Annual Report 2019
Dear Fellow Shareholders,
I am pleased to report that 2019 was another successful year for First Commonwealth, as we took
major strides to position our company for the future. Demonstrating our long-term commitment, we
made significant investments in our company and talent, and launched multiple, coordinated
initiatives that we believe will make us more competitive and efficient in 2020 and beyond.
Our core earnings per share (EPS) grew for the seventh consecutive year, driven primarily by good
loan and deposit growth and a four basis point expansion in our net interest margin to 3.75%, its
highest level since 2011. We expanded our footprint with the completion of our 5th acquisition in as
many years with the purchase of 14 former Santander branches located in Central Pennsylvania.
And our fee income business continued to expand, resulting in record levels of loan originations
coming from our mortgage and Small Business Administration (SBA) lending businesses.
We could not have achieved these results without the focused effort of our talented and dedicated
team.
Financial Performance
As the table below depicts, the earnings capacity of First Commonwealth has improved steadily
since 2013.
* Excludes merger related expenses, securities gains and DTA write-down in 2017.
We ended 2019 with core EPS of $1.10, which represents 16% compound annual growth from a
2012 starting point of $0.40 per share in core earnings. In 2019, we produced $108 million of core
net income, resulting in a core return on average assets (ROAA) of 1.35%, core return on average
tangible common equity (ROATCE) of 15.3% and a core efficiency ratio of 57.0%.
We enter 2020 with strong momentum in our businesses and geographies. Organic loan growth of
5.5% in 2019 (not including the loans acquired with the 14 branch acquisition) was led by corporate
banking, mortgage and indirect lending. Our new metropolitan markets in Ohio produced 68% of
this loan growth, despite accounting for only 23% of our current franchise.
And just as encouraging, our total deposits grew $780 million, or 13.2%, including $471 million in
acquired deposits from the branch acquisition and $309 million of organic growth. Our total deposits
now stand at $6.7 billion and our loan-to-deposit ratio was 93% at year-end.
The culture of deposit gathering at First Commonwealth is strong. Our core deposit funding base
serves as a source of strategic advantage for our bank, especially in the current low interest rate
environment. Our deposit base is comprised of 25% noninterest-bearing demand deposit (checking)
accounts and another 42% in relatively low-cost interest-bearing checking and savings accounts.
Our core efficiency ratio improved to 57.0% in 2019 despite the integration of the Santander branch
acquisition and three interest rate cuts by the Federal Reserve which pressured our net interest
margin and spread revenue during the second half of the year. That being said, we're ever mindful
of the importance of operating leverage, and we pay close attention to growing revenue while
keeping expenses meaningfully controlled.
Our noninterest income of $85.5 million also represented a historic high for our company and
comprises roughly 25% of our total revenue. Interchange income and deposit fee income set
records for our company in 2019. Moreover, our mortgage, wealth, corporate banking, SBA and
insurance businesses have become a meaningful part of our noninterest income momentum.
Additionally, our five acquisitions over the past five years have added valuable new checking
households.
Our key credit indicators remain either at or near pre-financial crisis lows for our company. At
December 31, 2019, our nonperforming loans as a percentage of total loans stood at 0.52%, down
from 0.55% at the end of 2018, net charge-offs fell to 0.18% of average loans, and our delinquent
and classified loan balances saw similar improvements.
Over the past several years, we have focused on improving the risk profile of our credit portfolio by
reducing the size of exposures to individual borrowers and adhering to concentration limits to sectors
and collateral types. While this has created a conscious headwind for loan growth, it has also
lowered the risk profile of our loan portfolio, and we believe this has been an appropriate tradeoff
that will benefit our shareholders in the long run.
Regional Business Model
In 2017, we began transitioning the bank to a regional leadership model where decisions can be
made locally and where accountability lies with local regional presidents. We have strong leaders in
each of our five markets of Northern Ohio, Central Ohio, Cincinnati Metro, Pittsburgh Metro and
Community Pennsylvania. Each regional president brings a wealth of leadership experience and
close ties to local businesses. This has resulted in greater partnership among our lines of business,
improved customer satisfaction and deeper customer relationships. Our regional presidents are
focused on winning and fulfilling our mission in their respective communities.
Our Measured Approach to Growth and Capital
The primary focus of our strategic plan is to consistently grow and diversify our revenue streams,
which include commercial, retail, mortgage, and SBA lending, along with our wealth management
and insurance businesses. These revenue streams provide the bank and shareholders with greater
stability to weather varying economic and interest rate cycles and a diversification of First
Commonwealth’s risk profile, which provides for more stable and consistent returns over time.
Our organic growth strategy is focused on the markets where we believe we can gain market share
or capitalize on demographic growth. These markets include major urban areas located in
Pennsylvania and Ohio and the surrounding rural communities in these states. Most of these metro
markets project population growth that is faster than our rural legacy markets, have strong and
diverse local economies, and are dominated by very large banks. We believe organic growth will be
achieved by attracting and retaining top talent, taking market share from our competitors and
enhancing our customers’ experience.
We expect bank consolidation to continue as a result of the low interest rate environment, escalating
costs of doing business, and the level of investment in technology that it takes to remain competitive.
We believe our acquisition experience, reputation for smoothly executing integrations, the scalability
of our internal systems, and our proven ability to retain local customers and talent positions us well
to capitalize on this strategy. We will continue to seek opportunities to enhance and expand our
footprint and build scale by partnering with community banks that have similar values and are
located in Pennsylvania, Ohio and contiguous markets. The larger metropolitan markets in these
areas have favorable economic environments for business and the rural areas have proven to be a
stable source of low-cost funding.
We continue to thoughtfully return capital to our shareholders, both through dividends and
opportunistic share repurchases – including our intent to complete the remaining $20 million in a $25
million repurchase program announced on March 4, 2019. On January 28, 2020, our Board of
Directors approved a 10% increase to our quarterly dividend to $0.11 per share. Our dividend
payout ratio target remains unchanged in the 30-60% range and currently stands at 40% based on
2019 Core EPS of $1.10.
I am extremely proud of our organization and believe we are well positioned for the future. We have
a strong organization with leadership capable of executing our strategy of efficiency and growth
initiatives. Maintaining profitable, diverse revenue streams gives us confidence in our ability to
weather future economic fluctuations and to continue to produce stable growth while delivering
shareholder value.
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 forward.
Sincerely,
T. Michael Price
President and Chief Executive Officer
First Commonwealth Financial Corporation
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
25-1428528
(I.R.S. Employer Identification No.)
15701
INDIANA, PA
(Address of principal executive offices)
(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 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 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 an 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, 2019) was approximately $1,307,605,800.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of February 27, 2020, was 98,262,862.
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 28, 2020 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
ITEM 16.
Form 10-K Summary
Signatures
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact constitute forward-
looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that
such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings
with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our
approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss,
earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements
of plans, objectives and expectations of First Commonwealth or its management or Board of Directors, including those relating
to products, services or operations; (iii) statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “estimate,” or words of similar
meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may,” are intended to identify forward-
looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ
materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-
looking statements include, but are not limited to:
• Local, regional, national and international economic conditions and the impact they may have on us and our customers.
• Volatility and disruption in national and international financial and commodity markets.
• Government intervention in the U.S. financial system.
• Changes in the mix of loan geographies, sectors and types or the level of non-performing assets and charge-offs.
• Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and
accounting requirements.
• The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the
Federal Reserve Board.
Inflation, interest rate, securities market and monetary fluctuations.
•
• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and
insurance) with which we and our subsidiaries must comply.
Political instability.
Impairment of our goodwill or other intangible assets.
• The soundness of other financial institutions.
•
•
• Acts of God or of war or terrorism.
• The timely development and acceptance of new products and services and perceived overall value of these products and
services by users.
• Changes in consumer spending, borrowings and savings habits.
• Changes in the financial performance and/or condition of our borrowers.
• Technological changes.
• The cost and effects of failure, interruption, or breach of security of our systems.
• Acquisitions and integration of acquired businesses.
• Our ability to attract and retain qualified employees.
• Changes in the competitive environment in our markets and among banking organizations and other financial service
providers.
• The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the
Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard
setters.
• Changes in the reliability of our vendors, internal control systems or information systems.
• Changes in our liquidity position.
• Changes in our organization, compensation and benefit plans.
• The costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other
governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory
approvals.
• Greater than expected costs or difficulties related to the integration of new products and lines of business.
• Our success at managing the risks involved in the foregoing items.
• The risk factors described in Item 1A of this Annual Report.
Forward-looking statements speak only as of the date on which such statements are made. We do not undertake any obligation
to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to
reflect the occurrence of unanticipated events.
3
PART I
ITEM 1.
Overview
Business
First Commonwealth Financial Corporation (“First Commonwealth,” the “Company” or “we”) is a financial holding company
headquartered in Indiana, Pennsylvania. First Commonwealth's subsidiaries include, First Commonwealth Bank ("FCB" or the
"Bank"), First Commonwealth Insurance Agency, Inc. ("FCIA"), FRAMAL and First Commonwealth Financial Advisors, Inc
("FCFA"). We provide a diversified array of consumer and commercial banking services through our bank subsidiary, FCB.
We also provide trust and wealth management services and offer insurance products through FCB and our other operating
subsidiaries. At December 31, 2019, we had total assets of $8.3 billion, total loans of $6.2 billion, total deposits of $6.7 billion
and shareholders’ equity of $1.1 billion. Our principal executive office is located at 601 Philadelphia Street, Indiana,
Pennsylvania 15701, and our telephone number is (724) 349-7220.
FCB is a Pennsylvania bank and trust company. At December 31, 2019, the Bank operated 147 community banking offices
throughout western and central Pennsylvania, and northeastern, central and southwestern Ohio, as well as corporate banking
centers in Pittsburgh, Pennsylvania, and Columbus, Canton and Cleveland, Ohio, and mortgage banking offices in Wexford,
Pennsylvania, and Hudson, Westlake and Lewis Center, Ohio. The Bank also operates a network of 163 automated teller
machines, or ATMs, at various branch offices and offsite locations. All of our ATMs are part of the NYCE and MasterCard/
Cirrus networks, both of which operate nationwide. The Bank is a member of the Allpoint ATM network, which allows
surcharge-free access to over 55,000 ATMs. The Bank is also a member of the “Freedom ATM Alliance,” which affords
cardholders surcharge-free access to a network of over 350 ATMs in over 50 counties in Pennsylvania, Maryland, New York,
and Ohio.
Historical and Recent Developments
FCB began in 1934 as First National Bank of Indiana. First National Bank of Indiana changed its name to National Bank of the
Commonwealth in 1971 and became a subsidiary of First Commonwealth in 1983.
Since the formation of the holding company in 1983, we have grown steadily through the acquisition of smaller banks and
thrifts in our market area, including Deposit Bank in 1984, Dale National Bank and First National Bank of Leechburg in 1985,
Citizens National Bank of Windber in 1986, Peoples Bank and Trust Company in 1990, Central Bank in 1992, Peoples Bank of
Western Pennsylvania in 1993, and Unitas National Bank and Reliable Savings Bank in 1994. In 1995, we merged all of our
banking subsidiaries (other than Reliable Savings Bank) into Deposit Bank and renamed the resulting institution “First
Commonwealth Bank.” We then merged Reliable Savings Bank into FCB in 1997. We acquired Southwest Bank in 1998 and
merged it into FCB in 2002.
We expanded our presence in the Pittsburgh market through the acquisitions of Pittsburgh Savings Bank (dba BankPittsburgh)
in 2003, Great American Federal in 2004 and Laurel Savings Bank in 2006. These acquisitions added 27 branches in Allegheny
and Butler Counties.
We have also focused on organic growth, improving the reach of our franchise and the breadth of our product offering. As part
of this strategy, we have opened fourteen de novo branches since 2005, all of which are in the greater Pittsburgh area. As a
result of our prior acquisitions and de novo strategy, FCB operates 57 branches and a corporate banking center in the Pittsburgh
metropolitan statistical area and currently ranks tenth in deposit market share.
In 2015, we expanded into central Ohio through the acquisition of First Community Bank with four branches in the Columbus
area. In 2016, we acquired 13 branches from FirstMerit Bank, National Association, in Canton-Massillon and Ashtabula, Ohio
and in 2017, we acquired DCB Financial Corp ("DCB") and its banking subsidiary The Delaware County Bank and Trust
Company with nine full-service banking offices in the Columbus, Ohio MSA. In 2018, we acquired Garfield Acquisition
Corp., and its banking subsidiary Foundation Bank with five full-service banking offices in the Cincinnati, Ohio area.
Additionally, since 2014, we have expanded our presence in this Ohio market by opening a corporate loan production office in
Columbus, Canton and Cleveland, Ohio, and mortgage loan offices in Hudson, Westlake and Lewis Center, Ohio.
In 2019, we expanded our Pennsylvania markets into State College, Lock Haven, Williamsport and Lewisburg through the
acquisition of 14 branches from Santander Bank, N.A. ("Santander").
Our operating objectives include expansion, diversification within our markets, growth of our fee-based income, and growth
internally and through acquisitions of financial institutions, branches, and financial services businesses. We generally seek
merger or acquisition partners that are culturally similar, have experienced management and possess either significant market
presence or have potential for improved profitability through financial management, economies of scale and expanded services.
We regularly evaluate merger and acquisition opportunities and, from time to time, conduct due diligence activities related to
4
possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition
discussions and, in some cases, negotiations, may take place and future merger acquisitions involving cash, debt or equity
securities may occur. Acquisitions typically involve the payment of a premium over book and market values, and, therefore,
some dilution of First Commonwealth’s tangible book value and net income per common share may occur in connection with
any future transaction. Our ability to engage in certain merger or acquisition transactions, whether or not any regulatory
approval is required, will be dependent upon our bank regulators’ views at the time as to the capital levels, quality of
management and our overall condition and their assessment of a variety of other factors. Certain merger or acquisition
transactions, including those involving the acquisition of a depository institution or the assumption of the deposits of any
depository institution, require formal approval from various bank regulatory authorities, which will be subject to a variety of
factors and considerations.
Loan Portfolio
The Company’s loan portfolio includes several categories of loans that are discussed in detail below.
Commercial, Financial, Agricultural and Other
Commercial, financial, agricultural and other loans represent term loans used to acquire business assets or revolving lines of
credit used to finance working capital. These loans are generally secured by a first lien position on the borrower’s business
assets as a secondary source of repayment. The type and amount of the collateral varies depending on the amount and terms of
the loan, but generally may include accounts receivable, inventory, equipment or other assets. Loans also may be supported by
personal guarantees from the principals of the commercial loan borrowers.
Commercial loans are underwritten for credit-worthiness based on the borrowers’ financial information, cash flow, net worth,
prior loan performance, existing debt levels, type of business and the industry in which it operates. Advance rates on
commercial loans are generally collateral-dependent and are determined based on the type of equipment, the mix of inventory
and the quality of receivables.
Credit risk for commercial loans can arise from a borrower’s inability or unwillingness to repay the loan, and in the case of
secured loans, from a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and
subsequent liquidation of collateral. The Company’s Credit Policy establishes loan concentration limits by borrower, geography
and industry.
Commercial Real Estate
Commercial real estate loans represent term loans secured by owner-occupied and non-owner occupied properties. Commercial
real estate loans are underwritten based on an evaluation of each borrower’s cash flow as the principal source of loan
repayment, and are generally secured by a first lien on the property as a secondary source of repayment. Our underwriting
process for non-owner occupied properties evaluates the history of occupancy, quality of tenants, lease terms, operating
expenses and cash flow. Commercial real estate loans are subject to the same credit evaluation as previously described for
commercial loans. Approximately 19%, by principal amount, of our commercial real estate loans involve owner-occupied
properties.
For loans secured by commercial real estate, at origination the Company obtains current and independent appraisals from
licensed or certified appraisers to assess the value of the underlying collateral. The Company’s general policy for commercial
real estate loans is to limit the terms of the loans to not more than 10 years with loan-to-value ratios not exceeding 80% on
owner-occupied and income producing properties. For non-owner occupied commercial real estate loans, the loan terms are
generally aligned with the property’s lease terms and are generally underwritten with a loan-to-value ratio not exceeding 75%.
Credit risk for commercial real estate loans can arise from economic conditions that could impact market demand, rental rates
and property vacancy rates and declines in the collateral value in relation to the outstanding loan balance in the event of a
default and subsequent liquidation of collateral.
Real Estate Construction
Real estate construction represents financing for real estate development. The underwriting process for these loans is designed
to confirm that the project will be economically feasible and financially viable and is generally conducted as though the
Company would be providing permanent financing for the project. Development and construction loans are secured by the
properties under development or construction, and personal guarantees are typically obtained as a secondary repayment source.
The Company considers the financial condition and reputation of the borrower and any guarantors and generally requires a
global cash flow analysis in order to assess the overall financial position of the developer.
5
Construction loans to residential builders are generally made for the construction of residential homes for which a binding sales
contract exists and for which the prospective buyers have been pre-qualified for permanent mortgage financing by either third-
party lenders or the Company. These loans are generally for a period of time sufficient to complete construction.
Residential construction loans to individuals generally provide for the payment of interest only during the construction phase.
At the end of the construction phase, substantially all of our loans automatically convert to permanent mortgage loans and can
either be retained in our loan portfolio or sold on the secondary market.
Credit risk for real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to
complete the project to specifications and economic conditions that could impact demand for or supply of the property being
constructed.
Residential Real Estate
Residential real estate loans include first lien mortgages used by the borrower to purchase or refinance a principal residence and
home equity loans and lines of credit secured by residential real estate. The Company’s underwriting process for these loans
determines credit-worthiness based upon debt-to-income ratios, collateral values and other relevant factors.
Credit risk for residential real estate loans can arise from a borrower’s inability or unwillingness to repay the loan or a shortfall
in the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent
liquidation of the real estate collateral.
The residential real estate portfolio includes both conforming and non-conforming mortgage loans. Conforming mortgage loans
represent loans originated in accordance with underwriting standards set forth by the government-sponsored entities, including
the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National
Mortgage Association, which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage
lenders. These loans are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios
of 80% or less (or have mortgage insurance to insure down to 80%), and are made to borrowers in good credit standing. Non-
conforming mortgage loans represent loans that generally are not saleable in the secondary market to the government-sponsored
entities due to factors such as the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio,
or the size of the loan. The Company does not offer “subprime,” “interest-only” or “negative amortization” mortgages.
Home equity lines of credit and other home equity loans are originated by the Company for typically up to 90% of the
appraised value, less the amount of any existing prior liens on the property. Additionally, the Company’s credit policy requires
borrower FICO scores of not less than 661 and a debt-to-income ratio of not more than 43%.
Loans to Individuals
The loans to individuals category includes consumer installment loans, personal lines of credit, consumer credit cards and
indirect automobile loans. Credit risk for consumer loans can arise from a borrower’s inability or unwillingness to repay the
loan, and in the case of secured loans, by a shortfall in the value of the collateral in relation to the outstanding loan balance in
the event of a default and subsequent liquidation of collateral.
The underwriting criteria for automobile loans generally allows for such loans to be made for up to 100% of the purchase price
or the retail value of the vehicle as listed by the National Automobile Dealers Association. The terms of the loan are determined
by the age and condition of the collateral, and range from 36 to 84 months. Collision insurance policies are required on all
automobile loans. The Company also makes other consumer loans, which may or may not be secured. The terms of secured
consumer loans generally depend upon the nature of the underlying collateral. Unsecured consumer loans and consumer credit
cards usually do not exceed $35 thousand. Unsecured consumer loans usually have a term of no longer than 36 months.
Deposits
Deposits are our primary source of funds to support our revenue-generating assets. We offer traditional deposit products to
businesses and other customers with a variety of rates and terms. Deposits at our bank are insured by the FDIC up to statutory
limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business and
prudently managing our cost of funds. At December 31, 2019, we held $6.7 billion of total deposits, which consisted of $1.7
billion, or 25%, in non-interest bearing checking accounts, $4.2 billion, or 62%, in interest bearing checking accounts, money
market and savings accounts, and $0.8 billion, or 13%, in CDs and IRAs.
6
Competition
The banking and financial services industry is extremely competitive in our market area. We face vigorous competition for
customers, loans and deposits from many companies, including commercial banks, savings and loan associations, finance
companies, credit unions, trust companies, mortgage companies, money market mutual funds, insurance companies, and
brokerage and investment firms. Many of these competitors are significantly larger than us, have greater resources, higher
lending limits and larger branch systems and offer a wider array of financial services than us. In addition, some of these
competitors, such as credit unions, are subject to a lesser degree of regulation or taxation than banks.
Employees
At December 31, 2019, First Commonwealth and its subsidiaries employed 1,429 full-time employees and 142 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.
Banking Holding Company Activities. In general, the BHC Act limits the business of bank holding companies to banking,
managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a
proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies such as
First Commonwealth may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is
either (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and does not
pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, without in either
case the prior approval of the FRB. Activities that are financial in nature include securities underwriting and dealing, insurance
agency activities and making merchant banking investments.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries
must be well capitalized and well managed. A depository institution subsidiary is considered to be well capitalized if it satisfies
the requirements for this status discussed in the section below captioned "Prompt Corrective Action." A depository institution
subsidiary is considered well managed if it received a composite rating and management rating of at least satisfactory in its
most recent examination. A financial holding company’s status will also depend upon maintaining its status as well capitalized
and well managed under applicable FRB regulations. If a financial holding company ceases to meet these capital and
management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with
the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to
compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence
any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such
financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB
may require divestiture of the holding company’s depository institutions.
7
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company
engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least satisfactory in its most recent examination under the CRA.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or
such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the
bank holding company.
Reporting. Under the BHC Act, First Commonwealth is subject to examination by the FRB and is required to file periodic
reports and other information of its operations with the FRB.
Source of Strength Doctrine. FRB policy and federal law require bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. First Commonwealth is expected to commit resources to support FCB, including
at times when First Commonwealth may not be in a financial position to provide such resources. Any capital loans by a bank
holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness
of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company
to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and
entitled to priority of payment.
Affiliate Transactions. Transactions between FCB, on the one hand, and First Commonwealth and its other subsidiaries, on the
other hand, are regulated under federal banking laws. The Federal Reserve Act imposes quantitative and qualitative
requirements and collateral requirements on covered transactions by FCB with, or for the benefit of, its affiliates, and generally
requires those transactions to be on terms at least as favorable to FCB as if the transaction were conducted with an unaffiliated
third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of
securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain
derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as
collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, any such
transaction by FCB (or its subsidiaries) must be limited to certain thresholds on an individual and aggregate basis and, for credit
transactions with any affiliate, must be secured by designated amounts of specified collateral.
