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,
2017, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects, the financial condition of First Commonwealth at
the end of such period and the results of operations of First Commonwealth for such period.
DATED: March 1, 2018
/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, 2017, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of First
Commonwealth at the end of such period and the results of operations of First Commonwealth for such period.
DATED: March 1, 2018
/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 24, 2018 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 505000
Louisville, KY 40233-5000
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