Attached files

file filename
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/fcf-ex322_20180331x10q.htm
EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/fcf-ex321_20180331x10q.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/fcf-ex312_20180331x10q.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/fcf-ex311_20180331x10q.htm
EX-10.2 - EXHIBIT 10.2 2018-2020 LTIP - FIRST COMMONWEALTH FINANCIAL CORP /PA/fcf-ex102_2018x2020longter.htm
EX-10.1 - EXHIBIT 10.1 2018 AIP - FIRST COMMONWEALTH FINANCIAL CORP /PA/fcf-ex101_2018annualincent.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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
 
25-1428528
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
601 Philadelphia Street, Indiana, PA
 
15701
(Address of principal executive offices)
 
(Zip Code)
724-349-7220
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a 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  x    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x    Accelerated filer  ¨    Smaller reporting company  ¨   Emerging growth company  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting 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  x
The number of shares outstanding of issuer’s common stock, $1.00 par value, as of May 8, 2018, was 100,361,905.



FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
PAGE
 
 
 
PART I.
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
 

2



ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

 
March 31, 2018
 
December 31, 2017
 
(dollars in thousands,
except share data)
Assets
 
 
 
Cash and due from banks
$
65,886

 
$
98,624

Interest-bearing bank deposits
9,736

 
8,668

Securities available for sale, at fair value
812,877

 
731,358

Securities held to maturity, at amortized cost (Fair value of $399,528 and $418,249 at March 31, 2018 and December 31, 2017, respectively)
410,430

 
422,096

Other investments
24,400

 
29,837

Loans held for sale
9,759

 
14,850

Loans:
 
 
 
Portfolio loans
5,381,305

 
5,407,376

Allowance for credit losses
(53,732
)
 
(48,298
)
Net loans
5,327,573

 
5,359,078

Premises and equipment, net
80,868

 
81,339

Other real estate owned
2,997

 
2,765

Goodwill
255,180

 
255,353

Amortizing intangibles, net
14,223

 
15,007

Bank owned life insurance
211,287

 
212,099

Other assets
95,551

 
77,465

Total assets
$
7,320,767

 
$
7,308,539

Liabilities
 
 
 
Deposits (all domestic):
 
 
 
Noninterest-bearing
$
1,443,747

 
$
1,416,771

Interest-bearing
4,259,775

 
4,163,934

Total deposits
5,703,522

 
5,580,705

Short-term borrowings
588,016

 
707,466

Subordinated debentures
72,167

 
72,167

Other long-term debt
8,011

 
8,161

Capital lease obligation
7,498

 
7,590

Total long-term debt
87,676

 
87,918

Other liabilities
42,204

 
44,323

Total liabilities
6,421,418

 
6,420,412

Shareholders’ Equity
 
 
 
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued

 

Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 shares issued at March 31, 2018 and December 31, 2017, and 97,603,151 and 97,456,478 shares outstanding at March 31, 2018 and December 31, 2017, respectively
113,915

 
113,915

Additional paid-in capital
471,768

 
470,123

Retained earnings
454,227

 
437,416

Accumulated other comprehensive loss, net
(13,009
)
 
(6,173
)
Treasury stock (16,311,751 and 16,458,424 shares at March 31, 2018 and December 31, 2017, respectively)
(127,552
)
 
(127,154
)
Total shareholders’ equity
899,349

 
888,127

Total liabilities and shareholders’ equity
$
7,320,767

 
$
7,308,539


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
For the Three Months Ended
 
March 31,
 
2018
 
2017
 
(dollars in thousands, except share data)
Interest Income
 
 
 
Interest and fees on loans
$
58,483

 
$
48,300

Interest and dividends on investments:
 
 
 
Taxable interest
7,056

 
6,994

Interest exempt from federal income taxes
410

 
397

Dividends
519

 
476

Interest on bank deposits
31

 
12

Total interest income
66,499

 
56,179

Interest Expense
 
 
 