SEC Regulations. First Commonwealth is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and
various state securities commissions for matters relating to the offer and sale of its securities and is subject to the SEC rules and
regulations relating to periodic reporting, proxy solicitation and insider trading.
Bank Regulation
FCB is a state bank chartered under the Pennsylvania Banking Code and is not a member of the FRB. As such, FCB is subject
to the supervision of, and is regularly examined by, both the Federal Deposit Insurance Corporation (“FDIC”) and the
Pennsylvania Department of Banking and Securities and is required to furnish quarterly reports to both agencies. The approval
of the Pennsylvania Department of Banking and Securities and FDIC is also required for FCB to establish additional branch
offices or merge with or acquire another banking institution.
Dividends. First Commonwealth is a legal entity separate and distinct from its banking and other subsidiaries. As a bank
holding company, First Commonwealth is subject to certain restrictions on its ability to pay dividends under applicable banking
laws and regulations. Federal bank regulators are authorized to determine under certain circumstances relating to the financial
condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to
prohibit payment thereof. In particular, federal bank regulators have stated that paying dividends that deplete a banking
organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking
organizations should generally pay dividends only out of current operating earnings.
A significant portion of our income comes from dividends from our bank, which is also the primary source of our liquidity. In
addition to the restrictions discussed above, our bank is subject to limitations under Pennsylvania law regarding the level of
dividends that it may pay to us. In general, dividends may be declared and paid only out of accumulated net earnings and may
not be declared or paid unless surplus is at least equal to capital. Dividends may not reduce surplus without the prior consent of
the Pennsylvania Department of Banking and Securities. FCB has not reduced its surplus through the payment of dividends. As
of December 31, 2019, FCB could pay dividends to First Commonwealth of $245.3 million without reducing its capital levels
below "well capitalized" levels and without the approval of the Pennsylvania Department of Banking and Securities.
Community Reinvestment. Under the Community Reinvestment Act ("CRA") a bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial
8
institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best
suited to its particular community, consistent with the CRA. The CRA requires the applicable regulatory agency to assess an
institution’s record of meeting the credit needs of its community. The CRA requires public disclosure of an institution’s CRA
rating and requires that the applicable regulatory agency provide a written evaluation of an institution’s CRA performance
utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. For its most recent examination, FCB received a “satisfactory” rating.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would
significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-
income communities where there is significant need for credit, more responsible lending, greater access to banking services,
and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA
credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for
measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. We will continue to
monitor the proposed rules and evaluate the impact of any changes to the regulations implementing the CRA on our business.
Consumer Financial Protection. We are subject to a number of federal and state consumer protection laws that extensively
govern our relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act,
the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection
Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury
laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require
disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in
credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive
and abusive practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight. Violations of
applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including
actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer
protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including
regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we
operate and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to
obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition
from engaging in such transactions even if approval is not required.
The Consumer Financial Protection Bureau ("CFPB"), has broad rulemaking, supervisory and enforcement powers under
various federal consumer financial protection laws. Although all institutions are subject to rules adopted by the CFPB and
examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has
primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary
responsibility for examination of our bank and enforcement with respect to federal consumer protection laws so long as our
bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance
with all state consumer laws. The CFPB also has the authority to require reports from institutions with less than $10 billion in
assets, such as our bank, to support the CFPB in implementing federal consumer protection laws, supporting examination
activities, and assessing and detecting risks to consumers and financial markets.
Deposit Insurance. Deposits of FCB are insured up to applicable limits by the FDIC and are subject to deposit insurance
assessments to maintain the Deposit Insurance Fund (“DIF”). Deposit insurance assessments are based upon average total assets
minus average total equity. The insurance assessments are based upon a matrix that takes into account a bank’s capital level and
supervisory rating. The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. As an institution with less than $10 billion in assets, FCB’s assessment rates are
based on its risk classification (i.e., the level of risk it poses to the FDIC’s deposit insurance fund). For institutions with $10
billion or more in assets, assessment rates are calculated using a scorecard that combines the supervisory risk ratings of the
institution with certain forward-looking financial measures. These assessment rates are subject to adjustments based upon the
insured depository institution’s ratio of long-term unsecured debt to the assessment base, long-term unsecured debt issued by
other insured depository institutions to the assessment base, and brokered deposits to the assessment base. However, the
adjustments based on brokered deposits to the assessment base will not apply so long as the institution is well capitalized and
has a composite CAMELS rating of 1 or 2. The CAMELS rating system is a bank rating system where bank supervisory
authorities rate institutions according to six factors: capital adequacy, asset quality, management quality, earnings, liquidity and
sensitivity to market risk. The FDIC may make additional discretionary assessment rate adjustments.
9
Capital Requirements
First Commonwealth and FCB are each required to comply with applicable capital adequacy standards established by the FRB.
In July 2013, the federal bank regulators approved final rules (the “Basel III Capital Rules”) implementing the Basel III
framework as well as certain provisions of the Dodd-Frank Act. Since fully phased in on January 1, 2019, the Basel III Capital
Rules require First Commonwealth and FCB to maintain the following:
• A minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of at least 4.5%, plus a 2.5% “capital
conservation buffer” (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.0%);
• A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer
(resulting in a minimum Tier 1 capital ratio of 8.5%);
• A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the
capital conservation buffer (resulting in a minimum total capital ratio of 10.5%); and
• A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported
on consolidated financial statements (known as the “leverage ratio”).
Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as
detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain
discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the
institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax effects not reflected
in net income).
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized
through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1
to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
During 2015, First Commonwealth and FCB made a one-time permanent election, as permitted under Basel III Capital Rules, to
exclude the effects of accumulated other comprehensive income items for the purposes of determining regulatory capital ratios.
With respect to FCB, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of
the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.” The Basel III Capital Rules prescribe
a standardized approach for risk weightings that expand the risk-weighting categories from the general risk-based capital rules
to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from
0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a
variety of asset categories.
Liquidity Requirements
The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity
tests. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an
adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon
(or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net
stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking
entities over a one-year time horizon. Rules applicable to certain large banking organizations have been implemented for LCR
and proposed for NSFR; however, based on our asset size, these rules do not currently apply to First Commonwealth and FCB.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take
“prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA
includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels
compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital
measures are the total capital ratio, the CET1 capital ratio (a new ratio requirement under the Basel III Capital Rules), the Tier 1
capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital
ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any
capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1
capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is
not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1
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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, 2019, 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.
The Volcker Rule
The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring
hedge funds and private equity funds (so called "covered funds"). The statutory provision is commonly called the “Volcker
Rule.” Banks with less than $10 billion in total consolidated assets, such as FCB, are exempt from the Volker Rule.
Depositor Preference
Under federal law, depositors (including the FDIC with respect to the subrogated claims of insured depositors) and certain
claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims
against such an institution in the liquidation or other resolution of such an institution by any receiver.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the FRB adopted rules establishing standards for assessing whether the
interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to
11
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 $21.7 million in card related interchange income during the 2019 fiscal year. If we did
not qualify for this exemption, we estimate that our interchange income would have been approximately $12.4 million,
representing a $9.3 million reduction due to the cap on interchange fees. We would become subject to the interchange fee cap
beginning July 1 of the year following the time when the level of our total assets reaches or exceeds $10 billion.
Financial Privacy
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers
and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to
outside vendors.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering
and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United
States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Financial institutions are
also prohibited from entering into specified financial transactions and account relationships and must use enhanced due
diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification
program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money
laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions
for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious
legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve
merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not
required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be
violating these obligations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") administers and enforces economic and trade
sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign
countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Commonwealth is
responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting
unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to
comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk
management processes also address the risk posed by compromised customer credentials, including security measures to
reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a
financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid
recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A
financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and
address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type
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of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including
financial penalties.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs
and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have
also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of
state-level activity in those areas to continue, and are continually monitoring developments in the states in which our customers
are located.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations
and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology
to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and
provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding
the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in
volume, and attackers respond rapidly to changes in defensive measures. While to date we have not experienced a significant
compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our
customers and third-party service providers are under constant threat and it is possible that we could experience a significant
event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future
due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking,
mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a
further discussion of risks related to cybersecurity.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in
those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the
manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the
application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure
under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes,
require us to increase our regulatory capital and modify our business strategy, and limit our ability to pursue business
opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely
affected, perhaps materially, as a result.
Availability of Financial Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any
document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. Our SEC filings are also available to the public on the SEC website at www.sec.gov and on our website at
www.fcbanking.com.
We also make available on our website, www.fcbanking.com, and in print to any shareholder who requests them, our Corporate
Governance Guidelines, the charters for our Audit, Risk, Compensation and Human Resources, and Governance Committees,
and the Code of Conduct and Ethics that applies to all of our directors, officers and employees.
Our Chief Executive Officer has certified to the New York Stock Exchange (“NYSE”) that, as of the date of the certification, he
was not aware of any violation by First Commonwealth of NYSE’s corporate governance listing standards. In addition, our
Chief Executive Officer and Chief Financial Officer have made certain certifications concerning the information contained in
this report pursuant to Section 302 of the Sarbanes-Oxley Act. The Section 302 certifications appear as Exhibits 31.1 and 31.2
to this annual report on Form 10-K.
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
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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. Changes to statutes, regulations or regulatory policies, including changes in interpretation or
implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could
subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-
banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies
or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal
and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil
money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are
pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities,
which heightens the risks associated with actual and perceived compliance failures. See “Supervision and Regulation” included
in Item 1. Business for a more detailed description of the regulatory requirements applicable to First Commonwealth.
Declines in real estate values could adversely affect our earnings and financial condition.
As of December 31, 2019, approximately 68% of our loans were secured by real estate. These loans consist of residential real
estate loans (approximately 27% of total loans), commercial real estate loans (approximately 34% of total loans) and real estate
construction loans (approximately 7% of total loans). Declines in real estate value 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, negatively 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. During 2019, the United States economy has continued to grow
across a wide range of industries and regions in the United States. However, there are emerging and continuing concerns related
to, among other things, the level of United States government debt and fiscal actions that may be taken to address that debt, the
potential effects of coronavirus on international trade (including supply chains and export levels), travel, employee productivity
and other economic activities, depressed oil prices and the United States-China trade disputes and related tariffs that may have a
destabilizing effect on financial markets and economic activity. A deterioration in economic conditions may significantly affect
the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and
profitability. Declines in real estate value and sales volumes and high unemployment may also result in higher than expected
loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses
and may adversely affect our capital, liquidity, 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 appropriate to reserve for estimated loan losses and risks inherent in
the loan portfolio. The level of the allowance for credit losses reflects management’s continuing evaluation of industry
concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and
unidentified losses in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses
inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using
existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions
or forecasts, new information regarding existing loans, identification of additional problem loans and other factors, both within
14
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.
We may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit
the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicates that the continuation
of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict
whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible
to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted
alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed
financial instruments.
In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among
other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended
alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar
LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible
to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve,
and what the effect of their implementation may be on the markets for floating-rate financial instruments.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are
either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk.
Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those
referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation
tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers
could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from
LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition
and results of operations.
Acts of cyber-crime may compromise client and company information, disrupt access to our systems or result in loss of
client or company assets.
Our business is dependent upon the availability of technology, the Internet and telecommunication systems to enable financial
transactions by clients, record and monitor transactions and transmit and receive data to and from clients and third parties.
Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by
clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our
technologies, systems, networks and our clients’ devices have been subject to, and are likely to continue to be the target of,
cyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the
unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other
information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’
business operations. Any of the foregoing could have a material adverse effect on First Commonwealth's business, financial
condition and results of operations.
We must evaluate whether any portion of our recorded goodwill is impaired. Impairment testing may result in a
material, non-cash write-down of our goodwill assets and could have a material adverse impact on our results of
operations.
At December 31, 2019, goodwill represented approximately 4% 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. Changes in the 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.
15
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.
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.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense
and we may not be able to hire people or to retain them. The unexpected loss of services of key personnel could have a material
16
adverse impact on our business, financial condition and results of operations because of their customer relationships, skills,
knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
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
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.
17
Changes in accounting standards could materially impact our financial statements.
From time to time accounting standards setters change the financial accounting and reporting standards that govern the preparation
of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our
financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively,
resulting in changes to previously reported financial results or a cumulative charge to retained earnings. See New Accounting
Pronouncements in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations elsewhere
in this report for further information regarding pending accounting standards updates.
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.
18
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise
additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside
of our control, and our financial condition. Economic conditions and the loss of confidence in financial institutions may increase
our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements
and borrowings from the discount window of the Federal Reserve or the Federal Home Loan Bank.
We cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit our access to the
capital markets, such as a decline in the confidence of debt purchasers, depositors of First Commonwealth Bank or counterparties
participating in the capital markets, or a downgrade of the Company’s or First Commonwealth Bank’s debt ratings, may adversely
affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future,
we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with
those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially
adverse effect on our business, financial condition and results of operations.
An investment in First Commonwealth’s common stock is not an insured deposit.
First Commonwealth’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other
deposit insurance fund or by any other public or private entity. Investment in First Commonwealth’s common stock is
inherently risky for the reasons described in this Risk Factors section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company. As a result, if you acquire First Commonwealth’s common
stock, you could lose some or all of your investment.
Provisions of our articles of incorporation, bylaws and Pennsylvania law, as well as state and federal banking
regulations, could delay or prevent a takeover of us by a third party.
Provisions in our articles of incorporation and bylaws, the corporate law of the Commonwealth of Pennsylvania, and state and
federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders,
or otherwise adversely affect the price of our common stock. These provisions include, among other things, advance notice
requirements for proposing matters that shareholders may act on at shareholder meetings. In addition, under Pennsylvania law,
we are prohibited from engaging in a business combination with any interested shareholder for a period of five years from the
date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential
takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price
of, and the voting and other rights of the holders of, our common stock.
ITEM 1B.
Unresolved Staff Comments
None.
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 147 community banking offices, of which 56 are leased and 91 are owned. We also lease three
mortgage loan production offices and four corporate loan production offices. During 2019, we acquired 14 offices, of which 5
are leased, as part of the Santander branch acquisition.
While these facilities are adequate to meet our current needs, available space is limited and additional facilities may be required
to support future expansion. However, we have no significant plans to lease, purchase or construct additional administrative
facilities.
19
ITEM 3.
Legal Proceedings
The information required by this Item is set forth in Part II, Item 8, Note 22, “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, 2019 is set forth below:
Jane Grebenc, age 61, 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 59, 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 60, 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 52, 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 57, 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 56, 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 50, 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 43, 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, 2019, there were approximately
5,804 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
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
Cash Dividends
Per Share
$
$
$
14.29
13.87
13.77
14.86
12.18
12.57
12.08
12.67
High Sale
Low Sale
$
15.14
16.30
17.72
16.21
13.59
13.88
15.66
11.43
$
$
0.10
0.10
0.10
0.10
Cash Dividends
Per Share
0.08
0.09
0.09
0.09
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, 2014, and the cumulative return is measured as of each
subsequent fiscal year end.
Index
First Commonwealth Financial Corporation
Russell 2000
SNL U.S. Bank Index
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
100.00
100.00
100.00
98.37
94.29
99.70
153.80
112.65
123.08
155.31
127.46
142.73
131.02
111.94
116.20
157.38
138.50
153.42
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
Average shares outstanding
At End of Period
Total assets
Investment securities
Loans and leases, net of unearned
income
Allowance for credit losses
Deposits
Short-term borrowings
Subordinated debentures
Other long-term debt
Shareholders’ equity
Key Ratios
Return on average assets
Return on average equity
Net loans to deposits ratio
Dividends per share as a percent of
net income per share
Average equity to average assets ratio
Periods Ended December 31,
2019
2018
2017
2016
2015
(dollars in thousands, except share data)
$
$
$
$
325,264
55,402
269,862
14,533
255,329
22
85,463
209,965
130,849
25,516
105,333
1.07
0.40
$
$
$
$
292,257
40,035
252,222
12,531
239,691
8,102
80,535
195,556
132,772
25,274
107,498
1.09
0.35
$
$
$
$
250,550
21,770
228,780
5,087
223,693
5,040
75,291
200,298
103,726
48,561
55,165
0.58
0.32
$
$
$
$
217,614
18,579
199,035
18,480
180,555
617
63,982
159,925
85,229
25,639
59,590
0.67
0.28
$
$
$
$
204,071
15,595
188,476
14,948
173,528
(153)
61,478
163,874
70,979
20,836
50,143
0.56
0.28
98,317,787
99,036,163
95,220,056
88,851,573
89,356,767
$
1.07
98,588,164
$
1.08
99,223,513
$
0.58
95,331,037
$
0.67
88,851,573
$
0.56
89,356,767
$ 8,308,773
$ 7,828,255
$ 7,308,539
$ 6,684,018
$ 6,566,890
1,256,176
1,335,228
1,183,291
1,187,623
1,333,836
6,189,148
5,774,139
5,407,376
4,879,347
4,683,750
51,637
47,764
6,677,615
5,897,992
201,853
170,450
56,917
1,055,665
721,823
170,288
7,551
975,389
48,298
5,580,705
707,466
72,167
8,161
888,127
50,185
4,947,408
867,943
72,167
8,749
749,929
50,812
4,195,894
1,510,825
72,167
9,314
719,546
1.31%
1.42%
10.32
91.91
37.38
12.71
11.41
97.09
32.11
12.47
0.77%
6.45
96.03
55.17
11.86
0.89%
8.02
97.61
41.79
11.15
0.78%
6.98
110.42
50.00
11.23
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, as of and for the years ended December 31, 2019, 2018 and 2017. 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, 2019, FCB operated 147 community banking offices throughout western and central Pennsylvania and
northeastern, central and southwestern Ohio, as well as loan production offices in Pittsburgh, Pennsylvania, and Cleveland,
Columbus, Canton, Lewis Center, Hudson and Westlake, Ohio.
Our consumer services include Internet, mobile and telephone banking, an automated teller machine network, personal
checking accounts, interest-earning checking accounts, savings accounts, health savings accounts, insured money market
accounts, debit cards, investment certificates, fixed and variable rate certificates of deposit, mortgage loans, secured and
unsecured installment loans, construction and real estate loans, safe deposit facilities, credit cards, credit lines with overdraft
checking protection and IRA accounts. Commercial banking services include commercial lending, small and high-volume
business checking accounts, on-line account management services, ACH origination, payroll direct deposit, commercial cash
management services and repurchase agreements. We also provide a variety of trust and asset management services and a full
complement of auto, home and business insurance as well as term life insurance. We offer annuities, mutual funds and stock
and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. Most of our commercial
customers are small and mid-sized businesses in Pennsylvania and Ohio.
As a financial institution with a focus on traditional banking activities, we earn the majority of our revenue through net interest
income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings.
Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing our net interest margin,
which is net interest income (on a fully taxable-equivalent basis) as a percentage of our average interest-earning assets. We also
generate revenue through fees earned on various services and products that we offer to our customers and, less frequently,
through sales of assets, such as loans, investments or properties. These revenue sources are offset by provisions for credit losses
on loans, operating expenses, income taxes and, less frequently, loss on sale or other-than-temporary impairments on
investment securities.
General economic conditions also affect our business by impacting our customers’ need for financing, thus affecting loan
growth, as well as impacting the credit strength of existing and potential borrowers.
Critical Accounting Policies and Significant Accounting Estimates
First Commonwealth’s accounting and reporting policies conform to accounting principles generally accepted in the United
States of America (“GAAP”) and predominant practice in the banking industry. The preparation of financial statements in
accordance with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in
the financial statements and accompanying notes. Over time, these estimates, assumptions and judgments may prove to be
inaccurate or vary from actual results and may significantly affect our reported results and financial position for the period
presented or in future periods. We currently view the determination of the allowance for credit losses to be critical because it is
highly dependent on subjective or complex judgments, assumptions and estimates made by management.
Allowance for Credit Losses
We account for the credit risk associated with our lending activities through the allowance and provision for credit losses. The
allowance represents management’s best estimate of 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 appropriateness 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.
Results of Operations—2019 Compared to 2018
Net Income
Net income for 2019 was $105.3 million, or $1.07 per diluted share, as compared to net income of $107.5 million, or $1.08 per
diluted share, in 2018. Impacting net income in 2019 was an increase in net interest income of $17.6 million, offset by an
increase in noninterest expense of $14.4 million, a decline in noninterest income of $3.2 million and an increase in provision for
credit losses of $2.0 million. The decrease in noninterest income was primarily due to net securities gains of $8.1 million
recognized in 2018 compared to $22 thousand recognized in 2019.
Our return on average equity was 10.3% and our return on average assets was 1.31% for 2019, compared to 11.4% and 1.42%,
respectively, for 2018.
Average diluted shares for the year 2019 were 1% less than the comparable period in 2018 primarily due to $6.3 million of
common stock buybacks completed during 2019.
Net Interest Income
Net interest income, which is our primary source of revenue, is the difference between interest income from earning assets
(loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and long-term debt). The amount
of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-
earning assets and interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a
fully taxable equivalent basis, to average interest-earning assets. To compare the tax exempt asset yields to taxable yields,
amounts are adjusted to the pretax equivalent amounts based on the marginal corporate federal income tax rate of 21% in 2019
and 2018. The taxable equivalent adjustment to net interest income for 2019 was $1.7 million compared to $2.0 million in
2018. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus
noninterest income) at 76% and 74% for the years ended December 31, 2019 and 2018, respectively.
Net interest income, on a fully taxable equivalent basis, was $271.6 million for the year-ended December 31, 2019, a $17.4
million, or 7%, increase compared to $254.2 million for the same period in 2018. The net interest margin, on a fully taxable
equivalent basis, increased 4 basis points to 3.75% in 2019 from 3.71% in 2018. The net interest margin is affected by both
26
changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
Additionally, the net interest margin for the year ended December 31, 2018 benefited by two basis points due to the recognition
of previously unrecognized interest income on assets that had previously been impaired.
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, 2019. Average earning assets for the year ended December 31, 2019 increased
$399.1 million, or 6%, compared to the year ended December 31, 2018. Interest-sensitive assets totaling $4.0 billion will either
reprice or mature over the next twelve months.
The taxable equivalent yield on interest-earning assets was 4.51% for the year ended December 31, 2019, an increase of 21
basis points from the 4.30% yield for the same period in 2018. This increase is largely due to the loan portfolio yield, which
improved by 26 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 21 basis points largely due to the Federal Reserve increasing short-
term interest rates. The Federal Reserve increased the Federal Funds target rate by 100 basis points in 2018 and then decreased
it by 75 basis points during 2019. While not reflected in the comparison of the periods presented, such decreases in rates have
the effect of lowering yields on variable and adjustable rate loans, as well as, to a lesser extent, the cost of interest-bearing
liabilities, and any additional rate decreases would be expected to have a similar effect. The investment portfolio yield
decreased 11 basis points in comparison to the prior year. This decrease can be attributed to the runoff of higher yielding
securities being replaced with lower yielding investment securities. Additionally, three basis points of the decrease in the
investment portfolio yield can be attributed to the recognition in 2018 of $0.4 million in previously unrecognized interest due to
the sale of the pooled trust preferred security portfolio. Investment portfolio purchases during the year ended December 31,
2019 have been primarily in corporate securities, obligations of US government agencies and obligations of other government-
sponsored enterprises with durations of approximate five years and municipal securities with a duration of approximately ten
years.
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 1.03% for the year-ended December 31, 2019, compared to 0.78% for the same
period in 2018. Higher market interest rates resulted in the cost of interest-bearing deposits increasing 28 basis points and short-
term borrowings increasing 38 basis points in comparison to the same period in the prior year. Deposits acquired in our recent
acquisitions, along with organic growth in consumer checking and savings deposits, contributed to a decline in average short-
term borrowings of $227.4 million for the year-ended December 31, 2019 compared to the same period in 2018.
Comparing the year ended December 31, 2019 with the same period in 2018, changes in rates positively impacted net interest
income by $0.6 million. The higher yield on interest-earning assets favorably impacted net interest income by $14.1 million,
while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $13.5 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively increased net interest income by
$16.8 million in the year ended December 31, 2019 compared to the same period in 2018. Higher levels of interest-earning
assets resulted in an increase of $18.6 million in interest income, and changes in the volume of interest-bearing liabilities
increased interest expense by $1.8 million, primarily due to an increase in long-term borrowings and time deposits.
Positively affecting net interest income was a $172.9 million increase in average net free funds at December 31, 2019 as
compared to December 31, 2018. 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 $115.3 million increase in average noninterest-bearing demand deposits, of which $16.6 million of the
increase can be attributed to the Santander branch acquisition. Average time deposits for the year ended December 31, 2019
increased $114.6 million, or 15%, compared to the comparable period in 2018, while the average rate paid on time deposits
increased 55 basis points. Over the next twelve months $586.0 million in certificates of deposits either mature or reprice.
27
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,
2019
2018
2017
(dollars in thousands)
Interest income per Consolidated Statements of Income
Adjustment to fully taxable equivalent basis
Interest income adjusted to fully taxable equivalent basis (non-GAAP)
Interest expense
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
$
325,264
1,748
327,012
55,402
271,610
$
$
292,257
1,974
294,231
40,035
254,196
$
$
250,550
4,225
254,775
21,770
233,005
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
2019
2018
2017
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
$
15,778
$
403
2.55% $
5,594
$
172
3.07% $
11,621
$
121
1.04%
65,345
1,180,698
5,987,398
7,249,219
93,953
(51,274)
738,154
780,833
$ 8,030,052
2,014
31,381
293,214
327,012
3.08
2.66
4.90
4.51
67,746
1,194,131
5,582,651
6,850,122
92,729
(52,609)
665,114
705,234
$ 7,555,356
2,084
33,123
258,852
294,231
3.08
2.77
4.64
4.30
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
$ 1,293,588
$
7,025
0.54% $ 1,179,439
$
2,597,674
864,056
391,547
216,383
15,180
14,520
8,298
10,379
0.58
1.68
2.12
4.80
2,441,327
749,408
618,957
147,915
4,615
8,624
8,474
10,741
7,581
0.39% $ 1,059,840
$
0.35
1.13
1.74
5.13
2,369,605
578,158
867,391
86,391
1,466
4,207
3,742
8,799
3,556
0.14%
0.18
0.65
1.01
4.12
5,363,248
55,402
1.03
5,137,046
40,035
0.78
4,961,385
21,770
0.44
1,549,507
96,896
1,020,401
2,666,804
1,434,233
41,740
942,337
2,418,310
1,356,125
37,818
855,134
2,249,077
$ 8,030,052
$ 7,555,356
$ 7,210,462
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
(a)
3.57%
Income on interest-earning assets has been computed on a fully taxable equivalent basis using the federal income tax statutory rate of 21% for 2019 and
2018 and 35% for 2017.
271,610
233,005
254,196
3.75%
3.71%
$
$
$
Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(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
2019 Change from 2018
2018 Change from 2017
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)
$
231
(70)
(1,742)
34,362
32,781
2,410
6,556
6,046
(2,443)
2,798
15,367
17,414
$
$
313
(74)
(372)
18,780
18,647
445
547
1,296
(3,957)
3,512
1,843
16,804
$
(82) $
4
(1,370)
15,582
14,134
1,965
6,009
4,750
1,514
(714)
13,524
610
$
$
51
(411)
2,846
36,970
39,456
3,149
4,417
4,732
1,942
4,025
18,265
21,191
$
(63) $
13
527
12,774
13,251
167
129
1,113
(2,509)
2,535
1,435
11,816
$
114
(424)
2,319
24,196
26,205
2,982
4,288
3,619
4,451
1,490
16,830
9,375
Interest-earning assets:
$
Interest-bearing deposits with
banks
Tax-free investment securities
Taxable investment securities
Loans
Total interest income (b)
Interest-bearing liabilities:
Interest-bearing demand
deposits
Savings deposits
Time deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
$
(a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b) Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for 2019 and 2018,
and 35% federal income tax statutory rate for 2017.
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
2019
2018
Dollars
Percentage
Dollars
Percentage
3,927
398
851
3,201
6,156
(dollars in thousands)
27% $
3
6
22
42
451
512
2,162
4,806
4,600
4%
4
17
38
37
$
14,533
100% $
12,531
100%
The provision for credit losses for the year 2019 totaled $14.5 million, an increase of $2.0 million, or 16.0%, compared to the
year 2018. The level of provision expense for the year-ended December 31, 2019 is primarily a result of $10.7 million in net
charge-offs, growth in the loan portfolio and an increase in the qualitative reserves as a result of a higher probability of slightly
less favorable economic conditions. Provision expense for the commercial, financial, agricultural and other category was
impacted by net charge-offs of $3.1 million and $103.4 million growth in the portfolio. The provision expense for the
commercial real estate category is primarily due to $1.8 million in net charge-offs and a $0.8 million increase in qualitative
reserves. Net charge-offs related to loans to individuals were $5.2 million for the year ended December 31, 2019, including
$2.6 million related to indirect auto loans and $1.9 million related to personal lines of credit. The provision expense for loans
to individuals was also impacted by growth in the portfolio of $108.6 million.
30
The level of provision expense for the year-ended December 31, 2018 is primarily a result of net charge-offs taken to resolve
certain nonperforming loans. The level of provision expense in the commercial, financial, agricultural and other category was
impacted by net charge-offs of $4.5 million, of which $3.3 million related to two commercial borrowers whose loans were sold
or paid off during 2018. Also impacting the level of provision expense for the commercial, financial, agricultural and other
category is the Company's periodic assessment of the allowance for loan loss methodology, including portfolio migration
analysis and loss emergence periods. The provision expense for the residential real estate category can be attributed to $107.5
million growth in the portfolio compared to December 31, 2018 and $1.0 million in net charge-offs. The provision expense for
the commercial real estate category is primarily due to $3.4 million in chargeoffs recorded on three commercial loans which
were part of the same relationship and were sold or paid off during 2018. Net charge-offs related to loans to individuals were
$4.0 million for the year ended December 31, 2018, including $2.2 million related to indirect auto loans and $1.1 million
related to personal lines of credit.
The allowance for credit losses was $51.6 million, or 0.83%, of total loans outstanding and 0.90% of total originated loans at
December 31, 2019, compared to $47.8 million, or 0.83%, and 0.91%, respectively, at December 31, 2018. Nonperforming
loans as a percentage of total loans decreased to 0.52% at December 31, 2019 from 0.55% at December 31, 2018. The
allowance to nonperforming loan ratio was 160.3% as of December 31, 2019 and 149.1% at December 31, 2018. Net charge-
offs were $10.7 million for the year-ended December 31, 2019 compared to $13.1 million for the same period in 2018.
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 determining the appropriateness of the allowance for credit
losses. The change in the allowance for credit losses is impacted by the 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. Additionally, with the adoption of ASU No 2016-13, "Financial
Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments" ("CECL"), beginning on
January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality,
macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.
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, 2019.
31
A detailed analysis of our credit loss experience for the previous five years is shown below:
2019
2018
2017
2016
2015
(dollars in thousands)
$
$
$
6,189,148
5,987,398
47,764
$
$
$
5,774,139
5,582,651
48,298
$
$
$
5,407,376
5,278,511
50,185
$
$
$
4,879,347
4,818,759
50,812
$
$
$
4,683,750
4,553,634
52,051
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
3,393
—
1,042
2,008
5,831
5,294
—
1,313
3,930
4,576
6,634
—
1,287
340
4,248
Total loans charged off
12,274
15,113
12,509
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:
326
158
315
189
626
1,614
10,660
14,533
51,637
$
788
141
361
153
605
2,048
13,065
12,531
47,764
$
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
Net charge-offs as a percentage of average
loans outstanding
Allowance for credit losses as a percentage of
end-of-period loans outstanding
0.18%
0.83%
0.23%
0.83%
0.13%
0.89%
0.40%
1.03%
0.36%
1.08%
32
Noninterest Income
The components of noninterest income for each year in the three-year period ended December 31 are as follows:
2019
2018
2017
$ Change
% Change
2019 compared to 2018
(dollars in thousands)
Noninterest Income:
Trust income
Service charges on deposit accounts
Insurance and retail brokerage
commissions
Income from bank owned life
insurance
Card related interchange income
Swap fee income
Other income
Subtotal
Net securities gains
Gain on sale of mortgage loans
Gain on sale of loans and other assets
Derivative mark to market
Total noninterest income
$
$
$
8,321
18,926
$
7,901
18,175
$
7,098
18,579
7,583
7,426
8,807
6,002
21,677
3,397
7,268
73,174
22
7,765
4,793
(269)
85,485
$
6,686
20,187
1,874
6,790
69,039
8,102
5,436
5,273
787
88,637
$
5,699
18,780
2,005
7,677
68,645
5,040
5,366
1,753
(473)
80,331
$
420
751
157
(684)
1,490
1,523
478
4,135
(8,080)
2,329
(480)
(1,056)
(3,152)
5 %
4
2
(10)
7
81
7
6
(100)
43
(9)
(134)
(4)%
Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market,
increased $4.1 million, or 6%, in 2019. Swap fee income increased $1.5 million due to growth in interest rate swaps entered
into for our commercial customers. Card-related interchange income increased $1.5 million, due to growth in customer
accounts and transactions, including $0.4 million attributable to the Santander acquisition in September 2019 as well as a full
year of activity after the Garfield acquisition in May 2018. Service charges on deposit accounts increased $0.8 million, due to
growth in customers' accounts, as well as $0.4 million attributable to the Santander acquisition and a full year after the Garfield
acquisition. Income from bank owned life insurance decreased $0.7 million, primarily due to $0.9 million in death claim
benefits recognized in the year ended December 31, 2018.
Total noninterest income decreased $3.2 million, or 4%, in comparison to the year ended December 31, 2018. The most
significant change, other than the changes noted above, include an $8.1 million decrease in net securities gains resulting from
gains recognized in 2018 related to the redemption of two of our pooled trust preferred securities and the sale of the remaining
pooled trust preferred portfolio. Gain on sale of mortgage loans increased $2.3 million as a result of growth in our mortgage
lending area. The mark to market adjustment on interest rate swaps entered into for our commercial customers resulted in a
decrease of $1.1 million. This adjustment does not reflect a realized loss on the swaps, but rather relates to a change in fair
value due to movements in corporate bond spreads and swap rates.
If the Company's total assets would equal or exceed $10 billion we would no longer qualify for exemption from the interchange
fee cap included in the Dodd-Frank Act. We estimate the application of the interchange fee cap would have decreased
interchange income by approximately $9.3 million in 2019.
33
Noninterest Expense
The components of noninterest expense for each year in the three-year period ended December 31 are as follows:
2019
2018
2017
$ Change
% Change
2019 Compared to 2018
(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits
Net occupancy
Furniture and equipment
Data processing
Advertising and promotion
Pennsylvania shares tax
Intangible amortization
Collection and repossession
Other professional fees and services
FDIC insurance
Other operating expenses
Subtotal
Loss on sale or write-down of assets
Litigation and operational losses
Merger and acquisition related
Total noninterest expense
$
$
112,237
18,923
15,160
10,692
4,250
4,602
3,344
2,204
4,631
1,219
25,756
203,018
1,724
1,687
3,536
$
105,115
17,219
14,247
10,470
3,956
4,875
3,217
2,762
4,473
2,007
23,336
191,677
1,080
1,162
1,637
$
103,714
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
$
209,965
$
195,556
$
200,298
$
7,122
1,704
913
222
294
(273)
127
(558)
158
(788)
2,420
11,341
644
525
1,899
14,409
7%
10
6
2
7
(6)
4
(20)
4
(39)
10
6
60
45
116
7%
Noninterest expense, excluding the loss on sale or write-down of assets, litigation and operational losses, and merger and
acquisition related expense, increased $11.3 million, or 6%, for the year ended 2019 compared to 2018. Contributing to the
2019 increase is a $7.1 million increase in salaries and employee benefits resulting from a higher number of full-time
equivalent employees, annual merit increases and a $2.3 million increase in hospitalization expense. The higher number of
employees is primarily a result of the acquisition of 14 branches from Santander in September 2019, the acquisition of Garfield
in May 2018 and continued expansion of our mortgage and commercial banking businesses. The Santander and Garfield
acquisitions accounted for $1.7 million of the salaries and employee benefit increase. Expenses contributing to the increase in
other operating expenses include higher out of state financial institution tax, charitable contributions and telephone expense.
The Santander and Garfield acquisitions accounted for $0.8 million of the $1.7 million increase in net occupancy expense, and
$0.4 million of the $0.9 million increase in furniture and equipment expense. FDIC insurance decreased $0.8 million as a result
of credits received as a result of the FDIC deposit insurance fund reaching the required minimum reserve ratio. The Company
has $0.7 million in remaining credits that will offset FDIC expense in future quarters. Collection and repossession expense
decreased $0.6 million due to costs related to several OREO properties that occurred in 2018 with no similar activity in 2019.
Intangible amortization expense increased $0.1 million as a result of the Santander and Garfield acquisitions.
Total noninterest expense increased $14.4 million, or 7%, compared to the year ended December 31, 2018. The most significant
change, other than the changes noted above, is a $1.9 million increase in merger related expenses. Merger expenses in 2019 are
a result of the Santander branch acquisition, while merger expenses in 2018 reflect expenses related to the acquisition of
Garfield.
Income Tax
The provision for income taxes of $25.5 million in 2019 reflects an increase of $0.2 million compared to the provision for
income taxes in 2018, despite a $1.9 million decrease in the level of income before taxes.
The effective tax rate was 19% for tax expense in both 2019 and 2018. We ordinarily generate an annual effective tax rate that
is less than the statutory rate due to benefits resulting from tax-exempt interest and income from bank owned life insurance,
which are relatively consistent regardless of the level of pretax income. Additionally, the year ended December 31, 2018
included a $0.6 million further adjustment to the deferred tax asset adjustment recorded in 2017.
34
Financial Condition
First Commonwealth’s total assets increased $480.5 million in 2019. Loans, including loans held for sale, increased $419.1
million, or 7%, while investments decreased $63.7 million, or 5%.
Loan growth in 2019 was impacted by $100.0 million in loans acquired as part of the Santander branch acquisition, including
$7.1 million in commercial, financial, agricultural and other, $71.8 million in residential real estate, $9.2 million in commercial
real estate and $11.8 million in loans to individuals.
During 2019, approximately $243.8 million in investment securities were sold, called or matured. Some of these securities were
higher yielding securities in comparison to the total portfolio yield and, as such, their replacement contributed to the decrease in
the yield earned on the portfolio. In total, $11.0 million in agency securities, $121.3 million in mortgage-backed securities, $6.0
million in corporate securities and $0.4 million in municipal securities were purchased in 2019 to help replace runoff from the
portfolio while maintaining a reduced risk profile.
First Commonwealth’s total liabilities increased $400.2 million, or 6%, in 2019. Deposits increased $779.6 million, or 13%,
including $471.4 million in deposits obtained as part of the acquisition of 14 Santander branches. Short-term borrowings
decreased $520.0 million, or 72%, primarily due to the $329.5 million in cash received as a result of the Santander acquisition
and long-term debt increased $49.1 million, or 27%, primarily due to extending the maturity on some FHLB borrowings.
Total shareholders' equity increased $80.3 million in 2019. Growth in shareholders' equity was a result of net income of $105.3
million and a $16.9 million increase in accumulated other comprehensive income, partially offset by $39.4 million in dividends
declared and $6.3 million in stock repurchases.
Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
2019
2018
2017
2016
2015
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(dollars in thousands)
$ 1,241,853
20% $ 1,138,473
20% $ 1,163,383
22% $ 1,139,547
23% $ 1,150,906
25%
449,039
1,681,362
2,117,519
699,375
7
27
34
12
358,978
1,562,405
2,123,544
590,739
6
27
37
10
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
$ 6,189,148
100% $ 5,774,139
100% $ 5,407,376
100% $ 4,879,347
100% $ 4,683,750
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 $6.2 billion as of December 31, 2019, reflecting growth of $415.0 million, or 7%, compared to
December 31, 2018. All categories experienced loan growth, except for commercial real estate. Commercial, financial,
agricultural and other loans increased $103.4 million, or 9%, largely due to growth in direct lending in Pennsylvania and Ohio.
Real estate construction loans increased $90.1 million, or 25%, with $69.3 million resulting from growth in commercial
construction projects primarily in Pennsylvania and Ohio and $20.8 million due to growth in consumer construction.
Residential real estate loans increased $119.0 million, or 8%, due to growth in our mortgage banking area as well as $71.8
million in mortgage loans acquired from Santander. Growth in the loans to individuals category of $108.6 million, or 18%, was
largely due to growth in indirect auto loans. Commercial real estate loans decreased $6.0 million, or less than 1%, as a result of
growth in this category being offset by runoff and prepayments.
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 northern Ohio in December
2016, the acquisition of DCB Financial of Columbus, Ohio in May 2017 and the acquisition of Garfield in Cincinnati, Ohio in
May 2018. As of December 31, 2019 and 2018, there were no concentrations of loans relating to any industry in excess of 10%
of total loans.
As of December 31, 2019, criticized loans (i.e., loans designated OAEM, substandard, impaired or doubtful) decreased $26.6
million, or 21%, from December 31, 2018. Criticized loans totaled $100.6 million at December 31, 2019 and represented 2% of
the total loan portfolio. Additionally, delinquencies on accruing loans increased $3.1 million, or 30%, at December 31, 2019
35
compared to December 31, 2018. As of December 31, 2019, nonaccrual loans increased $1.4 million, or 6%, compared to
December 31, 2018.
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at
December 31, 2019 were as follows:
Commercial, financial, agricultural and other
Real estate construction (a)
Commercial real estate
Other
Totals
Loans at fixed interest rates
Loans at variable interest rates
Totals
Within
One Year
One to
5 Years
After
5 Years
(dollars in thousands)
$
$
234,779
94,977
138,437
4,558
472,751
$
$
$
560,963
195,115
873,214
27,341
1,656,633
622,224
1,034,409
1,656,633
$
$
$
$
$
445,140
94,658
1,105,806
107,725
1,753,329
386,659
1,366,670
1,753,329
Total
1,240,882
384,750
2,117,457
139,624
3,882,713
(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 $137.1 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.
36
The following is a comparison of nonperforming and impaired assets and the effects on interest due to nonaccrual loans for the
period ended December 31:
Nonperforming Loans:
Loans on nonaccrual basis
Troubled debt restructured loans on
nonaccrual basis
Troubled debt restructured loans on
accrual basis
Total nonperforming loans
Loans past due in excess of 90 days and
still accruing
Other real estate owned
Loans outstanding at end of period
Average loans outstanding
Nonperforming loans as a percentage of
total loans
Provision for credit losses
Allowance for credit losses
Net charge-offs
Net charge-offs as a percentage of
average loans outstanding
Provision for credit losses as a
percentage of net charge-offs
Allowance for credit losses as a
percentage of end-of-period loans
outstanding (a)
Allowance for credit losses as a
percentage of nonperforming loans (a)
Gross income that would have been
recorded at original rates
Interest that was reflected in income
Net reduction to interest income due to
nonaccrual
2019
2018
2017
2016
2015
(dollars in thousands)
$
18,638
$
11,509
$
19,455
$
16,454
$
24,345
6,037
7,542
32,217
$
$
11,761
8,757
32,027
$
11,222
11,563
42,240
$
11,569
13,790
41,813
$
12,360
14,139
50,844
2,073
$
2,228
$
$ 6,189,148
$ 5,987,398
1,582
$
3,935
$
$ 5,774,139
$ 5,582,651
1,854
$
2,765
$
$ 5,407,376
$ 5,278,511
2,131
$
6,805
$
$ 4,879,347
$ 4,818,759
2,455
$
9,398
$
$ 4,683,750
$ 4,553,634
0.52%
0.55%
14,533
51,637
10,660
$
$
$
12,531
47,764
13,065
$
$
$
0.78%
5,087
48,298
6,974
$
$
$
0.86%
1.09%
18,480
50,185
19,107
$
$
$
14,948
50,812
16,187
0.18%
0.23%
0.13%
0.40%
0.36%
136.33%
95.91%
72.94%
96.72%
92.35%
0.83%
0.83%
0.89%
1.03%
1.08%
160.28%
149.14%
114.34%
120.02%
99.94%
1,860
262
1,598
$
$
1,428
256
1,172
$
$
2,079
783
1,296
$
$
1,296
533
763
$
$
572
—
572
$
$
$
$
$
(a) End of period loans and nonperforming loans exclude loans held for sale.
Nonperforming loans increased $0.2 million to $32.2 million at December 31, 2019, compared to $32.0 million at
December 31, 2018. Nonperforming loans as a percentage of total loans decreased to 0.5% from 0.6% at December 31, 2019
compared to December 31, 2018.