Interest on deposits
3,541

 
1,812

Interest on short-term borrowings
2,295

 
1,749

Interest on subordinated debentures
827

 
705

Interest on other long-term debt
77

 
83

Interest on lease obligations
74

 

Total interest expense
6,814

 
4,349

Net Interest Income
59,685

 
51,830

Provision for credit losses
6,903

 
3,229

Net Interest Income after Provision for Credit Losses
52,782

 
48,601

Noninterest Income
 
 
 
Net securities gains
2,840

 
652

Trust income
1,928

 
1,417

Service charges on deposit accounts
4,406

 
4,319

Insurance and retail brokerage commissions
1,868

 
2,082

Income from bank owned life insurance
1,494

 
1,292

Gain on sale of mortgage loans
1,484

 
977

Gain on sale of other loans and assets
574

 
307

Card-related interchange income
4,742

 
4,251

Derivatives mark to market
789

 
2

Swap fee income (expense)
290

 
(73
)
Other income
1,628

 
1,706

Total noninterest income
22,043

 
16,932

Noninterest Expense
 
 
 
Salaries and employee benefits
24,873

 
23,466

Net occupancy expense
4,369

 
3,761

Furniture and equipment expense
3,540

 
3,088

Data processing expense
2,433

 
2,085

Advertising and promotion expense
809

 
806

Pennsylvania shares tax expense
903

 
816

Intangible amortization
784

 
572

Collection and repossession expense
823

 
497

Other professional fees and services
1,007

 
959

FDIC insurance
776

 
793

Loss on sale or write-down of assets
197

 
99

Litigation and operational losses
179

 
232

Merger and acquisition related
337

 
611

Other operating expenses
5,843

 
4,980

Total noninterest expense
46,873

 
42,765

Income Before Income Taxes
27,952

 
22,768

Income tax provision
4,682

 
6,880

Net Income
$
23,270

 
$
15,888

Average Shares Outstanding
97,433,137

 
88,929,892

Average Shares Outstanding Assuming Dilution
97,601,162

 
88,987,671

Per Share Data:
 
 
 
Basic Earnings per Share
$
0.24

 
$
0.18

Diluted Earnings per Share
$
0.24

 
$
0.18

Cash Dividends Declared per Common Share
$
0.08

 
$
0.08


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
For the Three Months Ended
 
March 31,
 
2018
 
2017
 
(dollars in thousands)
Net Income
$
23,270

 
$
15,888

Other comprehensive (loss) income, before tax benefit (expense):
 
 
 
Unrealized holding (losses) gains on securities arising during the period
(3,982
)
 
2,543

Less: reclassification adjustment for gains on securities included in net income
(2,840
)
 
(652
)
Unrealized holding losses on derivatives arising during the period
(130
)
 
(516
)
Less: reclassification adjustment for losses on derivatives included in net income

 
78

Total other comprehensive (loss) income, before tax benefit (expense)
(6,952
)
 
1,453

Income tax benefit (expense) related to items of other comprehensive (loss) income
1,460

 
(509
)
Total other comprehensive (loss) income
(5,492
)
 
944

Comprehensive Income
$
17,778

 
$
16,832



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5


ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
 
 
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 share and 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
 
 
 
 
 
 
1,344

 
(1,344
)
 
 
 

January 1, 2018
97,456,478

 
113,915

 
470,123

 
438,760

 
(7,517
)
 
(127,154
)
 
888,127

Net income
 
 
 
 
 
 
23,270

 
 
 
 
 
23,270

Other comprehensive loss
 
 
 
 
 
 
 
 
(5,492
)
 
 
 
(5,492
)
Cash dividends declared ($0.08 per share)
 
 
 
 
 
 
(7,803
)
 
 
 
 
 
(7,803
)
Treasury stock acquired
(72,307
)
 
 
 
 
 
 
 
 
 
(1,079
)
 
(1,079
)
Treasury stock reissued
149,480

 
 
 
1,108

 

 
 
 
1,149

 
2,257

Restricted stock
69,500

 

 
537

 

 
 
 
(468
)
 