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 $6.9 million during 2019. For additional information on
TDRs please refer to Note 10 “Loans and Allowance for Credit Losses.”
Net charge-offs were $10.7 million in 2019 compared to $13.1 million for the year 2018. The most significant credit losses
recognized during the year include $1.4 million in charge-offs recognized on one commercial real estate relationship and
charge-offs on two commercial, financial, agricultural and other borrowers, each with a charge-off of $0.5 million. Net charge-
offs in the loans to individual category totaled $5.2 million for 2019, primarily due to charge-offs of indirect auto loans.
Additional detail on credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” under “Provision for Credit Losses,” “Allowance for Credit Losses" and "Credit Risk.”
Provision for credit losses as a percentage of net charge-offs increased to 136.3% for the year ended December 31, 2019 from
95.9% for the year ended December 31, 2018.
37
Allowance for Credit Losses
Following is a summary of the allocation of the allowance for credit losses at December 31:
2019
2018
2017
2016
2015
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
Allowance
Amount
%
(a)
(dollars in thousands)
$ 20,234
20% $ 19,374
20% $ 23,429
22% $ 35,974
23% $ 31,035
25%
2,558
4,093
19,768
4,984
7
27
34
12
2,002
3,969
18,386
4,033
6
27
37
10
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
$ 51,637
$ 47,764
$ 48,298
$ 50,185
$ 50,812
0.83%
0.83%
0.89%
1.03%
1.08%
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 increased $3.9 million from December 31, 2018 to December 31, 2019. The allowance for
credit losses as a percentage of end-of-period loans outstanding was 0.8% at December 31, 2019 remaining consistent with
December 31, 2018. The allowance for credit losses includes both a general reserve for performing loans and specific reserves
for impaired loans. Comparing December 31, 2019 to December 31, 2018, the general reserve for performing loans is 0.80% of
total performing loans for both periods. General reserves as a percentage of non-impaired originated loans were 0.86% at
December 31, 2019 compared to 0.88% at December 31, 2018. Specific reserves increased from 5.1% of nonperforming loans
at December 31, 2018 to 7.5% of nonperforming loans at December 31, 2019. The allowance for credit losses as a percentage
of nonperforming loans was 160.3% and 149.1% at December 31, 2019 and 2018, 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 appropriateness of the allowance at least quarterly, and in doing so relies on various factors
including, but not limited to, assessment of historical loss experience, 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.
38
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
2019
2018
2017
(dollars in thousands)
$
$
7,745
186,316
$
9,011
169,633
10,556
24,611
660,777
—
1,000
17,738
22,919
—
896,495
—
896,495
$
686,906
—
10,000
27,592
20,912
—
924,054
—
924,054
$
632,422
—
1,098
27,083
15,907
27,499
739,176
1,670
740,846
Total Securities Available for Sale
$
As of December 31, 2019, securities available for sale had a fair value of $902.3 million. Gross unrealized gains were $8.9
million and gross unrealized losses were $3.1 million.
The following is a schedule of the contractual maturity distribution of securities available for sale at December 31, 2019.
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
U.S.
Government
Agencies and
Corporations
States and
Political
Subdivisions
Other
Securities
Total
Amortized
Cost (a)
Weighted
Average
Yield (b)
$
306
$
— $
— $
(dollars in thousands)
5,665
189,790
660,077
13,909
3,829
—
20,977
1,942
—
$
855,838
$
17,738
$
22,919
$
306
40,551
195,561
660,077
896,495
3.53%
3.21
2.06
2.67
2.56%
(a) Equities are excluded from this schedule because they have an indefinite maturity.
(b) Yields are calculated on a taxable equivalent basis.
Mortgage-backed securities, which include mortgage-backed obligations of U.S. Government agencies and obligations of U.S.
Government-sponsored enterprises, have contractual maturities ranging from less than one year to approximately 30 years and
have anticipated average lives to maturity ranging from less than one year to approximately eight years.
The available for sale investment portfolio amortized cost decreased $27.6 million, or 3%, at December 31, 2019 compared to
2018. Available for sale investment purchases of $138.7 million were offset by the sale, call or maturity of $189.2 million in
investments. Liquidity provided from sales, calls and maturities was utilized to fund growth in the loan portfolio.
39
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
2019
2018
2017
(dollars in thousands)
$
$
$
3,392
51,291
$
3,635
55,221
3,925
58,249
229,667
12,081
40,092
600
337,123
$
279,109
13,159
42,331
400
393,855
$
305,126
14,056
40,540
200
422,096
The following is a schedule of the contractual maturity distribution of securities held to maturity at December 31, 2019.
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
(dollars in thousands)
— $
1,327
$
— $
12,081
—
284,350
6,941
31,824
—
600
—
—
296,431
$
40,092
$
600
$
$
$
1,327
19,622
31,824
284,350
337,123
1.93%
2.43
3.11
2.41
2.48%
The held to maturity investment portfolio decreased $56.7 million, or 14%, at December 31, 2019 compared to 2018. Held to
maturity investment purchases of $0.2 million were offset by the sale, call or maturity of $54.6 million in investments.
See Note 8 “Investment Securities,” Note 9 “Impairment of Investment Securities” and Note 18 “Fair Values of Assets and
Liabilities” for additional information related to the investment portfolio.
40
Deposits
Total deposits increased $779.6 million, or 13%, in 2019, with $471.4 million of the growth resulting from the Santander
branch acquisition. Growth was experienced in all deposit categories. For additional information concerning our deposits,
please refer to Note 14 “Interest-Bearing Deposits.”
Time deposits of $100 thousand or more had remaining maturities as follows as of the end of each year in the three-year period
ended December 31:
2019
2018
2017
Amount
%
Amount
%
Amount
%
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
$
$
51,625
88,352
133,893
103,759
377,629
(dollars in thousands)
14% $
23
35
28
100% $
51,619
59,201
133,285
140,429
384,534
13% $
15
35
37
100% $
47,964
22,101
68,174
72,142
210,381
23%
11
32
34
100%
Short-Term Borrowings and Long-Term Debt
Short-term borrowings decreased $520.0 million, or 72%, from $721.8 million as of December 31, 2018 to $201.9 million at
December 31, 2019. Long-term debt increased $49.1 million, or 27%, from $185.1 million at December 31, 2018 to $234.2
million at December 31, 2019 as a result of additional borrowings from the FHLB. For additional information concerning our
short-term borrowings, subordinated debentures and other long-term debt, please refer to Note 15 “Short-term Borrowings,”
Note 16 “Subordinated Debentures” and Note 17 “Other Long-term Debt” of the Consolidated Financial Statements.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below sets forth our contractual obligations to make future payments as of December 31, 2019. For a more detailed
description of each category of obligation, refer to the note in our Consolidated Financial Statements indicated in the table
below.
Footnote
Number
Reference
1 Year
or Less
After 1
But Within
3 Years
After 3
But Within
5 Years
(dollars in thousands)
After 5
Years
Total
FHLB advances
Subordinated debentures
Operating leases
Total contractual obligations
17
16
12
$
$
659
$
51,397
$
1,508
$
3,353
$
56,917
—
5,199
—
10,045
—
9,730
170,450
44,391
170,450
69,365
5,858
$
61,442
$
11,238
$
218,194
$
296,732
The table above excludes our cash obligations upon maturity of certificates of deposit, which is set forth in Note 14 “Interest-
Bearing Deposits” of the Consolidated Financial Statements.
In addition, see Note 11 “Commitments and Letters of Credit” for detail related to our off-balance sheet commitments to extend
credit, financial standby letters of credit, performance standby letters of credit and commercial letters of credit as of
December 31, 2019. 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, 2019, a reserve for probable losses of $4.5 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
41
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 $779.6 million, or 13%,
during 2019, and comprised 92% of total liabilities at December 31, 2019, as compared to 86% at December 31, 2018. Proceeds
from the sale, maturity and redemption of investment securities totaled $243.8 million during 2019 and provided liquidity to
fund loans, pay down short-term borrowings, purchase investment securities and fund depositor withdrawals. Additionally, in
September 2019, $243.3 million in short-term borrowings were paid off with proceeds from the Santander branch acquisition.
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,
2019 our borrowing capacity at the Federal Reserve related to this program was $882.4 million and there were no amounts
outstanding. Additionally, as of December 31, 2019, our maximum borrowing capacity at the Federal Home Loan Bank of
Pittsburgh was $1.5 billion and as of that date amounts used against this capacity included $0.2 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, 2019, our maximum borrowing capacity under this program was
$1.2 billion and as of that date there was $4.2 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, 2019, our outstanding certificates of deposits from this program have an average weighted rate of 1.06% and an
average original term of 332 days.
We also have available unused federal funds lines with six correspondent banks. These lines have an aggregate commitment of
$205.0 million and there were no amounts outstanding as of December 31, 2019. In addition, we have available unused repo
lines with three correspondent banks. These lines have an aggregate commitment of $535.5 million with no outstanding balance
as of December 31, 2019.
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 $47.7 million for the year ended
December 31, 2019, as well as any cash necessary to repurchase our shares, which totaled $6.3 million for the year ended
December 31, 2019. 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 $22.9 million at
December 31, 2019. At the end of 2019, the Parent Company had a $20.0 million short-term, unsecured revolving line of credit
with another financial institution. As of December 31, 2019, 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.
42
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 0.80 and 0.74 at December 31, 2019 and 2018, respectively. A ratio of less than one indicates a higher
level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is
largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within
one year.
Following is the gap analysis as of December 31:
2019
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
$ 2,818,183
$
313,651
$
494,467
$ 3,626,301
$ 2,052,952
$
475,962
103,225
19,510
2,940,918
121,302
4,151,518
274,213
79,866
—
393,517
161,488
—
193
162,225
—
656,692
303,245
—
385
345,316
19,510
633,178
235,437
—
—
3,991,127
2,686,130
711,399
586,035
4,151,518
274,791
246,512
—
103,082
2,822
—
53,064
4,547,033
161,681
303,630
$(1,606,115)
$
231,836
$
353,062
0.65
19.33%
2.43
2.79%
2.16
4.25%
5,012,344
$(1,021,217)
0.80
12.29%
349,594
55,886
$ 2,336,536
$
655,513
7.68
28.12%
12.73
7.89%
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
43
2018
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
$
$ 2,659,890
81,971
3,013
2,744,874
116,469
3,581,563
794,206
291,134
60,654
—
351,788
116,664
—
218
$
439,098
99,288
—
538,386
276,101
—
443
$ 3,390,122
241,913
3,013
$ 1,802,605
612,407
—
$
569,659
468,916
—
3,635,048
509,234
3,581,563
794,867
2,415,012
338,148
—
54,080
1,038,575
2,834
—
57,932
4,492,238
$(1,747,364)
0.61
22.32%
$
116,882
234,906
3.01
3.00%
$
276,544
261,842
1.95
3.34%
4,885,664
$(1,250,616)
0.74
15.98%
392,228
$ 2,022,784
6.16
25.84%
$
60,766
977,809
17.09
12.49%
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.
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.
December 31, 2019 ($)
December 31, 2019 (%)
December 31, 2018 ($)
December 31, 2018 (%)
Net interest income change (12 months)
-200
-100
+100
+200
(dollars in thousands)
$
$
(12,540)
(4.52)%
(16,914)
$
$
(6.32)%
$
$
(5,880)
(2.12)%
(6,442)
(2.41)%
$
$
4,279
1.54%
1,368
0.51%
8,032
2.90%
2,587
0.97%
The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates
as compared to if rates remained unchanged, assuming there are no changes in balance sheet categories.
December 31, 2019 ($)
December 31, 2019 (%)
December 31, 2018 ($)
December 31, 2018 (%)
Net interest income change (12 months)
-200
-100
+100
+200
(dollars in thousands)
$
$
(41,661)
(15.02)%
(37,239)
(13.90)%
$
$
(21,604)
(7.79)%
(14,277)
$
$
(5.33)%
$
$
12,259
4.42%
10,674
3.99%
22,291
8.04%
20,597
7.69%
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 2019 and 2018, the cost of our interest-bearing liabilities averaged 1.03% and 0.78%,
44
respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 4.51% and
4.30%, respectively.
The ALCO is responsible for the identification and management of interest rate risk exposure. As such, the ALCO continuously
evaluates strategies to manage our exposure to interest rate fluctuations.
Asset/liability models require that certain assumptions be made, such as prepayment rates on earning assets and the impact of
pricing on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our
experience, business plans and published industry experience. While management believes such assumptions to be reasonable,
there can be no assurance that modeled results will approximate actual results.
Credit Risk
First Commonwealth maintains an allowance for credit losses at a level deemed sufficient for losses inherent in the loan
portfolio at the date of each statement of financial condition. Management reviews the appropriateness of the allowance on a
quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to
maintain the allowance at a level that is appropriate based on management’s assessment of 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 $250 thousand, loss
experience trends and other relevant factors.
First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and
probability of funding. The reserve totaled $4.5 million at December 31, 2019 and is classified in “Other liabilities” on the
Consolidated Statements of Financial Condition.
Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent
loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose terms have
been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of
the borrower, who could not obtain comparable terms from alternate financing sources. In 2019, 38 loans totaling $8.3 million
were identified as troubled debt restructurings, requiring no additional specific reserves.
We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable
to fully collect principal or interest due according to the contractual terms of the loan. A loan is also placed in nonaccrual status
when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the
borrower. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are
placed on nonaccrual status at 150 days past due.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The 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 $51.6 million at December 31, 2019 or 0.83% of loans outstanding, compared to $47.8
million or 0.83% of loans outstanding at December 31, 2018. Credit measures as of December 31, 2019 compared to
December 31, 2018 reflect a decrease in the level of criticized loans of $26.6 million from $127.2 million at December 31, 2018
to $100.6 million at December 31, 2019. Classified assets increased $11.8 million from $40.2 million at December 31, 2018 to
$52.0 million at December 31, 2019. Delinquency on accruing loans increased $3.1 million, or 30%, and the level of
nonperforming loans increased $0.2 million for the same period.
The allowance for credit losses as a percentage of nonperforming loans was 160.3% at December 31, 2019 and 149.1% as of
December 31, 2018. The allowance for credit losses includes specific allocations of $2.4 million related to nonperforming
loans covering 8% of the total nonperforming balance at December 31, 2019 and specific allocations of $1.5 million covering
5% of the total nonperforming balance at December 31, 2018. 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, 2019.
45
The following table provides information on net charge-offs and nonperforming loans by loan category:
For the Period Ended December 31, 2019
As of December 31, 2019
% 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
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total loans, net of
unearned income
$
3,067
(158)
727
1,819
5,205
28.77%
(1.48)
6.82
17.06
48.83
(dollars in thousands)
0.05% $
—
0.01
0.03
0.09
10,211
—
12,982
8,606
418
31.69%
—
40.30
26.71
1.30
$
10,660
100.00%
0.18% $
32,217
100.00%
0.16%
—
0.21
0.14
0.01
0.52%
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, 2019. See discussions related to the provision for credit
losses and loans for more information.
New Accounting Pronouncements
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 Current Expected Credit Loss ("CECL") methodology requires the use of the modified retrospective
transition method by means of a one-time cumulative-effect 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.
We have established a CECL implementation team, which includes members from the finance and credit areas, with oversight
by the Chief Executive Officer, Chief Financial Officer and Chief Credit Officer. In the fourth quarter of 2018, a third party
was engaged to assist with evaluation of data and methodologies related to this standard.
As part of its process of adopting CECL, Management implemented a third party software solution and determined appropriate
loan segments, methodologies, model assumptions and qualitative components. Our implementation plan also included the
assessment and documentation of appropriate processes, policies and internal controls. Refinement and completion of this
documentation will be completed during the first quarter of 2020. Additionally, Management engaged a third party to perform a
model validation, which was completed during the fourth quarter of 2019 and first quarter of 2020.
Parallel runs utilizing third and fourth quarter 2019 data have been completed and incorporated preliminary operational
procedures and internal controls. Based on our fourth quarter parallel run and the composition, characteristics and quality of
our loan portfolio as well as prevailing economic conditions and forecasts as of the adoption date, we estimate that adoption of
ASU 2016-13 will result in an increase of approximately 20% - 30% to our December 31, 2019 allowance for credit losses of
$51.6 million.
In addition, ASU 2016-13 amends the accounting for credit losses on certain debt securities. Based upon the nature and
characteristics of our securities portfolio at the adoption date, management does not expect to record any allowance for credit
losses on its debt securities as a result of adopting ASU 2016-13.
The ultimate impact of adopting ASU 2016-13, and at each subsequent reporting period, is highly dependent on credit quality,
macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other
management judgments. The transition adjustment to record the allowance for credit losses may fall outside of management’s
estimated increase based on material changes in these dependencies, specifically the macroeconomic forecast and conditions
and loan composition, used in calculating the allowance for credit losses upon the adoption of ASU 2016-13.
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
46
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 will not have a material impact on First Commonwealth’s financial condition or results of operations.
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement." This ASU updates disclosure requirements for fair value measurements, including elimination of the
disclosure related to the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy. ASU No.
2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Adoption of this ASU will not
have a material impact on First Commonwealth's financial condition or results of operations, as it relates only to disclosure
requirements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) -
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”
This ASU clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software. This standard is effective for interim and annual
periods for fiscal years beginning after December 15, 2019 and will not have a material impact on First Commonwealth's
financial condition or results of operations.
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.
47
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 $338,718 at December 31, 2019 and $383,993
at December 31, 2018)
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,
2019
2018
(dollars in thousands, except
share data)
$
102,346
$
19,510
902,292
337,123
16,761
15,989
95,934
3,013
909,247
393,855
32,126
11,881
6,189,148
5,774,139
(51,637)
(47,764)
6,137,511
5,726,375
137,268
2,228
303,328
16,366
220,723
97,328
80,474
3,935
274,202
13,038
215,766
68,409
$
8,308,773
$
7,828,255
$
1,690,247
$
1,466,213
4,987,368
6,677,615
201,853
170,450
56,917
6,815
234,182
139,458
4,431,779
5,897,992
721,823
170,288
7,551
7,217
185,056
47,995
7,253,108
6,852,866
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 shares issued as of
December 31, 2019 and 2018; and 98,311,840 and 98,518,668 shares outstanding at December 31, 2019
and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net
Treasury stock (15,603,062 and 15,396,234 shares at December 31, 2019 and 2018, respectively)
Total shareholders’ equity
Total liabilities and shareholders’ equity
113,915
493,737
577,348
5,579
(134,914)
1,055,665
113,915
492,273
511,409
(11,341)
(130,867)
975,389
$
8,308,773
$
7,828,255
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2019
Years Ended December 31,
2018
(dollars in thousands, except share data)
2017
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
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
$
291,889
$
257,316
$
218,530
29,773
1,591
1,608
403
325,264
36,725
8,298
9,084
1,016
279
55,402
269,862
14,533
255,329
22
8,321
18,926
7,583
6,002
7,765
4,793
21,677
(269)
3,397
7,268
85,485
31,264
1,646
1,859
172
292,257
21,713
10,741
6,987
300
294
40,035
252,222
12,531
239,691
8,102
7,901
18,175
7,426
6,686
5,436
5,273
20,187
787
1,874
6,790
88,637
112,237
18,923
15,160
10,692
4,250
4,602
3,344
2,204
4,631
1,219
1,724
1,687
3,536
25,756
209,965
130,849
25,516
105,333
98,317,787
98,588,164
1.07
1.07
0.40
$
$
$
$
105,115
17,219
14,247
10,470
3,956
4,875
3,217
2,762
4,473
2,007
1,080
1,162
1,637
23,336
195,556
132,772
25,274
107,498
99,036,163
99,223,513
1.09
1.08
0.35
$
$
$
$
$
$
$
$
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
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
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income
Other comprehensive income (loss), before tax expense (benefit):
Unrealized holding gains on securities arising during the period
Less: reclassification adjustment for gains on securities included in net
income
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives arising during the
period
Reclassification adjustment for losses on derivatives included in
net income
Unrealized (losses) gains for postretirement obligations:
Net (loss) gain
Total other comprehensive income (loss), before income tax
expense (benefit)
Income tax expense (benefit) related to items of other comprehensive
income (loss)
Comprehensive Income
Years Ended December 31,
2019
2018
2017
(dollars in thousands)
$
105,333
$
107,498
$
55,165
20,625
2,783
7,023
(22)
(8,102)
(5,040)
935
—
(121)
326
10
144
(901)
119
94
21,417
(4,839)
1,295
4,497
$
122,253
$
(1,015)
103,674
$
441
56,019
The accompanying notes are an integral part of these Consolidated Financial Statements.
50
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, 2018
98,518,668
$
113,915
$
492,273
$
511,409
$
(11,341) $
(130,867) $
Net income
Total other comprehensive income
Cash dividends declared ($0.35 per share)
Treasury stock acquired
Treasury stock reissued
Restricted stock
105,333
(39,394)
16,920
(486,849)
205,021
75,000
—
1,014
450
—
—
(6,259)
1,730
482
975,389
105,333
16,920
(39,394)
(6,259)
2,744
932
Balance at December 31, 2019
98,311,840
$
113,915
$
493,737
$
577,348
$
5,579
$
(134,914) $
1,055,665
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, 2017
97,456,478
$
113,915
$
470,123
$
437,416
$
(6,173) $
(127,154) $
888,127
Cumulative effect of adoption of ASU
2018-02
January 1, 2018
Net income
Total other comprehensive loss
Cash dividends declared ($0.32 per share)
97,456,478
$
113,915
$
470,123
$
438,760
$
(7,517) $
(127,154) $
1,344
(1,344)
107,498
(34,849)
(3,824)
Treasury stock acquired
Treasury stock reissued
Restricted stock
(1,920,544)
2,908,234
74,500
21,579
571
—
—
—
(26,189)
22,447
29
—
888,127
107,498
(3,824)
(34,849)
(26,189)
44,026
600
Balance at December 31, 2018
98,518,668
$
113,915
$
492,273
$
511,409
$
(11,341) $
(130,867) $
975,389
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 ($0.28 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
The accompanying notes are an integral part of these Consolidated Financial Statements.
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2019
2018
2017
(dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
105,333
$
107,498
$
55,165
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
Distribution from unconsolidated subsidiary
Other—net
Net cash provided by operating activities
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales
Proceeds from maturities and redemptions
Purchases
Transactions with securities available for sale:
Proceeds from sales
Proceeds from maturities and redemptions
Purchases
Purchases of FHLB stock
Proceeds from the redemption of FHLB stock
Proceeds from bank owned life insurance
Proceeds from the sale of loans
Proceeds from sales of other assets
Acquisition, net of cash acquired
Net increase in loans
Purchases of premises and equipment
Net cash provided by (used in) investing activities
Financing Activities
Net (decrease) increase in federal funds purchased
Net (decrease) increase in other short-term borrowings
Net increase in deposits
Repayments of other long-term debt
Proceeds from issuance of long-term debt
Repayments of capital lease obligations
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
14,533
2,292
10,370
(10,671)
3,892
(5,998)
(251,428)
251,968
423
(256)
1,484
—
(14,310)
107,632
948
54,632
(200)
0
189,194
(138,670)
(36,850)
52,215
557
37,534
6,822
332,468
(358,328)
(17,380)
122,942
(11,000)
(508,970)
308,783
(634)
50,000
(402)
(39,394)
211
(6,259)
(207,665)
22,909
98,947
12,531
3,473
8,046
(21,540)
3,083
(5,808)
(165,898)
177,287
(2,561)
383
(1,926)
9,000
11,695
135,263
—
47,614
(20,650)
15,939
140,707
(331,969)
(52,107)
51,488
2,140
40,783
4,477
705
(237,276)
(9,599)
(347,748)
11,000
3,357
176,558
(23,598)
98,026
(373)
(34,849)
208
(26,189)
204,140
(8,345)
107,292
$
121,856
$
98,947
$
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)
(11,591)
(52,797)
—
(160,477)
149,175
(588)
—
(260)
(30,513)
228
(1,458)
(43,893)
(8,385)
115,677
107,292
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
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. First Commonwealth's subsidiaries include, First Commonwealth Bank ("FCB" or
the "Bank"), First Commonwealth Insurance Agency, Inc. ("FCIA"), FRAMAL and First Commonwealth Financial Advisors,
Inc ("FCFA").
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 28 counties in central and western Pennsylvania as well as throughout 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 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. 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.
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 estimated market value on an
53
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 market 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. Troubled debt restructured loans are considered to be
impaired loans.
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.
54
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 appropriateness
of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an
amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable
estimated losses. First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses
consists of several key elements. These elements include an assessment of individual problem loans, delinquency and loss
experience trends and other relevant factors, all of which may be susceptible to significant changes.
The major loan classifications used in the allowance for credit losses calculation include pass, other assets especially mentioned
(“OAEM”), substandard and doubtful. Additional information related to these credit quality categories is provided in Note 10,
"Loans and Allowance for Credit Losses."
First Commonwealth consistently applies the following comprehensive methodology and procedure for determining the
allowance for credit losses.
All impaired credits in excess of $250 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 in 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. Off-balance sheet credit exposure includes commitments to extend credit,
standby letters of credit and commercial letters of credit. Management determines the appropriateness 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.
55
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 and cash receipts and disbursements are included in "Operating Activities" in the Consolidated
Statements of Cash Flows. 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 $4.2 million and $3.8 million as of December 31,
2019 and 2018, respectively, and is reflected in "Other Liabilities" on the Consolidated Statements of Financial Condition.
Premises, Equipment and Lease Commitments
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 7 years.
A right-of-use asset and related lease liability is recognized on the Consolidated Statements of Financial Condition for operating
leases First Commonwealth has entered to lease certain office facilities. These amounts are reported as components of premises
and equipment and other liabilities. Short-term operating leases, which are leases with an original term of 12 months or less and
do not have a purchase option that is likely to be exercised, are not recognized as part of the right-of-use asset or lease liability.
First Commonwealth has no material leasing arrangements for which it is the lessor of property or equipment.
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 impairment 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.
56
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 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, 2019, First Commonwealth has interest rate derivative
positions that are designated as hedging instruments and others that are not designated as hedging instruments. See Note 7,
“Derivatives,” for a description of these instruments.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
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 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.
57
• 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 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 18 “Fair Values of
Assets and Liabilities” for additional information.
Revenue from Contracts with Customers
First Commonwealth records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from
Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify
the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance
obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.
A significant component of the Company's revenue, net interest earned on financial assets and liabilities, is excluded from the
scope of Topic 606. First Commonwealth generally fully satisfies its performance obligations on its contracts with customers as
services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity.
Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, the Company has
made no significant judgments in applying the revenue guidance prescribed in Topic 606 that affect the determination of the
amount and timing of revenue from contracts with customers.
Note 2—Acquisition
Santander Branch Acquisition
On September 6, 2019, the Company's banking subsidiary, First Commonwealth Bank, completed its acquisition of 14 full
service branches from Santander Bank N.A. ("Santander") receiving $329.5 million in cash. This acquisition further expands
the Company's market into State College, Lock Haven, Williamsport and Lewisburg, Pennsylvania and included the purchase of
$100.0 million in loans and $471.4 million in deposits.
58
The table below summarizes the final purchase price allocation and the net assets acquired (at fair value) and consideration
received in connection with the Santander acquisition (dollars in thousands):
Consideration Received
Cash 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
Total Fair Value of Identifiable Net Assets
Goodwill
2,935
99,956
3,637
5,615
770
112,913
471,386
186
471,572
$
329,533
(358,659)
$
29,126
The goodwill of $29.1 million arising from the acquisition represents the value of synergies and economies of scale expected
from combining the operations of the Company with the branches acquired from Santander. The goodwill for this transaction is
expected to be deducted over a 15-year period for income tax purposes.
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. 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.” The fair value of acquired
loans and certificate of deposits is established by discounting the expected future cash flows with a market discount rate for like
maturities and risk instruments. The $100.0 million fair value of acquired loans is the result of $101.2 million in loans acquired
from Santander and the recognition of a net combined yield and credit mark adjustment of $1.2 million. The $471.4 million
fair value of acquired deposits is the result of $471.0 million in deposits acquired and the recognition of a yield mark
adjustment of $0.4 million on the certificate of deposits. A $5.6 million core deposit intangible was recognized for core
deposits acquired.
Costs related to the acquisition totaled $3.7 million. These amounts were expensed as incurred and are recorded as a merger and
acquisition related expense in the Consolidated Statements of Income.
As a result of the full integration of the operations of the Santander branches, it is not practicable to determine revenue or net
income included in the Company's operating results relating to Santander since the date of acquisition as Santander’s results
cannot be separately identified.
Garfield Acquisition Corporation
On May 1, 2018, the Company completed its acquisition of Garfield Acquisition Corporation ("Garfield") and its banking
subsidiary, Foundation Bank, for consideration of $17.4 million in cash and 2.7 million shares of the Company's common stock.
Through the acquisition, the Company obtained five full-service banking offices which are operating under the First
Commonwealth name. This acquisition expands the Company's presence into the Cincinnati, Ohio market and added $184.5
million in loans and $141.3 million in deposits to the Company's balance sheet.
59
The table below summarizes the final purchase price allocation and the net assets acquired (at fair value) and consideration
transferred in connection with the Garfield acquisition (dollars in thousands):
Consideration Paid
Cash paid to shareholders
Shares issued to shareholders (2,745,098 shares)
Total consideration paid
$
17,400
41,561
$
58,961
Fair Value of Assets Acquired
Cash and cash equivalents
FHLB Stock
Loans
Premises and other equipment
Core deposit intangible
Other assets
Total assets acquired
Fair Value of Liabilities Assumed
Deposits
Federal Home Loan Bank borrowings
Other liabilities
Total liabilities assumed
Total Fair Value of Identifiable Net Assets
Goodwill
18,105
3,261
184,506
409
1,248
1,747
209,276
141,281
22,988
5,068
169,337
39,939
$
19,022
The goodwill of $19.0 million arising from the acquisition represents the value of synergies and economies of scale expected
from combining the operations of the Company with Garfield Acquisition 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.” The $184.5 million
fair value of acquired loans is the result of $183.7 million in net loans acquired from Garfield, the recognition of a net
combined yield and credit mark adjustment of $4.3 million and the $5.1 million reversal of Garfield's allowance as well as prior
fair value marks recorded by Garfield.
The fair value of the 2,745,098 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 $1.6 million. These amounts were expensed as incurred and are recorded as a merger and
acquisition related expense in the Condensed Consolidated Statements of Income.
As a result of the full integration of the operations of Garfield, it is not practicable to determine revenue or net income included
in the Company's operating results relating to Garfield since the date of acquisition as Garfield’s results cannot be separately
identified.
60
Note 3—Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income in the
Consolidated Statements of Comprehensive Income as of December 31. Reclassification adjustments related to securities
available for sale are included in the “Net securities gains” line in the Consolidated Statements of Income and reclassification
adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Consolidated Statements
of Income.
2019
2018
2017
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 on
securities arising during the
period
Reclassification adjustment
for gains on securities
included in net income
Total unrealized gains
(losses) on securities
Unrealized gains (losses) on
derivatives:
Unrealized holding gains
(losses) on derivatives
arising during the period
Reclassification adjustment
for losses on derivatives
included in net income
Total unrealized gains
(losses) on derivatives
Unrealized (losses) gains for
postretirement obligations:
Net (loss) gain
Total unrealized
(losses) gains for
postretirement
obligations
Total other
comprehensive
income (loss)
$ 20,625
$ (4,331) $ 16,294
$ 2,783
$
(585) $ 2,198
$
7,023
$ (2,458) $
4,565
(22)
5
(17)
(8,102)
1,701
(6,401)
(5,040)
1,764
(3,276)
20,603
(4,326)
16,277
(5,319)
1,116
(4,203)
1,983
(694)
1,289
935
(196)
739
326
(68)
258
(901)
315
(586)
—
935
(121)
(121)
—
(196)
—
739
10
336
(3)
7
119
(42)
77
(71)
265
(782)
273
(509)
25
25
(96)
144
(30)
114
(96)
144
(30)
114
94
94
(20)
(20)
74
74
$ 21,417
$ (4,497) $ 16,920
$ (4,839) $
1,015
$ (3,824) $
1,295
$
(441) $
854
61
The following table details the change in components of OCI for the year-ended December 31:
Balance at December 31
Other comprehensive income before
reclassification adjustment
Amounts reclassified from accumulated other
comprehensive income (loss)
Net gain
16,294
(17)
Net other comprehensive income during the period
Balance at December 31
$
16,277
4,580
$
2019
Securities Available
for Sale
Derivatives
Post-Retirement
Obligation
Accumulated Other
Comprehensive
Income
(dollars in thousands)
$
(11,697) $
(105) $
461
$
(11,341)
17,033
(17)
(96)
16,920
5,579
(96)
(96)
365
$
739
—
739
634
$
2018
Securities Available
for Sale
Derivatives
Post-Retirement
Obligation
Accumulated Other
Comprehensive
Income
(dollars in thousands)
Balance at January 1
$
(6,166) $
Cumulative effect of adoption of ASU 2018-02
Balance at January 1
Other comprehensive income before
reclassification adjustment
Amounts reclassified from accumulated other
comprehensive income (loss)
Net gain
(1,328)
(7,494)
2,198
(6,401)
Net other comprehensive income during the period
(4,203)
(306) $
(64)
(370)
258
7
265
Balance at December 31
$
(11,697) $
(105) $
299
$
48
347
114
114
461
$
(6,173)
(1,344)
(7,517)
2,456
(6,394)
114
(3,824)
(11,341)
Securities Available
for Sale
Derivatives
Post-Retirement
Obligation
Accumulated Other
Comprehensive
Income
2017
(dollars in thousands)
(7,455) $
203
$
225
$
4,565
(3,276)
1,289
(6,166) $
(586)
77
(509)
(306) $
(7,027)
3,979
(3,199)
74
854
74
74
299
$
(6,173)
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
$
$
62
Note 4—Supplemental Cash Flow Disclosures
The following table presents information related to cash paid during the year for interest and income taxes as well as detail on
non-cash investing and financing activities for the years ended December 31:
2019
2018
2017
(dollars in thousands)
Cash paid during the period for:
Interest
Income taxes
Non-cash investing and financing activities:
$
56,005
$
40,071
$
21,787
23,826
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
Loans transferred from available for sale to held to maturity
Gross increase (decrease) in market value adjustment to securities
available for sale
Gross increase (decrease) in market value adjustment to derivatives
Investments committed to purchase, not settled
Increase in limited partnership investment unfunded commitment
Net assets (liabilities) acquired through acquisition
Proceeds from death benefit on bank-owned life insurance not received
Treasury shares issued
4,723
—
30,359
482
20,604
935
25,484
1,469
(361,595)
484
2,531
21,552
27,902
3,067
1,891
15,102
—
4,334
—
37,367
—
(5,319)
1,983
336
—
—
21,834
—
2,257
(783)
—
—
37,070
245
2,258
Note 5—Earnings per Share
The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and
diluted earnings per share computation for the years ending December 31:
Weighted average common shares issued
Average treasury shares
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
Basic Earnings Per Share
Diluted Earnings Per Share
2019
2018
2017
113,914,902
(15,447,299)
(37,496)
(112,320)
113,914,902
(14,747,687)
(37,411)
(93,641)
111,809,880
(16,463,079)
(37,411)
(89,334)
98,317,787
99,036,163
95,220,056
231,957
149,939
38,420
37,411
73,570
37,411
98,588,164
99,223,513
95,331,037
$
$
1.07
1.07
$
$
1.09
1.08
$
$
0.58
0.58
63
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.
12/31/2019
Price Range
12/31/2018
Price Range
12/31/2017
Price Range
Shares
From
To
Shares
From
To
Shares
From
To
Restricted Stock
Restricted Stock Units
81,730
26,217
$
$
12.99
16.62
$
$
15.44
16.62
71,560
$
8.84
$
14.49
18,173
$
8.55
$
13.96
— $
— $
—
— $
— $
—
Note 6—Cash and Due from Banks
Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository
institutions with transaction accounts, such as checking accounts and NOW accounts. Reserves are maintained in the form of
vault cash or balances held with the local Federal Reserve Bank. First Commonwealth Bank maintained average balances of
$14.7 million during 2019 and $4.9 million during 2018 with the Federal Reserve Bank of Cleveland.
Note 7—Derivatives
Derivatives Not Designated as Hedging Instruments
First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These derivatives
relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate
loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives
interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into
with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays
the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the
customer, and receives interest from the financial institution for the same floating rate on the same notional amount.
The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined
by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
We have 31 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 12 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 and collars that are not designated as hedging instruments. The interest
rate caps relate to contracts that First Commonwealth enters into with loan customers that provide 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 interest rate collars relate to contracts that First Commonwealth enters into with loan
customers that provides both a maximum and minimum interest rate on their variable rate loan. At the same time the interest
rate collar is entered into with the customer, First Commonwealth enters into an offsetting interest rate collar with another
financial institution. The notional amount and the maximum and minimum interest rates on both interest collar 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
In 2015, the Company entered into an interest rate swap contract, which was designated as a cash flow hedge. This contract,
which had a total notional amount of $65.0 million, matured on March 4, 2019. The periodic net settlement of interest rate
swaps was an adjustment to "Interest and fees on loans" in the Consolidated Statements of Income. For the years ended
December 31, 2019 and 2018, there was a negative impact of $0.1 million and $0.6 million, respectively, on interest income as
a result of these interest rate swaps. For the year ended December 31, 2017, there was a positive impact of $0.5 million on
interest income.
64
In August 2019, the Company entered into two interest rate swap contracts that are designated as cash flow hedges. These
contracts mature on August 15, 2024 and August 15, 2026 and have notional amounts of $30.0 million and $40.0 million,
respectively. 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 made on subordinated debentures benchmarked to the 3-month LIBOR rate.
Therefore, the interest rate swaps convert the interest rate benchmark on the first $70.0 million of 3-month LIBOR based
subordinated debentures to a fixed rate.
The periodic net settlement of these interest rate swaps are recorded as an adjustment to "Interest on subordinated debentures"
in the Consolidated Statement of Income. For the year ended December 31, 2019, interest expense decreased by $0.2 million as
a result of these interest rate swaps. Changes in the fair value of the cash flow hedges are reported on the balance sheet and in
OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in
"Interest on subordinated debentures," the same line item in the Consolidated Statements of Income as the income on the
hedged items. The cash flow hedges were highly effective at December 31, 2019 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 in the rate 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 "Noninterest
income" in the Consolidated Statements of Income. The impact to noninterest income for the year ended December 31, 2019
was an increase of $0.1 million and the impact to noninterest expense for the years ended December 31, 2018 and 2017 was a
decrease of $189 thousand and $19 thousand, respectively.
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, 2019, the underlying funded
mortgage loan commitments had a carrying value of $9.8 million and a fair value of $10.7 million, while the underlying
unfunded mortgage loan commitments had a notional amount of $25.5 million. At December 31, 2018, the underlying funded
mortgage loan commitments had a carrying value of $6.9 million and a fair value of $7.6 million, while the underlying
unfunded mortgage loan commitments had a notional amount of $9.9 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 operating expenses" in the Consolidated
Statements of Income. The impact on other noninterest expense for the year ended December 31, 2019 totaled $5 thousand. At
December 31, 2019, the underlying loans had both a carrying value and a fair value of $4.8 million. At December 31, 2018, the
underlying loans had both a carrying value and a fair value of $1.9 million.
65
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
Interest rate collars
Risk participation agreements
Sold credit protection on risk participation agreements
Interest rate options
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
2019
2018
(dollars in thousands)
$
(272) $
(3)
587,275
87,188
35,354
164,632
(69,011)
25,460
801
70,000
(63)
30,000
(41)
4,789
411,645
36,111
—
162,139
(59,315)
9,900
(133)
65,000
(170)
15,000
(6)
1,927
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
Decrease in other expense
Hedging interest rate derivatives:
(Decrease) increase in interest and fees on loans
Decrease in interest from subordinated debentures
Increase in other expense
Hedging interest rate forwards:
Increase in other income
Decrease in other expense
Hedging interest rate derivatives:
Increase in other expense
2019
2018
2017
(dollars in thousands)
$
(269) $
(352)
$
787
(332)
(118)
(159)
7
106
—
5
(590)
—
10
—
(189)
15
(473)
—
452
—
119
—
(19)
4
The fair value of our derivatives is included in a table in Note 18, “Fair Values of Assets and Liabilities,” in the line items
“Other assets” and “Other liabilities.”
66
Note 8—Investment Securities
Securities Available for Sale
Below is an analysis of the amortized cost and fair values of securities available for sale at December 31:
2019
2018
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
Other Government-
Sponsored Enterprises
Obligations of States and
Political Subdivisions
Corporate Securities
Total Securities
Available for Sale
$
7,745
$
596
$
— $
8,341
$
9,011
$
479
$
(84) $
9,406
186,316
2,983
(166)
189,133
169,633
214
(2,103)
167,744
660,777
4,113
(2,943)
661,947
686,906
1,846
(15,391)
673,361
1,000
—
17,738
22,919
171
1,043
—
—
—
1,000
10,000
17,909
23,962
27,592
20,912
12
126
321
—
10,012
(6)
(221)
27,712
21,012
$ 896,495
$
8,906
$
(3,109) $ 902,292
$ 924,054
$
2,998
$ (17,805) $ 909,247
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.
The amortized cost and estimated fair value of debt securities available for sale at December 31, 2019, 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)
$
— $
35,886
5,771
—
41,657
854,838
$
896,495
$
—
36,554
6,317
—
42,871
859,421
902,292
(a) Mortgage Backed Securities include an amortized cost of $194.1 million and a fair value of $197.5 million for Obligations of U.S.
Government agencies issued by Ginnie Mae and an amortized cost of $660.8 million and a fair value of $661.9 million for
Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
67
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to
securities available for sale were as follows for the years ended December 31:
Proceeds from sales
Gross (losses) gains realized:
Sales Transactions:
Gross gains
Gross losses
Maturities and impairment
Gross gains
Gross losses
Other-than-temporary impairment
Net gains and impairment
2019
2018
2017
(dollars in thousands)
948
$
15,939
$
143,660
— $
(7)
(7)
29
—
—
29
22
$
4,719
—
4,719
3,383
—
—
3,383
8,102
$
$
359
(316)
43
5,057
(60)
—
4,997
5,040
$
$
$
Gross losses on sales transactions recognized in 2019 were the result of the sale of one municipal security after its credit rating
was withdrawn. Gross gains from maturities recognized in 2019 were the result of calls on ten municipal securities. Gross gains
from sales transactions of $4.7 million were recognized in 2018 as a result of the sale of the remaining pooled trust preferred
security portfolio. Gross gains from maturities and impairment of $3.4 million were recognized in 2018 as a result of
successful auction calls on PreSTL XIV and PreSTL IX, two of our pooled trust preferred securities.
During 2017, proceeds from sales of investments include the liquidation of the DCB investment portfolio as well as the sale of
small positions in CMO and MBS investments. Gross gains from maturities and impairments 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.
Securities available for sale with an approximate fair value of $584.8 million and $636.3 million were pledged as of
December 31, 2019 and 2018, 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:.
2019
2018
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
$
3,392
$
57
$
— $
3,449
$
3,635
$
— $
(97) $
3,538
51,291
18
(184)
51,125
55,221
—
(2,327)
52,894
229,667
1,377
(294)
230,750
279,109
212
(7,254)
272,067
12,081
40,092
600
67
554
—
—
—
—
12,148
13,159
40,646
42,331
600
400
—
175
—
(258)
12,901
(313)
42,193
—
400
$ 337,123
$
2,073
$
(478) $ 338,718
$ 393,855
$
387
$ (10,249) $ 383,993
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
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2019, 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)
$
$
$
1,327
7,541
31,824
—
40,692
296,431
337,123
$
1,331
7,621
32,294
—
41,246
297,472
338,718
(a) Mortgage Backed Securities include an amortized cost of $54.7 million and a fair value of $54.6 million for Obligations of U.S.
Government agencies issued by Ginnie Mae and an amortized cost of $241.7 million and a fair value of $242.9 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 $306.8 million and $250.3 million were pledged as of December 31, 2019
and 2018, respectively, to secure public deposits for other purposes required or permitted by law.
69
Note 9—Impairment of Investment Securities
Securities Available for Sale and Held to Maturity
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,
2019, 2018 and 2017, 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 weakness in
the U.S. economy or changes in real estate values.