69

Balance at March 31, 2018
97,603,151

 
$
113,915

 
$
471,768

 
$
454,227

 
$
(13,009
)
 
$
(127,552
)
 
$
899,349

 
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 share and 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
 
 
 
 
 
 
15,888

 
 
 
 
 
15,888

Other comprehensive income
 
 
 
 
 
 
 
 
944

 
 
 
944

Cash dividends declared ($0.08 per share)
 
 
 
 
 
 
(7,119
)
 
 
 
 
 
(7,119
)
Treasury stock acquired
(78,632
)
 
 
 
 
 
 
 
 
 
(1,102
)
 
(1,102
)
Treasury stock reissued
158,638

 
 
 
1,044

 

 
 
 
1,214

 
2,258

Restricted stock
26,000

 

 
137

 

 
 
 
60

 
197

Balance at March 31, 2017
89,113,083

 
$
105,563

 
$
367,607

 
$
421,533

 
$
(6,083
)
 
$
(127,625
)
 
$
760,995



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6


ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
For the Three Months Ended
 
March 31,
 
2018
 
2017
Operating Activities
(dollars in thousands)
Net income
$
23,270

 
$
15,888

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
6,903

 
3,229

Deferred tax expense
1,097

 
2,506

Depreciation and amortization
2,380

 
2,113

Net gains on securities and other assets
(5,143
)
 
(1,718
)
Net amortization of premiums and discounts on securities
775

 
867

Income from increase in cash surrender value of bank owned life insurance
(1,494
)
 
(1,292
)
Increase in interest receivable
(620
)
 
(338
)
Mortgage loans originated for sale
(38,218
)
 
(27,580
)
Proceeds from sale of mortgage loans
46,134

 
29,829

(Decrease) increase in interest payable
(235
)
 
571

Increase in income taxes payable
3,557

 
4,354

Other-net
(17,004
)
 
(991
)
Net cash provided by operating activities
21,402

 
27,438

Investing Activities
 
 
 
Transactions with securities held to maturity:
 
 
 
Proceeds from maturities and redemptions
11,335

 
10,826

Purchases

 
(25,140
)
Transactions with securities available for sale:
 
 
 
Proceeds from sales

 

Proceeds from maturities and redemptions
44,067

 
33,125

Purchases
(130,012
)
 
(85,220
)
Purchases of FHLB stock
(13,491
)
 
(12,883
)
Proceeds from the redemption of FHLB stock
18,928

 
10,712

Proceeds from sale of loans
6,647

 

Proceeds from sale of other assets
1,141

 
1,631

Restricted cash

 
(21,284
)
Net decrease (increase) in loans
16,012

 
(37,514
)
Purchases of other assets
(154
)
 
(410
)
Purchases of premises and equipment
(1,820
)
 
(1,531
)
Net cash used in investing activities
(47,347
)
 
(127,688
)
Financing Activities
 
 
 
Net increase in federal funds purchased
6,000

 

Net (decrease) increase in other short-term borrowings
(125,450
)
 
93,658

Net increase in deposits
122,849

 
22,385

Repayments of other long-term debt
(150
)
 
(145
)
Repayments of capital lease obligation
(92
)
 

Dividends paid
(7,803
)
 
(7,119
)
Purchase of treasury stock
(1,079
)
 
(1,102
)
Net cash (used in) provided by financing activities
(5,725
)
 
107,677

Net (decrease) increase in cash and cash equivalents
(31,670
)
 