The following table presents the gross unrealized losses and estimated fair values at December 31, 2019 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 –
Commercial
Obligations of U.S. Government-Sponsored
Enterprises:
Mortgage-Backed Securities –
Residential
Total Securities
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)
$
54,501
$
(201) $
16,365
$
(149) $
70,866
$
(350)
111,969
$ 166,470
$
(436)
219,015
(637) $ 235,380
$
(2,801)
330,984
(2,950) $ 401,850
$
(3,237)
(3,587)
At December 31, 2019, fixed income securities issued by U.S. Government-sponsored enterprises comprised 90% of total
unrealized losses and Government agencies account for 10% of total unrealized losses. All unrealized losses are a result of
changes in market interest rates. At December 31, 2019, there were 36 debt securities in an unrealized loss position, 25 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, 2019.
70
The following table presents the gross unrealized losses and estimated fair value at December 31, 2018 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
$
2,289
$
Mortgage-Backed Securities – Commercial
95,826
(41) $
(925)
5,028
$
(140) $
7,317
$
75,959
(3,505)
171,785
(181)
(4,430)
Obligations of U.S. Government-Sponsored
Enterprises:
Mortgage-Backed Securities – Residential
Mortgage-Backed Securities – Commercial
Obligations of States and Political
Subdivisions
Corporate Securities
Total Securities
156,732
—
8,591
14,769
$ 278,207
$
(1,856)
—
626,003
12,901
(20,789)
782,735
(258)
12,901
(85)
(214)
9,338
(234)
17,929
3,993
(3,121) $ 733,222
(7)
18,762
(24,933) $ 1,011,429
$
$
(22,645)
(258)
(319)
(221)
(28,054)
As of December 31, 2019, our corporate securities had an amortized cost and estimated fair value of $22.9 million and $24.0
million, respectively, and were comprised of debt for large regional banks. At December 31, 2018, these securities had an
amortized cost of $20.9 million and estimated fair value of $21.0 million. There were four corporate securities in an unrealized
loss position as of December 31, 2019 and one corporate security in a loss position as of December 31, 2018. 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.
During 2018, all of our pooled trust preferred collateralized debt obligations were liquidated either through a successful auction
call or sale. Other-than-temporary impairment charges were recognized on the pooled trust preferred securities in 2008, 2009
and 2010. The following table provides a cumulative roll forward of credit losses recognized in earnings for the trust preferred
securities 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 securities (b)
Reduction for debt securities sold during the period
Reduction for debt securities called during the period
Balance, ending
2019
2018
2017
(dollars in thousands)
$
— $
12,208
$
17,056
—
—
—
—
—
—
—
(223)
(9,164)
(2,821)
$
— $
— $
—
—
(890)
—
(3,958)
12,208
(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 year ended December 31, 2017, no other-than-temporary impairment charges were recorded on equity securities. There
were no equity securities in an unrealized loss position as of December 31, 2019 and 2018.
71
Other Investments
As a member of the Federal Home Loan Bank ("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, 2019 and 2018,
our FHLB stock totaled $15.1 million and $30.5 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, 2019.
At both December 31, 2019 and 2018, Other Investments also includes $1.7 million in equity securities. These securities do not
have a readily determinable fair value and are carried at cost. For the years ended December 31, 2019 and 2018, there were no
gains or losses recognized through earnings on equity securities. On a quarterly basis, management evaluates equity securities
by reviewing 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.
Note 10—Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types as of December 31:
Originated
Loans
2019
Acquired
Loans
Total Loans
Originated
Loans
(dollars in thousands)
2018
Acquired
Loans
Total Loans
$ 1,212,026
$
29,827
$ 1,241,853
$ 1,100,947
$
37,526
$ 1,138,473
442,777
1,415,808
1,958,346
685,416
6,262
265,554
159,173
13,959
449,039
353,008
1,681,362
1,313,645
2,117,519
1,922,349
699,375
585,347
5,970
248,760
201,195
5,392
358,978
1,562,405
2,123,544
590,739
$ 5,714,373
$
474,775
$ 6,189,148
$ 5,275,296
$
498,843
$ 5,774,139
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 commercial 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)
Substandard
Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in
deterioration of the repayment prospects or weaken the Bank’s credit position at some future date. The
credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances
surrounding the specific credit. No loss of principal or interest is expected.
Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified
as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity.
Loans for which repayment plans have not been met or collateral equity margins do not protect the
Company may also be classified as substandard.
Doubtful
Loans with the characteristics of substandard loans with the added characteristic that collection or
liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade commercial 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
72
predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category
ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors
related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default,
whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related
loan balances.
The following tables represent our credit risk profile by creditworthiness category for the years ended December 31:
2019
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential real
estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$ 1,171,363
$
442,751
$ 1,406,845
$ 1,918,690
$
685,108
$ 5,624,757
29,359
11,304
—
40,663
$ 1,212,026
$
26
—
—
26
442,777
475
8,488
—
8,963
$ 1,415,808
13,533
26,123
—
39,656
$ 1,958,346
$
—
308
—
308
685,416
43,393
46,223
—
89,616
$ 5,714,373
$
27,696
$
5,697
$
262,630
$
153,814
$
13,947
$
463,784
2,009
122
—
2,131
565
—
—
565
537
2,387
—
2,924
2,072
3,287
—
5,359
—
12
—
12
5,183
5,808
—
10,991
Originated Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
Acquired Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
$
29,827
$
6,262
$
265,554
$
159,173
$
13,959
$
474,775
73
2018
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential real
estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$ 1,055,394
$
337,367
$ 1,302,912
$ 1,880,139
$
585,141
$ 5,160,953
33,723
11,830
—
45,553
$ 1,100,947
$
15,641
—
—
15,641
353,008
1,026
9,707
—
10,733
$ 1,313,645
28,904
13,306
—
42,210
$ 1,922,349
$
—
206
—
206
585,347
79,294
35,049
—
114,343
$ 5,275,296
$
31,399
$
5,337
$
245,637
$
198,201
$
5,377
$
485,951
5,890
237
—
6,127
37,526
$
633
—
—
633
5,970
$
736
2,387
—
3,123
248,760
$
441
2,553
—
2,994
201,195
$
—
15
—
15
5,392
$
7,700
5,192
—
12,892
498,843
Originated Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
Acquired Loans
Pass
Non-Pass
OAEM
Substandard
Doubtful
Total Non-Pass
Total
$
Portfolio Risks
The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital and liquidity. 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
loans. 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, 2019 and 2018 were $12.3 million and $15.1 million, respectively.
Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe
is appropriate to absorb losses inherent to the portfolio as of December 31, 2019. 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.
74
Originated Loans
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
Acquired Loans
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
$
$
$
$
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
2019
Total past
due and
nonaccrual
Nonaccrual
(dollars in thousands)
Current
Total
391
198
3,757
227
4,070
8,643
1
—
304
—
87
392
$
$
$
$
57
—
749
114
1,020
1,940
$
$
140
9
736
—
931
1,816
— $
—
207
107
89
403
$
1
—
221
—
35
257
$
$
$
$
$
$
$
$
8,780
—
6,646
6,609
307
22,342
74
—
1,949
298
12
2,333
2018
9,368
207
11,888
6,950
6,328
34,741
$ 1,202,658
442,570
1,403,920
1,951,396
679,088
$ 5,679,632
$ 1,212,026
442,777
1,415,808
1,958,346
685,416
$ 5,714,373
76
—
2,681
405
223
3,385
$
$
29,751
6,262
262,873
158,768
13,736
471,390
$
$
29,827
6,262
265,554
159,173
13,959
474,775
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
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
$
130
212
3,697
492
2,362
$
247
$
—
710
69
532
92
—
790
—
662
$
10,223
$
10,692
$ 1,090,255
$ 1,100,947
—
6,238
3,437
207
212
352,796
353,008
11,435
1,302,210
1,313,645
3,998
3,763
1,918,351
1,922,349
581,584
585,347
Total
$
6,893
$
1,558
$
1,544
$
20,105
$
30,100
$ 5,245,196
$ 5,275,296
Acquired Loans
Commercial, financial,
agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
$
$
Nonaccrual Loans
1
$
— $
— $
204
$
205
$
37,321
$
37,526
—
226
—
46
273
$
—
24
—
12
36
$
—
27
—
11
38
$
—
1,904
1,042
15
3,165
$
—
2,181
1,042
84
3,512
5,970
246,579
200,153
5,308
495,331
$
$
5,970
248,760
201,195
5,392
498,843
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
75
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, 2019 and December 31, 2018. Total gains of $0.4 million, $1.8
million and $21 thousand were recognized on sales of impaired loans during the years ended December 31, 2019, 2018, and
2017 respectively.
76
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, 2019 and 2018. 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, 2019, 2018 and 2017. 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
2019
Related
specific
allowance
(dollars in thousands)
Average
recorded
investment
Interest
Income
Recognized
Originated Loans:
With no related specific allowance recorded:
Commercial, financial, agricultural and other
$
1,848
$
$
2,411
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With a specific 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 specific allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With a specific allowance recorded:
Commercial, financial, agricultural and other
$
$
29,698
$
39,122
$
27,154
$
684
1,580
—
1
851
—
2,432
2,432
$
$
6,997
—
12,437
3,210
640
23,284
10,032
—
498
5,308
—
15,838
$
73
—
2,585
320
15
2,993
—
10,372
3,015
406
15,641
8,290
—
474
5,293
—
14,057
73
$
—
2,136
298
12
2,519
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
10,819
7,455
371
21,056
4,110
—
241
1,747
—
6,098
2,479
$
—
1,986
747
13
5,225
—
—
—
—
—
—
2,519
$
—
2,993
$
$
—
— $
—
5,225
$
66
—
365
156
17
604
77
—
—
3
—
80
—
—
8
18
—
26
—
—
—
—
—
—
26
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
77
Recorded
investment
Unpaid
principal
balance
2018
Related
specific
allowance
(dollars in thousands)
Average
recorded
investment
Interest
Income
Recognized
Originated Loans:
With no related specific allowance recorded:
Commercial, financial, agricultural and other
$
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With a specific 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 specific allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With a specific allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
$
$
$
8,735
—
10,726
3,599
281
23,341
3,042
—
486
1,866
—
5,394
28,735
73
—
2,031
1,042
15
3,161
131
—
—
—
—
131
3,292
$
$
$
$
16,442
—
12,571
3,812
408
33,233
3,181
—
495
1,878
—
5,554
38,787
73
—
2,604
2,052
17
4,746
131
—
—
—
—
131
4,877
$
$
$
$
$
$
$
$
797
—
107
596
—
1,500
1,500
131
—
—
—
—
131
131
18,480
—
10,651
7,919
310
37,360
2,531
—
504
991
—
4,026
41,386
214
—
1,906
1,565
16
3,701
11
—
—
—
—
11
3,712
$
$
$
$
602
—
271
177
11
1,061
20
—
13
4
—
37
1,098
10
—
5
—
—
15
—
—
—
—
—
—
15
78
With no related specific allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
With a specific allowance recorded:
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Subtotal
Total
2017
Originated
Acquired
Average
recorded
investment
Interest
Income
Recognized
Average
recorded
investment
Interest
Income
Recognized
(dollars in thousands)
$
$
10,282
—
11,366
6,469
353
28,470
9,391
—
167
143
—
9,701
38,171
$
$
394
—
355
583
19
1,351
96
—
—
4
—
100
1,451
$
$
476
25
535
2,135
6
3,177
—
—
74
155
—
229
3,406
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
Unfunded commitments related to nonperforming loans were $1.7 million and $1.6 million at December 31, 2019 and 2018,
respectively. After considering the collateral related to these commitments, a reserve of $12 thousand was established for these
off balance sheet exposures at both December 31, 2019 and 2018, 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. Troubled debt restructured loans are considered to be impaired loans.
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:
2019
2018
2017
(dollars in thousands)
$
$
$
$
7,542
6,037
13,579
60
163
223
$
$
$
$
8,757
11,761
20,518
60
1,027
1,087
$
$
$
$
11,563
11,222
22,785
60
54
114
Troubled debt restructured loans
Accrual status
Nonaccrual status
Total
Commitments
Letters of credit
Unused lines of credit
Total
79
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
2019
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
2
20
5
11
38
Number
of
Contracts
3
37
3
15
58
Commercial, financial,
agricultural and other
Residential real estate
Commercial real estate
Loans to individuals
Total
$
$
$
$
— $
— $
204
556
—
156
965
6,261
143
$
156
$
154
$
1,186
6,817
143
1,059
594
121
$
760
$
7,525
$
8,302
$
1,928
$
17
—
—
17
Type of Modification
2018
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
74
$
— $
8,250
$
8,324
$
6,104
$
242
—
—
316
$
241
—
89
330
$
1,316
1,016
53
10,635
$
1,799
1,016
142
11,281
$
1,638
975
112
8,829
$
—
—
—
—
—
—
—
—
—
—
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
$
$
9,561
$
6,946
$
134
179
—
7,081
$
261
—
28
2,095
$
987
573
269
968
448
49
1,878
$
77
11,054
$
$
851
412
65
8,274
$
566
1
29
—
596
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, 2019, 2018 and 2017, $0.8
million, $0.3 million and $0.3 million, respectively, of total rate modifications represent loans with modifications to the rate as
well as payment due to reamortization. For 2019, 2018 and 2017, the changes in loan balances between the pre-modification
balance and post-modification balance are due to customer payments. In 2019, the change between the pre-modification and
post-modification balance for commercial real estate loans is primarily due to the payoff of one large commercial relationship
that restructured during the year.
80
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 loans that were restructured within the past twelve months and that were considered to be
in default during the year ending December 31:
Residential real estate
Loans to individuals
Total
2019
2018
2017
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
— $
—
— $
—
—
—
(dollars in thousands)
1
—
1
$
$
49
—
49
— $
1
1
$
—
2
2
The following tables provide detail related to the allowance for credit losses for the years ended December 31.
2019
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$
19,235
$
2,002
$
3,934
$
18,382
$
4,033
$
47,586
—
158
398
2,558
(986)
246
897
4,091
(632)
189
1,792
19,731
— $
35
$
4
$
—
—
—
—
(56)
69
(46)
2
$
$
2,558
$
4,093
— $
1
$
$
(1,376)
—
1,409
37
19,768
851
$
$
(2,667)
245
3,408
20,221
139
$
(726)
81
519
13
20,234
1,580
18,654
$
$
$
(5,747)
(10,032)
611
6,087
4,984
— $
(84)
15
69
—
1,449
12,582
51,585
178
(2,242)
165
1,951
52
4,984
$
51,637
— $
2,432
2,558
4,092
18,917
4,984
49,205
1,241,853
449,039
1,681,362
2,117,519
699,375
6,189,148
9,246
—
1,741
6,846
—
17,833
1,232,607
449,039
1,679,621
2,110,673
699,375
6,171,315
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
81
2018
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Total
(dollars in thousands)
$
23,418
$
1,349
$
2,753
$
17,328
$
3,404
$
(4,554)
579
4,604
4,033
— $
(22)
26
(4)
—
48,252
(14,902)
1,846
12,390
47,586
46
(211)
202
141
178
(5,201)
746
272
19,235
—
135
518
2,002
(1,217)
233
2,165
3,934
11
$
— $
6
$
$
$
$
(93)
42
179
139
19,374
928
$
$
—
6
(6)
—
(96)
128
(3)
35
2,002
$
3,969
— $
107
3,862
(3,930)
153
4,831
18,382
29
—
—
(25)
4
$
$
$
$
$
18,386
596
4,033
$
47,764
— $
1,631
18,446
2,002
17,790
4,033
46,133
1,138,473
358,978
1,562,405
2,123,544
590,739
5,774,139
11,631
—
3,747
5,710
—
21,088
1,126,842
358,978
1,558,658
2,117,834
590,739
5,753,051
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
2017
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:
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
$
35,974
$
577
$
2,492
$
6,619
$
4,504
$
(6,176)
3,900
(10,280)
23,418
—
(458)
1
468
11
—
465
307
1,349
—
—
5
(5)
—
(1,261)
304
1,218
2,753
19
(26)
67
(54)
6
(340)
274
10,775
17,328
—
—
4
25
29
(4,220)
460
2,660
3,404
—
(28)
55
(27)
—
50,166
(11,997)
5,403
4,680
48,252
19
(512)
132
407
46
$
$
$
$
23,429
3,478
19,951
1,349
$
2,759
— $
1,349
111
2,648
$
$
17,357
157
$
$
3,404
$
48,298
— $
3,746
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
Note 11—Commitments and Letters of Credit
First Commonwealth is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financial needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and
commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the Consolidated Statements of Financial Condition. First Commonwealth’s exposure to credit loss in
the event of nonperformance by the other party of the financial instrument for commitments to extend credit, standby letters of
credit and commercial letters of credit is represented by the contract or notional amount of those instruments. First
Commonwealth uses the same credit policies for underwriting all loans, including these commitments and conditional
obligations.
As of December 31, 2019 and 2018, First Commonwealth did not own or trade other financial instruments with significant off-
balance sheet risk including derivatives such as futures, forwards, option contracts and the like, although such instruments may
be appropriate to use in the future to manage interest rate risk. See Note 7, “Derivatives,” for a description of interest rate
derivatives entered into by First Commonwealth.
Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to
guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the
maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a
total default by the guaranteed parties, without consideration for possible recoveries under recourse provisions or from
collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon;
therefore, the total commitment amounts do not necessarily represent future cash requirements.
83
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
2019
2018
(dollars in thousands)
$
1,981,275
$
1,883,914
16,630
23,293
783
18,298
22,027
887
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, 2019 include amounts issued in 2019 of $0.9 million in financial standby
letters of credit and $7.0 million in performance standby letters of credit. There were no commercial letters of credit issued
during 2019. A liability of $0.1 million and $0.2 million has been recorded as of December 31, 2019 and 2018, respectively,
which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the
unrecognized portion of fees received at the time the commitment was issued.
Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the
borrower or guaranteed parties. Management’s evaluation of the credit risk in these commitments resulted in the recording of a
liability of $4.5 million and $5.0 million as of December 31, 2019 and 2018, respectively. This liability is reflected in “Other
liabilities” in the Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of
default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.
Note 12—Premises, Equipment and Lease Commitments
Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life
Land
Buildings and improvements
Operating lease right of use asset
Leasehold improvements
Furniture and equipment
Software
Subtotal
Less accumulated depreciation and amortization
Total premises and equipment, net
2019
(dollars in thousands)
$
$
15,446
76,965
52,114
Indefinite
10-50 years
1-25 years
5-40 years
3-7 years
3-7 years
37,716
71,548
40,399
294,188
156,920
$
137,268
$
2018
15,359
78,643
—
27,573
67,735
38,800
228,110
147,636
80,474
Depreciation related to premises and equipment included in noninterest expense for the years ended December 31, 2019, 2018
and 2017 amounted to $10.5 million, $9.5 million and $9.0 million, respectively. Amortization of lease right-of-use assets
totaled $3.5 million in 2019.
Lease Commitments
On January 1, 2019, the Company adopted ASU 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic
842 using the transition option provided in ASU 2018-11, which provides for the modified retrospective approach. Under this
approach, comparative periods were not restated and no cumulative effect adjustment to the opening balance of retained
earnings was required.
84
First Commonwealth has elected to apply certain practical expedients provided under the standard including (i) to not apply the
requirements in the new standard to short-term leases (ii) to not reassess the lease classification for any expired or existing lease
(iii) to account for lease and non-lease components separately (iv) to not reassess initial direct costs for any existing leases. The
impact of this standard primarily relates to operating leases of certain real estate properties, primarily certain branch and ATM
locations and office space. First Commonwealth has no material leasing arrangements for which it is the lessor of property or
equipment.
Adoption of this standard resulted in the Company recognizing an ROU asset of $38.5 million and a lease liability of $41.8
million on January 1, 2019.
The following table represents the lease costs and other lease information for the year ended December 31, 2019 (dollars in
thousands).
Operating lease cost classified as occupancy and equipment expense
Weighted average lease term, in years
Weighted average discount rate
Operating cash flows
$
$
5,328
15.27
3.43%
4,656
The ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to present value the
minimum lease payments. First Commonwealth's lease agreements often include one or more options to renew at the
Company's discretion. If we consider the renewal option to be reasonably certain, we include the extended term in the
calculation of the ROU asset and lease liability.
First Commonwealth uses incremental borrowing rates when calculating the lease liability because the rate implicit in the lease
is not readily determinable. The incremental borrowing rate used by First Commonwealth is an amortizing loan rate obtained
from the Federal Home Loan Bank ("FHLB") of Pittsburgh. This rate is consistent with a collateralized borrowing rate and is
available for terms similar to the lease payment schedules.
The following table reconciles future minimum lease payments due under non-cancelable operating leases (those amounts
subject to recognition) to the lease liability as of December 31, 2019 (dollars in thousands):
For the twelve months ended
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Less remaining imputed interest
Operating lease liability
$
$
5,199
5,084
4,961
4,939
4,791
44,391
69,365
16,471
52,894
Rent expense, net of rental income, for all operating leases totaled $4.9 million in 2019, $4.1 million in 2018 and $2.7 million
in 2017. Rent expense includes amounts related to items that are not included in the determination of lease right-of-use assets
including expenses related to short-term leases and non-lease components such as taxes, insurance, and common area
maintenance costs.
Note 13—Goodwill and Other 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.
85
We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of December 31, 2019 and 2018
was $303.3 million and $274.2 million, respectively. The $29.1 million increase in goodwill during the year ended
December 31, 2019 is the result of the acquisition of 14 branches from Santander, completed in third quarter of 2019. No
impairment charges on goodwill or other intangible assets were incurred in 2019, 2018 or 2017.
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, 2019 and December 31, 2019 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, 2019, 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, 2019
Customer deposit intangibles
Customer list intangible
Total other intangible assets
December 31, 2018
Customer deposit intangibles
Customer list intangible
Total other intangible assets
Gross
Intangible
Assets
Accumulated
Amortization
(dollars in thousands)
Net
Intangible
Assets
$
$
$
$
25,843
2,283
28,126
20,228
2,283
22,511
$
$
$
$
(11,760) $
(1,340)
(13,100) $
(8,877) $
(1,069)
(9,946) $
14,083
943
15,026
11,351
1,214
12,565
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 9.7 years and a weighted average
amortization period of approximately 8.1 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 9.7 years and a weighted average amortization period
of 7.9 years. In the table above, the change in the gross customer deposit intangible and customer list intangibles from
December 31, 2018 to December 31, 2019 is due to the Santander acquisition resulting in $5.6 million of core deposit
intangibles. First Commonwealth recognized amortization expense on other intangible assets of $3.2 million, $3.1 million, and
$3.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
In addition to customer deposit intangibles and customer list intangibles, First Commonwealth has servicing rights on mortgage
loans as well as certain commercial loans totaling $1.3 million and $0.5 million as of December 31, 2019 and 2018,
respectively. These servicing rights relate to loans sold to third parties on which the Company retains servicing responsibilities.
The Company recognized amortization expense on these servicing assets of $0.2 million and $0.1 million for the years ended
December 31, 2019 and 2018, respectively.
86
The following presents the estimated amortization expense of core deposit and customer list intangibles:
2020
2021
2022
2023
2024
Thereafter
Total
Core Deposit
Intangibles
Customer List
Intangible
Total
(dollars in thousands)
$
$
3,163 $
2,753
2,343
1,933
1,522
2,369
14,083 $
230 $
193
159
127
97
137
943 $
3,393
2,946
2,502
2,060
1,619
2,506
15,026
Note 14—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
2019
2018
(dollars in thousands)
$
$
254,981
3,896,536
835,851
4,987,368
$
$
180,209
3,401,354
850,216
4,431,779
Interest-bearing deposits at December 31, 2019 and 2018 include allocations from interest-bearing demand deposit accounts of
$1.1 billion and $952.1 million, respectively, into savings, which includes money market accounts. These allocations 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, 2019 and 2018 were certificates of deposit in denominations of $250 thousand or
more of $143.9 million and $140.2 million, respectively.
Interest expense related to certificates of deposit in denominations of $250 thousand or greater amounted to $3.3 million in
2019, $1.6 million in 2018 and $0.5 million in 2017.
Included in time deposits at December 31, 2019, were certificates of deposit with the following scheduled maturities (dollars in
thousands):
$
$
586,365
184,934
34,250
10,389
19,913
835,851
2020
2021
2022
2023
2024 and thereafter
Total
87
Note 15—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
Ending
Balance
2019
Average
Balance
Average
Rate
Ending
Balance
2018
Average
Balance
Average
Rate
Ending
Balance
2017
Average
Balance
Average
Rate
(dollars in thousands)
Federal funds purchased
$
— $
8,069
2.53% $
11,000
$
8,801
2.05% $
— $
6,225
Borrowings from FHLB
136,200
278,930
2.62
565,000
467,594
2.12
567,500
710,932
Securities sold under
agreements to
repurchase
65,653
104,548
Total
$ 201,853
$ 391,547
0.75
2.12
145,823
142,562
$ 721,823
$ 618,957
0.44
1.74
139,966
150,234
$ 707,466
$ 867,391
Maximum total at any
month-end
Weighted average rate at
year-end
$ 670,831
$ 811,026
$ 967,259
1.41%
2.17%
1.24%
1.18
0.24
1.01
1.27%
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
Federal funds purchased
Borrowings from FHLB
Securities sold under agreements to repurchase
Total interest on short-term borrowings
Note 16—Subordinated Debentures
Subordinated debentures outstanding at December 31 are as follows:
2019
2018
2017
(dollars in thousands)
204
$
180
$
7,313
781
9,929
632
8,298
$
10,741
$
$
$
77
8,360
362
8,799
Due
Amount
Rate
Amount
Rate
2019
2018
(dollars in thousands)
Owed to:
First Commonwealth Bank
First Commonwealth Bank
First Commonwealth Capital Trust II
First Commonwealth Capital Trust III
Total
2028-06-
01
2033-06-
01
2034-01-
23
2034-04-
06
4.875% until June 1, 2023,
$ 49,222
then LIBOR + 1.845% $
49,131
49,061
30,929
41,238
$ 170,450
5.50% until June 1, 2028,
then LIBOR + 2.37%
LIBOR + 2.85
LIBOR + 2.85
48,990
30,929
41,238
$ 170,288
4.875% until June 1, 2023,
then LIBOR + 1.845%
5.50% until June 1, 2028,
then LIBOR + 2.37%
LIBOR + 2.85
LIBOR + 2.85
On May 21, 2018, First Commonwealth Bank issued ten-year subordinated notes with an aggregate principal amount of $50.0
million and a fixed-to-floating rate of 4.88%. The rate remains fixed until June 1, 2023, then adjusts on a quarterly basis to
LIBOR + 1.845%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2023, in whole or in
part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to
the date of redemption. Deferred issuance costs of $0.9 million are being amortized on a straight-line basis over the term of the
notes.
On May 21, 2018, First Commonwealth Bank also issued fifteen-year subordinated notes with an aggregate principal amount of
$50.0 million and a fixed-to-floating rate of 5.50%. The rate remains fixed until June 1, 2028, then adjusts on a quarterly basis
to LIBOR + 2.37%. The Bank may redeem the notes, beginning with the interest payment due on June 1, 2028, in whole or in
part at a redemption price equal to 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest to
the date of redemption. Deferred issuance costs of $1.1 million are being amortized on a straight-line basis over the term of the
notes.
88
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.
Note 17—Other Long-term Debt
Other long-term debt at December 31 follows:
Borrowings from FHLB due:
2019
2020
2021
2022
2023
2024
Thereafter
Total
2019
2018
Amount
Weighted
Average
Contractual
Rate
Amount
(dollars in thousands)
Weighted
Average
Contractual
Rate
$
$
659
50,685
712
739
769
3,353
56,917
3.84%
2.32
3.85
3.86
3.86
3.77
$
$
631
655
681
708
735
4,141
7,551
3.83%
3.84
3.84
3.85
3.85
3.79
The weighted average contractual rate reflects the rate due to creditors. There are no purchase accounting adjustments related to
long-term debt in 2019 or 2018. 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 16, “Subordinated Debentures.”
Note 18—Fair Values of Assets and Liabilities
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures for non-financial assets and non-
financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). All non-financial assets are included either as a separate line item on the Consolidated Statements of
Financial Condition or in the “Other assets” category of the Consolidated Statements of Financial Condition. Currently, First
Commonwealth does not have any non-financial liabilities to disclose.
FASB ASC Topic 825, “Financial Instruments,” permits entities to irrevocably elect to measure select financial instruments and
certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period
89
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
observable inputs 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, corporate securities, FHLB stock, loans held for sale,
interest rate derivatives (including interest rate swaps, interest rate caps, interest rate collars and risk participation
agreements), certain other real estate owned and certain impaired loans.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by
the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow
information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses
available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix
pricing. The model will also use processes such as an option-adjusted spread to assess the impact of interest rates and to
develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market
research publications.
Management validates the market values provided by the third party service by having another source price 100% of the
securities on a monthly basis, 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 include FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB
stock is provided in Note 9, “Impairment of Investment Securities.”
Loans held for sale include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair
value for these loans was determined on the basis of rates obtained in the respective secondary market. Loans held for sale
could also include 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, interest rate collars 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 7, “Derivatives.”
For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its
counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default,
expected loss given default, net exposures and remaining contractual life, among other things, in determining if any estimated
fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary,
appropriate adjustments are made to reflect the exposure.
We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2019 and 2018, 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.
90
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 non-marketable equity investments, certain interest rate derivatives, certain
impaired loans and certain other real estate.
The estimated fair value of the other investments included in Level 3 is based on carrying value as these securities do not have a
readily determinable fair 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 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.
December 31, 2019
Other Investments
Impaired Loans
Fair Value
(dollars in
thousands)
Valuation Technique
Unobservable Inputs
Range / (weighted
average)
$
1,670
Carrying Value
N/A
884 (a)
Gas Reserve study
Discount rate
N/A
10.00%
2,239 (a) Discounted Cash Flow
Discount Rate
3.84% - 9.50%
Gas per MMBTU
$2.61 - $3.49 (b)
Oil per BBL/d
$47.09 - $53.14 (b)
Limited Partnership Investments
5,795
Par Value
December 31, 2018
Other Investments
Impaired Loans
1,670
Carrying Value
1,104 (a)
Gas Reserve study
Discount rate
N/A
N/A
N/A
N/A
10.00%
Gas per MMBTU
$2.81 - $3.35 (b)
Oil per BBL/d
$51.59 - $59.55 (b)
3,249 (a) Discounted Cash Flow
Discount Rate
1.90% - 9.50%
Limited Partnership Investments
2,696
Par Value
N/A
N/A
(a)
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.
(b) unobservable inputs are defined as follows: MMBTU—one million British thermal units; BBL/d—barrels per day.
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:
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
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Corporate Securities
Total Securities Available for Sale
Other Investments
Loans Held for Sale
Other Assets (a)
Total Assets
Other Liabilities (a)
Total Liabilities
2019
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
$
$
$
— $
—
—
—
—
—
—
—
—
—
— $
— $
— $
$
8,341
189,133
— $
—
8,341
189,133
661,947
1,000
17,909
23,962
902,292
15,091
15,989
21,894
955,266
21,469
21,469
$
$
$
—
—
—
—
—
1,670
—
5,795
7,465
$
— $
— $
661,947
1,000
17,909
23,962
902,292
16,761
15,989
27,689
962,731
21,469
21,469
(a) Hedging and non-hedging interest rate derivatives and limited partnership investments
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
Other Government-Sponsored Enterprises
Obligations of States and Political Subdivisions
Corporate Securities
Total Securities Available for Sale
Other Investments
Loans Held for Sale
Other Assets (a)
Total Assets
Other Liabilities (a)
Total Liabilities
2018
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
$
$
$
— $
—
—
—
—
—
—
—
—
—
— $
— $
— $
9,406
167,744
$
— $
—
9,406
167,744
673,361
10,012
27,712
21,012
909,247
30,456
11,881
1,769
953,353
2,081
2,081
$
$
$
—
—
—
—
—
1,670
—
2,696
4,366
$
— $
— $
673,361
10,012
27,712
21,012
909,247
32,126
11,881
4,465
957,719
2,081
2,081
(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, 2019:
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
Other Investments
Other Assets
Total
(dollars in thousands)
$
1,670
$
2,696
$
4,366
—
—
—
—
—
—
—
—
1,670
$
198
—
2,956
—
—
(55)
—
—
5,795
$
198
—
2,956
—
—
(55)
—
—
7,465
$
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, 2019.
During the year ended December 31, 2019, 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, 2018:
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
Other Investments
Other Assets
Total
(dollars in thousands)
$
23,646
$
1,670
$
2,143
$
27,459
8,102
(118)
—
—
(12,289)
(19,341)
—
—
—
—
—
—
—
—
—
—
601
—
—
(48)
—
$
—
— $
—
1,670
$
—
2,696
$
8,102
(118)
601
—
(12,289)
(19,389)
—
—
4,366
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, 2018.
During the year ended December 31, 2018, there were no transfers between fair value Levels 1, 2 or 3.
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
2019
Level 1
Level 2
Level 3
Total
(dollars in thousands)
— $
—
— $
12,267
2,608
14,875
$
$
17,518
—
17,518
2018
Level 1
Level 2
Level 3
(dollars in thousands)
— $
—
— $
15,076
4,035
19,111
$
$
15,320
—
15,320
$
$
$
$
29,785
2,608
32,393
Total
30,396
4,035
34,431
$
$
$
$
$
$
$
$
Total
Gains
(Losses)
(2,667)
(196)
(2,863)
Total
Gains
(Losses)
(1,778)
(593)
(2,371)
Impaired loans over $250 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 $2.2 million as of
December 31, 2019 and consisted primarily of commercial real estate properties in Pennsylvania. We review whether events
and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets
may not be recoverable. If events and circumstances indicate further impairment, we will record a charge to the extent that the
carrying value of the assets exceed their fair values, less estimated costs to sell, as determined by valuation techniques
appropriate in the circumstances.
Certain other assets and liabilities, including goodwill, core deposit intangibles and customer list intangibles are measured at
fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to
fair value adjustments only in certain circumstances. Additional information related to this measurement is provided in Note 13
“Goodwill and Other Amortizing Intangible Assets.” There were no other assets or liabilities measured at fair value on a
nonrecurring basis during 2019.
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. 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.
94
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.
Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and
standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not
necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees,” clarified that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The
carrying amount and estimated fair value for standby letters of credit was $0.1 million and $0.2 million at December 31, 2019
and 2018, respectively. See Note 11, “Commitments and Letters of Credit,” for additional information.
Deposit liabilities: The estimated fair value of demand deposits, savings accounts and money market deposits is the amount
payable on demand at the reporting date because of the customers' ability to withdraw funds immediately. The carrying value
of variable rate time deposit accounts and certificates of deposit approximate the fair value at the report date. Also, fair values
of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently
being offered and a schedule of aggregated expected maturities.
Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental
borrowing rate for similar types of borrowings. The carrying amounts of other short-term borrowings, such as federal funds
purchased and securities sold under agreement to repurchase, were used to approximate fair value due to the short-term nature
of the borrowings.
Subordinated debt and long-term debt: The fair value of long-term debt and subordinated debt is estimated by discounting the
future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements.
95
The following table presents carrying amounts and estimated fair values of First Commonwealth’s financial instruments at
December 31:
$
Carrying
Amount
102,346
19,510
902,292
337,123
16,761
15,989
6,189,148
6,677,615
201,853
56,917
170,450
6,815
2019
Fair Value Measurements Using:
Total
Level 1
Level 2
Level 3
(dollars in thousands)
$
102,346
19,510
902,292
338,718
16,761
15,989
6,393,872
6,677,595
201,151
58,051
171,772
6,815
—
—
—
—
1,670
—
6,381,605
—
—
—
171,772
—
$
$
102,346
19,510
—
—
—
—
—
— $
—
902,292
338,718
15,091
15,989
12,267
—
—
—
—
—
6,677,595
201,151
58,051
—
6,815
2018
Fair Value Measurements Using:
Carrying
Amount
Total
Level 1
Level 2
Level 3
(dollars in thousands)
$
95,934
$
95,934
$
95,934
$
3,013
909,247
393,855
32,126
11,881
3,013
909,247
383,993
32,126
11,881
5,774,139
5,821,791
5,897,992
5,904,147
721,823
7,551
170,288
7,217
721,532
7,720
168,067
7,217
3,013
—
—
—
—
—
—
—
—
—
—
— $
—
909,247
383,993
30,456
11,881
15,076
5,904,147
721,532
7,720
—
7,217
—
—
—
—
1,670
—
5,806,715
—
—
—
168,067
—
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
Capital lease obligation
96
Note 19—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
2019
2018
2017
(dollars in thousands)
$
$
22,942
282
23,224
2,284
8
2,292
25,516
$
$
21,330
298
21,628
3,666
(20)
3,646
25,274
$
$
29,071
274
29,345
19,237
(21)
19,216
48,561
The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:
Tax at statutory rate
Increase (decrease) resulting from:
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
2019
2018
2017
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
(dollars in thousands)
$
27,478
21% $
27,882
21% $
36,304
35%
229
(1,260)
(1,298)
(7)
—
374
—
(1)
(1)
—
—
—
220
(1,404)
(1,473)
(5)
(346)
400
—
(1)
(1)
—
—
—
164
(1,995)
(2,709)
(11)
16,709
99
—
(2)
(3)
—
17
—
Total tax provision
$
25,516
19% $
25,274
19% $
48,561
47%
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 21% for the years ended December 31, 2019 and December 31, 2018 and 35% for the year ended December 31, 2017
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
statutory rate produced an annual effective tax rate of 19%, 19% and 47% for the years ended December 31, 2019, 2018 and
2017, respectively. The annual effective tax rate of 47% for the year ended December 31, 2017, 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 in 2017.
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 allowed for a measurement period
not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.
97
In accordance with SAB 118, the accounting for income tax effects of the Act has been completed as of the year ended
December 31, 2018. The completion of the accounting resulted in an immaterial change to the previously recorded re-
measurement.
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:
Lease liability
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:
Right of use asset
Unrealized gain on securities available for sale
Depreciation of assets
Other
Total deferred tax liabilities
Net deferred tax asset
2019
2018
(dollars in thousands)
$
$
$
$
11,203
10,937
275
216
—
2,017
48
1,720
710
2,185
964
28
956
31,259
(10,302) $
(1,386)
(1,470)
(1,239)
(14,397)
16,862
$
—
10,116
311
216
3,137
3,636
711
1,426
629
2,477
1,064
799
1,486
26,008
—
—
(1,378)
(1,064)
(2,442)
23,566
The Company has approximately $9.3 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 2034 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, 2019, 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, 2019. 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. Generally, tax years prior to the year ended December 31, 2016 are no longer open to
examination by federal and state taxing authorities.
Note 20—Retirement Plans
First Commonwealth has a savings plan pursuant to the provisions of section 401(k) of the Internal Revenue code. Effective
January 1, 2013, a participating employee can receive a maximum matching contribution of 6% of their compensation. In
98
addition, each participating employee may contribute up to 80% of their eligible compensation to the plan. The 401(k) plan
expense was $3.6 million in 2019, $3.2 million in 2018, and $2.8 million in 2017.
First Commonwealth maintains a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to provide deferred
compensation for those employees who are in the top 7% of full-time employees, as determined on the basis of base
compensation. 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.
Participants are also eligible to defer all or a portion of the Annual Incentive Plan (on a pre-tax basis) from 10% to 100% of
their annual cash incentive earned. There was no NQDC Plan expense in 2019, 2018 and 2017.
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
2019
2018
2017
(dollars in thousands)
$
$
— $
34
—
(60)
(26) $
— $
38
—
(35)
3
$
—
49
—
(21)
28
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
99
2019
2018
(dollars in thousands)
$
883
$
1,188
—
34
—
61
(144)
834
—
—
144
(144)
—
834
—
—
38
—
(174)
(169)
883
—
—
169
(169)
—
883
—
463
1,297
$
584
1,467
2019
2018
(dollars in thousands)
834
$
883
$
$
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
2019
2018
2017
(dollars in thousands)
$
$
(366) $
—
(366) $
(461) $
—
(461) $
(347)
—
(347)
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
2019
2018
2017
2.88%
5.55%
4.75%
2025
4.11%
6.00%
4.75%
2024
3.37%
6.00%
4.75%
2023
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
2019
2018
2017
4.11%
6.00%
4.75%
2024
10.00%
12.1
3.37%
6.00%
4.75%
2023
10.00%
12.1
3.74%
6.00%
4.75%
2022
10.00%
11.0
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) introduced a prescription drug
benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription
drug benefit that is at least actuarially equivalent to Medicare Part D. The postretirement plans of First Commonwealth are
provided through insurance coverage; therefore, First Commonwealth will not receive a direct federal subsidy. The preceding
measures of the accumulated postretirement benefit cost assume that First Commonwealth will not receive the subsidy due to
the relatively small number of retirees.
The health care cost trend rate assumption can have a significant impact on the amounts reported for this plan. A one-
percentage-point change in assumed health care cost trend rates would have the following effects:
Effect on postretirement benefit obligation
Effect on total of service and interest cost components
One-Percentage-
Point Increase
One-Percentage-
Point Decrease
(dollars in thousands)
$
$
14
1
(13)
(1)
100
As of December 31, 2019, the projected benefit payments for the next ten years are as follows:
2020
2021
2022
2023
2024
2025 - 2029
Projected Benefit
Payments
(dollars in thousands)
$
102
96
89
82
75
286
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 2020 are as
follows (dollars in thousands):
Net gain
Transition obligation
Total
Postretirement
Benefits
(dollars in thousands)
$
$
(52)
—
(52)
Note 21—Incentive Compensation Plan
On January 20, 2009, the Board of Directors of the Company adopted, with shareholder approval, the First Commonwealth
Financial Corporation Incentive Compensation Plan. This plan allows for shares of common stock to be issued to employees,
directors, and consultants of the Company and its subsidiaries as an incentive to aid in the financial success of the Company.
The shares can be issued as options, stock appreciation rights, performance share or unit awards, dividend or dividend
equivalent rights, stock awards, restricted stock awards, or other annual incentive awards. Up to 5,000,000 shares of stock can
be awarded under this plan, of which 2,930,128 shares were still eligible for awards as of December 31, 2019.
101
Restricted Stock
The following provides detail on the restricted stock awards which were issued and outstanding in 2019, 2018 and 2017 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
February 21, 2019
February 21, 2019
November 26, 2018
May 29, 2018
March 26, 2018
February 26, 2018
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
June 26, 2015
February 20, 2015
February 5, 2015
January 15, 2015
November 17, 2014
April 8, 2014
March 24, 2014
March 4, 2014
Shares issued
Grant Price
Vesting Date
Number of
Equal Vesting
Periods
63,000 $
15,000 $
2,000 $
3,000
2,000
77,500
5,000
7,000
7,000
7,000
15,000
10,000
33,000
10,000
10,000
5,000
20,000
1,000
10,000
50,000
20,000
3,500
27,500
46,000
5,000
14.22 February 22, 2022
14.22 February 22, 2022
13.82 November 26, 2021
15.44 May 29, 2021
14.08 March 26, 2021
14.49 February 26, 2021
12.99 March 24, 2020
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
9.84 June 26, 2018
8.45 August 31, 2017
8.55 February 5, 2018
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
1
1
1
1
1
1
1
1
1
1
3
1
3
1
1
1
1
1
1
1
1
1
3
1
1
Compensation expense related to restricted stock was $2.7 million, $2.6 million and $3.8 million in 2019, 2018 and 2017,
respectively. As of December 31, 2019, there was $3.1 million of unrecognized compensation cost related to unvested restricted
stock awards granted.
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:
2019
2018
2017
Weighted
Average
Grant Date
Fair Value
13.05
14.22
10.09
14.40
14.27
$
Shares
137,500
78,000
(41,000)
(3,000)
171,500
Weighted
Average
Grant Date
Fair Value
9.99
14.50
9.37
9.34
13.05
$
Shares
117,000
84,500
(54,000)
(10,000)
137,500
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
Outstanding, beginning of the year
Granted
Vested
Forfeited
Outstanding, end of the year
102
The following provides detail on restricted stock awards estimated to be granted on a performance award basis during 2019,
2018 and 2017. These plans were previously approved by the Board of Directors.
Grant Date
January 26, 2015
December 30, 2015
February 18, 2016
February 23, 2017
February 22, 2018
February 21, 2019
Target
Share
Award
Performance
Period
(years)
Award if
threshold
met
Award if
targets are
met
Award if
superior
met
Award if
threshold not
achieved
Vesting After
Performance
Period (years)
125,000
60,000
160,650
93,500
102,000
121,900
3
5
3
3
3
3
40%
100%
200%
—%
40%
40%
40%
40%
100%
100%
100%
100%
200%
200%
200%
200%
—%
—%
—%
—%
0
0
0
0
0
0
Final vesting
December 31, 2017
December 31, 2020
December 31, 2018
December 31, 2019
December 31, 2020
December 31, 2021
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
2019
2018
2017
496,603
134,929
(188,700)
—
442,832
525,045
130,995
(149,480)
(9,957)
496,603
426,596
276,442
(171,637)
(6,356)
525,045
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, the February 22, 2018 grant has a fair value of $14.17 for 50% of the grant, $13.25 for 25% of the
grant and $15.83 for the remaining 25% of the grant and the February 21, 2019 grant has a fair value of $14.22 for 50% of the
grant, $16.62 for 25% of the grant and $13.07 for the remaining 25% of the grant.