7,427

Cash and cash equivalents at January 1
107,292

 
115,677

Cash and cash equivalents at March 31
$
75,622

 
$
123,104


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or the “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of First Commonwealth’s financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity as of and for the periods presented.
The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year of 2018. These interim financial statements should be read in conjunction with First Commonwealth’s 2017 Annual Report on Form 10-K.
Adoption of New Accounting Standards
On January 1, 2018, First Commonwealth adopted ASU 2014-09, "Revenue from Contracts with Customers" ("ASC 606") and all subsequent amendments to the ASU, which creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain(loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company's revenues come from interest income and other sources, including loans and securities, that are outside the scope of ASC 606. The Company's services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include trust income, service charges on deposits, insurance and retail brokerage commissions, interchange fees and gain(loss) on other real estate owned ("OREO"). Refer to Note 13, "Revenue Recognition" for further discussion on the Company's accounting policies for revenue sources within the scope of ASC 606. 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 ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
On January 1, 2018, First Commonwealth elected to adopt ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)." As part of this adoption, First Commonwealth has elected to reclassify the income tax effects resulting from tax reform from accumulated other comprehensive income to retained earnings on a portfolio basis. ASU 2018-02 provides for the reclassification of the stranded tax effects resulting from the Tax Cuts and Jobs Act. As of January 1, 2018, First Commonwealth reclassified $1.3 million from accumulated other comprehensive income to retained earnings in relation to the stranded tax effect which included accumulated other comprehensive income recognized on available-for-sale investment securities, interest rate swaps and other post-retirement benefits. This reclassification is shown as an adjustment to the beginning of the year balances and can be seen in the Condensed Consolidated Statements of Changes in Shareholders' Equity.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and when that assessment indicates that impairment exists, requiring the entity to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a

8


valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with this ASU, and as reflected in Note 10, "Fair Values of Assets and Liabilities", the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion.
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.
Note 2 Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Condensed Consolidated Statements of Income.
 
For the Three Months Ended March 31,
 
2018
 
2017
 
Pretax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Pretax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
(dollars in thousands)
Unrealized (losses) gains on securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains on securities arising during the period
$
(3,982
)
 
$
837

 
$
(3,145
)
 
$
2,543

 
$
(890
)
 
$
1,653

Reclassification adjustment for gains on securities included in net income
(2,840
)
 
596

 
(2,244
)
 
(652
)
 
228

 
(424
)
Total unrealized (losses) gains on securities
(6,822
)
 
1,433

 
(5,389
)
 
1,891

 
(662
)
 
1,229

Unrealized losses on derivatives:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on derivatives arising during the period
(130
)
 
27

 
(103
)
 
(516
)
 
181

 
(335
)
Reclassification adjustment for losses on derivatives included in net income

 

 

 
78

 
(28
)
 
50

Total unrealized losses on derivatives
(130
)
 
27

 
(103
)
 
(438
)
 
153

 
(285
)
Total other comprehensive (loss) income
$
(6,952
)
 
$
1,460

 
$
(5,492
)
 
$
1,453

 
$
(509
)
 
$
944

 
 
 
 
 
 
 
 
 
 
 
 
The following table details the change in components of OCI for the three months ended March 31:
 
2018
 
2017
 
Securities Available for Sale
Post-Retirement Obligation
Derivatives
Accumulated Other Comprehensive Income (Loss)
 
Securities Available for Sale
Post-Retirement Obligation
Derivatives
Accumulated Other Comprehensive Income (Loss)
 
(dollars in thousands)
Balance at December 31
$
(6,166
)
$
299

$
(306
)
$
(6,173
)
 
$
(7,455
)
$
225

$
203

$
(7,027
)
Cumulative effect of adoption of ASU 2018-02
(1,344
)


(1,344
)
 




Balance at January 1
(7,510
)
299

(306
)
(7,517
)
 
(7,455
)
225

203

(7,027
)
Other comprehensive (loss) income before reclassification adjustment
(3,145
)

(103
)
(3,248
)
 
1,653


(335
)
1,318

Amounts reclassified from accumulated other comprehensive (loss) income
(2,244
)


(2,244
)
 
(424
)

50

(374
)
Net other comprehensive (loss) income during the period
(5,389
)

(103
)
(5,492
)
 
1,229


(285
)
944

Balance at March 31
$
(12,899
)
$
299

$
(409
)
$
(13,009
)
 
$
(6,226
)
$
225

$
(82
)
$
(6,083
)