Note 22—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, 2019, 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 $1 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.
Note 23—Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all
subsequent ASUs that modified Topic 606. The standard’s core principle is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to
be entitled in exchange for those goods or services. In doing so, First Commonwealth will generally be required to use more
judgment and make more estimates than under current guidance. These may include identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price
to each separate performance obligation.
The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts
were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The implementation
103
of the new standard did not have a material impact on the measurement or recognition of revenue, therefore a cumulative effect
adjustment to opening retained earnings was not necessary.
In connection with the adoption of Topic 606, First Commonwealth is required to capitalize, and subsequently amortize into
expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The
incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would
not have incurred if the contract had not been obtained, for example, sales commission. The Company utilizes the practical
expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from
capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not
capitalize any contract acquisition cost.
The Company also evaluated whether it has any significant contract balances. A contract asset balance occurs when an entity
performs a service for a customer before the customer pays consideration resulting in a contract receivable or before payment is
due resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which
the Company has already received payment from the customer. First Commonwealth’s noninterest revenue streams are largely
based on transactional activity, or standard month-end revenue accruals such as trust income which is based on month-end
market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation
and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and
therefore, does not experience significant contract balances. As of December 31, 2019 and 2018, the Company did not have any
significant contract balances.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In
addition, certain noninterest income streams such as fees associated with derivatives are not in scope of the new guidance.
Topic 606 is applicable to noninterest revenue streams such as trust income, service charges on deposits, insurance and retail
brokerage commissions, card related interchange income and gain (loss) on sale of OREO. The recognition of these revenue
streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from
contracts with customers.
Noninterest revenue streams in-scope of Topic 606 are discussed below:
Trust Income
Trust income is primarily comprised of fees earned from the management and administration of trusts and other customer
assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly,
based upon a tiered scale of market value of the assets under management at month-end. Payment is generally received a few
days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based
incentives. Optional services such as financial planning or tax return preparation services are also available to trust customers.
The Company’s performance obligation for these transactional-based services is generally satisfied and related revenue
recognized, at a point in time. Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of fees earned from its deposit customers for transaction-based, account
maintenance, overdraft services and account analysis fees. Transaction-based fees, which include services such as ATM use
fees, stop payment fees, statement rendering and ACH fees, are recognized at the time the transaction is executed which is the
point in time the Company fulfills the customer’s request. Monthly account maintenance fees are earned over the course of the
month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at
the point in time that the overdraft occurs. The Company’s performance obligation for account analysis fees is generally
satisfied, and the related revenue recognized, during the month the service is provided. Payment for service charges on deposit
accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Insurance and Retail Brokerage Commissions
Insurance income primarily consists of commissions received from execution of personal, business and health insurance
policies when acting as an agent on behalf of insurance carriers. The Company’s performance obligation is generally satisfied
upon the issuance of the insurance policy. Because the Company’s contracts with the insurance carriers are generally
cancellable by either party, with minimal notice, insurance commissions are recognized during the policy period as received.
Also, the majority of insurance commissions are received on a monthly basis during the policy period, however some carriers
pay the full annual commission to First Commonwealth at the time of policy issuance or renewal. In these cases, First
Commonwealth would be required to refund any commissions it would not be entitled to as a result of cancelled or terminated
104
policies. The Company has established a refund liability for the remaining term of the policies expected to be cancelled. The
Company also receives incentive-based contingency fees from the insurance carriers. Contingency fee revenue, which totals
approximately $0.5 million per year, is recognized as received due to the immaterial amount.
Retail brokerage income primarily consists of commissions received on annuity and investment product sales through a third-
party service provider. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy or
the execution of an investment transaction. The Company does not earn a significant amount of trailer fees on annuity sales.
However, after considering the factors impacting these trailer fees, such as the uncertainty of investor behavior and changes in
the market value of assets, First Commonwealth determined that it would recognize trailing fees as received because it could
not reasonably estimate an amount of future trailing commissions for which collection is probable. Commissions from the third-
party service provider are received on a monthly basis based upon customer activity for the month. The fees are recognized
monthly with a receivable until commissions are received from the third-party service provider the following month. Because
the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does
not control the services rendered to the customers, retail brokerage fees are presented net of related costs, including $3.0 million
and $2.5 million in commission expense as of December 31, 2019 and 2018, respectively.
Card Related Interchange Income
Card related interchange income is primarily comprised of debit and credit card income, ATM fees and merchant services
income. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and
credit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a
Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services
income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account
management fees. Card related interchange income is recognized at the point in time as the customer transactions are settled.
Other Income
Other income includes service revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.
The Company’s performance obligation for these services are largely satisfied, and related revenue recognized, when the
services are rendered or upon completion. Payment is typically received immediately or in the following month.
Gains(losses) on sales of OREO
First Commonwealth records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which
generally occurs at the time of an executed deed. When First Commonwealth finances the sale of OREO to the buyer, an
assessment of whether the buyer is committed to perform their obligations under the contract is completed along with an
evaluation of whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is
derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the
gain or loss on the sale, First Commonwealth adjusts the transaction price and related gain(loss) on sale if a significant
financing component is present.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606 for the year
ended December 31:
Noninterest Income
In-scope of Topic 606:
Trust income
Service charges on deposit accounts
Insurance and retail brokerage commissions
Card-related interchange income
Gain on sale of other loans and assets
Other income
Noninterest Income (in-scope of Topic 606)
Noninterest Income (out-of-scope of Topic 606)
Total Noninterest Income
105
2019
2018
2017
(dollars in thousands)
$
$
8,321
18,926
7,583
21,677
1,062
3,837
61,406
24,079
85,485
$
$
7,901
18,175
7,426
20,187
982
3,708
58,379
30,258
88,637
$
$
7,098
18,579
8,807
18,780
1,005
4,328
58,597
21,734
80,331
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, 2018
Advances
Repayments
December 31, 2019
$
$
15,638
4,803
(1,195)
19,246
Note 25—Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its subsidiary bank is limited by restrictions imposed on all depository
institutions by banking regulation that restricts and limits the payment of dividends and the ability of depository institutions to
engage in transactions, including lending transactions and asset purchases, with affiliates.
First Commonwealth and First Commonwealth Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators which, if undertaken, could have a direct material effect on First Commonwealth’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth
and First Commonwealth Bank must meet specific capital guidelines that involve quantitative measures of First
Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First
Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors.
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.
During the second quarter of 2018, First Commonwealth Bank, the Company's banking subsidiary, issued $100 million in
subordinated debt, which under regulatory rules qualifies as Tier II capital. This subordinated debt issuance increased the total
risk-based capital ratio by 160 basis points.
106
As of December 31, 2019 and 2018, First Commonwealth and First Commonwealth Bank met all capital adequacy
requirements to which they are subject and were 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
Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
(dollars in thousands)
$ 954,991
913,863
14.26% $ 703,370
702,006
13.67
10.50% $ 669,877
668,577
10.50
10.00%
10.00
$ 800,526
759,398
11.95% $ 569,395
568,291
11.36
8.50% $ 535,901
534,862
8.50
As of December 31, 2019
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Tier I Capital to Average Assets
8.00%
8.00
5.00%
5.00
6.50%
6.50
First Commonwealth Financial Corporation
First Commonwealth Bank
$ 800,526
759,398
10.17% $ 314,963
314,338
9.66
4.00% $ 393,704
392,922
4.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
$ 730,526
759,398
10.91% $ 468,914
468,004
11.36
7.00% $ 435,420
434,575
7.00
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, 2018
Total Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
Tier I Capital to Risk Weighted
Assets
First Commonwealth
Financial Corporation
$ 918,786
14.65% $ 619,173
9.88% $ 658,361
10.50% $ 627,011
10.00%
885,151
14.14
618,213
9.88
657,341
10.50
626,039
10.00
$ 767,881
12.25% $ 493,771
7.88% $ 532,959
8.50% $ 501,608
8.00%
First Commonwealth Bank
734,246
11.73
493,005
7.88
532,133
8.50
500,831
8.00
Tier I Capital to Average Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
Common Equity Tier I to Risk
Weighted Assets
First Commonwealth
Financial Corporation
First Commonwealth Bank
107
$ 767,881
10.28% $ 298,856
4.00% $ 298,856
4.00% $ 373,570
5.00%
734,246
9.84
298,340
4.00
298,340
4.00
372,926
5.00
$ 697,881
11.13% $ 399,719
6.38% $ 438,907
7.00% $ 407,557
6.50%
734,246
11.73
399,100
6.38
438,227
7.00
406,925
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 five branches in northern Ohio which
management believes represents a better use of capital for shareholders. Repurchases under all programs resulted in a total of
16,665,735 shares repurchased at an average price of $7.55 per share. In 2018, First Commonwealth announced a $25.0 million
common stock repurchase program. This program was completed prior to the end of 2018 and resulted in a total of 1,843,373
shares repurchased at an average price of $13.58. On March 4, 2019, a share repurchase program was authorized for up to
$25.0 million in shares of the Company's common stock. As of December 31, 2019, 393,946 shares have been repurchased at
an average price of $12.71.
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
December 31,
2019
2018
(dollars in thousands)
$
$
$
22,889
13
1,086,844
2,190
306
3,801
4,750
5,097
6,924
1,132,814
4,983
72,167
1,055,664
21,466
14
1,014,685
2,192
280
3,519
—
5,444
5,402
1,053,002
5,446
72,167
975,389
$
$
$
Total liabilities and shareholders’ equity
$
1,132,814
$
1,053,002
Statements of Income
Interest and dividends
Dividends from subsidiaries
Interest expense
Other income
Operating expense
Income before taxes and equity in undistributed earnings of
subsidiaries
Applicable income tax benefits
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
For the years ended December 31,
2019
2018
2017
(dollars in thousands)
$
8
$
1
$
55,964
(3,735)
6
(4,525)
47,718
1,720
49,438
55,895
81,851
(3,722)
14
(4,047)
74,097
1,324
75,421
32,077
1
52,586
(3,000)
17
(4,767)
44,837
2,557
47,394
7,771
55,165
Net income
$
105,333
$
107,498
$
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,
2019
2018
2017
(dollars in thousands)
$
105,333
$
107,498
$
55,165
Depreciation and amortization
Net gains on sales of assets
Decrease (increase) in prepaid income taxes
Undistributed equity in subsidiaries
Distribution from unconsolidated subsidiary
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
Acquisition of affiliate, net of cash received
Investment in subsidiaries
Net cash used in by investing activities
Financing Activities
Dividends paid
Proceeds from reissuance of treasury stock
Purchase of treasury stock
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
340
(2)
629
(55,895)
—
(2,957)
47,448
1
(586)
2
0
0
(583)
(39,394)
211
(6,259)
(45,442)
1,423
21,466
320
(7)
37
(32,077)
9,000
(1,628)
83,143
3
(87)
7
—
(17,202)
(17,279)
(34,849)
208
(26,189)
(60,830)
5,034
16,432
$
22,889
$
21,466
$
322
(3)
(550)
(7,771)
—
8,767
55,930
2
(207)
3
(250)
(37,690)
(38,142)
(30,513)
228
(1,458)
(31,743)
(13,955)
30,387
16,432
Cash dividends declared per common share were $0.40 for 2019, $0.35 in 2018 and $0.32 in 2017.
First Commonwealth Financial Corporation has an unsecured $20.0 million line of credit with another financial institution. As
of December 31, 2019, there are no amounts outstanding on this line and we are in compliance with all debt covenants related
to the line of credit.
109
Quarterly Summary of Financial Data—Unaudited
The unaudited quarterly results of operations for the years ended December 31 are as follows:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Net securities gains
Other noninterest income
Other expenses
Income before income taxes
Income tax provision
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
Average shares outstanding
Average shares outstanding assuming dilution
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Net securities 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
2019
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(dollars in thousands, except per share data)
$
$
$
81,038
12,233
68,805
4,895
63,910
7
22,521
53,109
33,329
6,509
26,820
0.27
0.27
98,182,023
98,508,219
$
$
$
82,575
14,130
68,445
2,708
65,737
9
22,170
54,897
33,019
6,375
26,644
0.27
0.27
98,267,229
98,547,898
$
$
$
82,057
14,931
67,126
2,835
64,291
6
21,900
52,229
33,968
6,688
27,280
0.28
0.28
98,346,674
98,600,609
$
$
$
79,594
14,108
65,486
4,095
61,391
—
18,872
49,730
30,533
5,944
24,589
0.25
0.25
98,479,041
98,706,827
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
2018
(dollars in thousands, except per share data)
$
77,945
$
74,873
$
72,940
$
12,896
65,049
1,499
63,550
—
20,529
50,024
34,055
7,057
26,998
0.27
0.27
$
$
11,060
63,813
2,961
60,852
—
19,757
49,530
31,079
5,930
25,149
0.25
0.25
$
$
9,265
63,675
1,168
62,507
5,262
21,046
49,129
39,686
7,605
32,081
0.32
0.32
$
$
$
$
66,499
6,814
59,685
6,903
52,782
2,840
19,203
46,873
27,952
4,682
23,270
0.24
0.24
99,147,933
99,358,759
100,226,647
100,490,812
95,305,009
99,504,409
97,433,137
97,601,162
110
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of
1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be
disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in applicable rules and forms of the Securities and Exchange Commission.
In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of
our internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. No such changes
were identified in connection with this evaluation.
111
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
First Commonwealth is responsible for the preparation, the integrity, and the fair presentation of the Consolidated Financial
Statements included in this annual report. The Consolidated Financial Statements and notes to the financial statements have
been prepared in conformity with generally accepted accounting principles and include some amounts based upon
management’s best estimates and judgments.
First Commonwealth’s management is responsible for establishing and maintaining effective internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f), that is designed to produce reliable financial statements in
conformity with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements. Under the supervision and with the participation of management,
including First Commonwealth’s principal executive officer and principal financial officer, First Commonwealth conducted an
evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
All internal control systems, no matter how well designed, have inherent limitations, including the possibility that a control can
be circumvented and that misstatements due to error or fraud may occur without detection. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Based on First Commonwealth’s evaluation based on criteria established in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that
internal control over financial reporting was effective as of December 31, 2019. The effectiveness of First Commonwealth’s
internal control over financial reporting as of December 31, 2019 has been audited by Ernst & Young, LLP, an independent
registered public accounting firm, as stated in their attestation report which is included herein.
First Commonwealth Financial Corporation
Indiana, Pennsylvania
February 28, 2020
/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 Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Commonwealth Financial Corporation
Opinion on Internal Control over Financial Reporting
We have audited First Commonwealth Financial Corporation and subsidiaries’ internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, First
Commonwealth Financial Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2019, the related
consolidated statements of income, comprehensive income, changes in stockholder’s equity, and cash flows for the year ended
December 31, 2019, and the related notes and our report dated February 28, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s 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
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 28, 2020
113
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of First Commonwealth Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial condition of First Commonwealth Financial Corporation
and subsidiaries (the Company) as of December 31, 2019, the related consolidated statements of income, comprehensive
income, changes in shareholders' equity, and cash flows for the year ended December 31, 2019, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019, and the results
of its operations and its cash flows for the year ended December 31, 2019, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 28, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex
judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matter or on the accounts or disclosures to which it relates.
114
Description of the
Matter
How We
Addressed the
Matter in Our
Audit
Allowance for Credit Losses
The Company’s loan portfolio totaled $6.2 billion as of December 31, 2019, and the associated allowance
for credit losses was $51.6 million. As discussed in Note 1 and Note 10, determining the amount of the
allowance requires significant judgment and estimates about the collectability of loans and the factors that
deserve consideration in estimating probable credit losses. Management relies on qualitative analysis of
certain factors related to portfolio risks and economic conditions and adjusts the actual historical loss rates
to reflect the impact these factors may have on probable losses in the portfolio. Qualitative 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. Management makes estimates for the
qualitative factors using assumptions and information that is often subjective and changing rapidly.
Auditing management’s estimate of the allowance for credit losses involved a high degree of subjectivity
due to the judgment and estimates required in evaluating management’s determination of the qualitative
factors to the allowance for credit losses. Management’s identification and measurement of the qualitative
factor adjustments is highly judgmental and could have a significant effect on the allowance for credit
losses.
We obtained an understanding of the Company’s process for establishing the allowance for credit losses,
including the qualitative factor adjustments made to the allowance for credit losses. We evaluated the
design and tested the operating effectiveness of controls over the Company’s allowance for credit losses
process, which included, among others, management’s review and approval controls designed to assess
the need and level of qualitative factor adjustments to the allowance for credit losses and the completeness
and accuracy of the data utilized to support management’s assessment.
To test the qualitative factor adjustments, we performed audit procedures that included, among others,
evaluating the appropriateness of management’s methodology and assessing whether all relevant risks
were reflected in the allowance for credit losses and the basis for the need to consider qualitative factor
adjustments. Regarding the measurement of the qualitative factors, we evaluated the completeness,
accuracy and relevance of the underlying internal and external market data utilized in management’s
estimate and considered the existence of new or contrary information. We corroborated the data by
comparing it to the Company’s historic loan performance and third-party macroeconomic data. We also
compared the overall allowance for credit losses to those established by peer banks as a way to evaluate
that the total allowance for credit losses inclusive of the qualitative factor adjustments is appropriately
reflecting losses incurred in the portfolio and analyzed the change in the components of the qualitative
reserves relative to the changes in the Company’s loan portfolio.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
Pittsburgh, Pennsylvania
February 28, 2020
115
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 statement of financial condition of First Commonwealth Financial Corporation
and subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of income, comprehensive
income, changes in shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2018,
and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its
operations and its cash flows for each of the years in the two year period ended December 31, 2018, in conformity with U.S.
generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our 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 risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our 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 provides a
reasonable basis for our opinion.
We served as the Company's auditor 2006 to 2018.
Pittsburgh, Pennsylvania
March 1, 2019
/s/ KPMG LLP
116
ITEM 9B.
Other Information
None.
117
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 28, 2020 (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, 2019:
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
442,832
N/A
442,832
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
2,930,128
N/A
2,930,128
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.
118
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.
119
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
2019 Annual Incentive Plan
2017-2019 Long-Term Incentive Plan
2018-2020 Long-Term Incentive Plan
2019-2021 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 7, 2019
Exhibit 10.2 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 9, 2018
Exhibit 10.2 to the quarterly report on Form
10-Q filed May 7, 2019
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
120
Exhibit
Number
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
21.1
23.1
23.2
31.1
31.2
32.1
32.2
101.00
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
Change of Control Agreement dated November 14,
2019 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 10.1 to current report on Form 8-K
filed November 19, 2019
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
Subsidiaries of the Registrant
Consent of EY LLP Independent Registered Public
Accounting Firm
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, 2019, formatted in
XBRL (Extensible Business Reporting Language): (i)
the Consolidated Balance Sheets at December 31, 2019
and December 31, 2018, (ii) the Consolidated
Statements of Income for the years ended December
31, 2019, 2018 and 2017, (iii) the Consolidated
Statements of Comprehensive Income for the years
ended December 31, 2019, 2018 and 2017, (iv) the
Consolidated Statements of Changes in Shareholders’
Equity for the years ended December 31, 2019, 2018
and 2017, (v) the Consolidated Statements of Cash
Flows for the years ended December 31, 2019, 2018
and 2017, and (vi) the Notes to Consolidated Financial
Statements.
ITEM 16.
Form 10-K Summary
None.
121
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania.
SIGNATURES
FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant)
By:
/S/ T. Michael Price
T. Michael Price
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
Dated: February 28, 2020
/S/ Julie A. Caponi
Director
Julie A. Caponi
/S/ Ray T. Charley
Director
Ray T. Charley
/S/ Gary R. Claus
Director
February 28, 2020
February 28, 2020
February 28, 2020
Gary R. Claus
David S. Dahlmann
Director, Chairman
February 28, 2020
/S/ Johnston A. Glass
Director
Johnston A. Glass
/S/ Jon L. Gorney
Director
Director
Director
Director
Director
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
President and Chief Executive Officer
(Principal Executive Officer)
February 28, 2020
Executive Vice President, Chief
Financial Officer, and Treasurer
Director
Director
February 28, 2020
February 28, 2020
February 28, 2020
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/ Aradhna M. Oliphant
Aradhna M. Oliphant
/S/ T. Michael Price
T. Michael Price
/S/ James R. Reske
James R. Reske
/S/ Robert J. Ventura
Robert J. Ventura
Stephen A. Wolfe
122
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
3101 North Central Avenue, Suite 400
Phoenix, AZ 85012
Incorporated under laws of Arizona
100%
100%
100%
100%
100%
100%
100%
50%
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-226681) of First Commonwealth Financial Corporation, and
(2) Registration Statement (Form S-3 No. 333-187288) of First Commonwealth Financial Corporation, and
(3) Registration Statement (Form S-8 No. 333-159090) of First Commonwealth Financial Corporation
of our reports dated February 28, 2020, with respect to the consolidated financial statements of First Commonwealth Financial
Corporation and the effectiveness of internal control over financial reporting of First Commonwealth Financial Corporation
included in this Annual Report (Form 10-K) of First Commonwealth Financial Corporation for the year ended December 31,
2019.
Pittsburgh, Pennsylvania
February 28, 2020
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. 333-226681 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 report dated March 1, 2019, with respect to the
consolidated statement of financial condition of First Commonwealth Financial Corporation and subsidiaries as of
December 31, 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes, which report
appears in the December 31, 2019 annual report on Form 10-K of First Commonwealth Financial Corporation.
Pittsburgh, Pennsylvania
February 28, 2020
/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.
February 28, 2020
Date
/S/ T. Michael Price
Signature
President and Chief Executive Officer
Title
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James R. Reske, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of First Commonwealth Financial Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
February 28, 2020
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,
2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects, the financial condition of First Commonwealth at
the end of such period and the results of operations of First Commonwealth for such period.
DATED: February 28, 2020
/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, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of First
Commonwealth at the end of such period and the results of operations of First Commonwealth for such period.
DATED: February 28, 2020
/S/ James R. Reske
James R. Reske
Executive Vice President, Chief Financial Officer and Treasurer
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Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders will be held at:
Rustic Lodge
2199 Oakland Avenue
Indiana, PA
on Tuesday, April 28, 2020 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