9

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 3 Supplemental Cash Flow Disclosures
The following table presents information related to cash paid during the period for interest, as well as detail on non-cash investing and financing activities for the three months ended March 31:
 
2018
 
2017
 
(dollars in thousands)
Cash paid during the period for:
 
 
 
Interest
$
7,072

 
$
3,832

Income taxes
28

 
1,039

Non-cash investing and financing activities:
 
 
 
Loans transferred to other real estate owned and repossessed assets
1,186

 
958

Loans transferred from held to maturity to held for sale
8,019

 
3,613

Gross (decrease) increase in market value adjustment to securities available for sale
(6,822
)
 
1,892

Gross decrease in market value adjustment to derivatives
(131
)
 
(438
)
Investments committed to purchase, not settled

 
498

Noncash treasury stock reissuance
2,257

 
2,258

Proceeds from death benefit on bank-owned life insurance not received
2,306

 

Note 4 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 computations:
 
For the Three Months Ended March 31,
 
2018
 
2017
Weighted average common shares issued
113,914,902

 
105,563,455

Average treasury stock shares
(16,369,144
)
 
(16,527,204
)
Average deferred compensation shares
(37,411
)
 

Average unearned nonvested shares
(75,210
)
 
(106,359
)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
97,433,137

 
88,929,892

Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share
130,614

 
57,779

Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share
37,411

 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share
97,601,162

 
88,987,671

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 three months ended March 31 because to do so would have been antidilutive.
 
2018
 
2017
 
 
 
Price Range
 
 
 
Price Range
 
Shares
 
From
 
To
 
Shares
 
From
 
To
Restricted Stock
37,298

 
$
9.84

 
$
14.49

 
13,750

 
$
13.96

 
$
13.96

Restricted Stock Units
43,067

 
$
13.25

 
$
15.83

 
24,375

 
$
15.09

 
$
15.09



10

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 5 Commitments and Contingent Liabilities
Commitments and Letters of Credit
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 of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.
The following table identifies the notional amount of those instruments at:
 
March 31, 2018
 
December 31, 2017
 
(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
 
 
 
Commitments to extend credit
$
1,782,701

 
$
1,840,180

Financial standby letters of credit
17,636

 
17,946

Performance standby letters of credit
21,328

 
20,472

Commercial letters of credit
1,055

 
1,149

 
The notional amounts outstanding as of March 31, 2018 include amounts issued in 2018 of $37 thousand in financial standby letters of credit and $0.4 million in performance standby letters of credit. There were no commercial letters of credit issued in 2017. A liability of $0.2 million has been recorded as of March 31, 2018 and December 31, 2017, 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 related to these commitments resulted in the recording of a liability of $5.2 million as of March 31, 2018 and December 31, 2017. This liability is reflected in "Other liabilities" in the Condensed 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.
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 March 31, 2018, 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.
First Commonwealth Financial Corporation and First Commonwealth Bank were named defendants in an action commenced August 27, 2015 by eight named plaintiffs that is pending in the Court of Common Pleas of Jefferson County, Pennsylvania.  The plaintiffs allege that the Bank repossessed motor vehicles, sold the vehicles and sought to collect deficiency balances in a manner that did not comply with the notice requirements of the Pennsylvania Uniform Commercial Code (UCC), charged inappropriate costs and fees, including storage costs for dates that a repossessed vehicle was not in storage, and wrongly filed forms with the Department of Motor Vehicles asserting that the Bank had complied with applicable laws relating to the repossession of the vehicles. The plaintiffs seek to pursue the action as a class action on behalf of the named plaintiffs and other similarly situated plaintiffs who had their automobiles repossessed and seek to recover damages under the UCC and the

11

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Pennsylvania Fair Credit Extension Uniformity Act. First Commonwealth Financial Corporation, First Commonwealth Bank, the plaintiffs, the plaintiffs’ counsel and First Commonwealth’s liability insurer have entered into a Class Action Settlement Agreement and Release in which, among other things, First Commonwealth and its insurer have agreed to pay certain amounts into a settlement fund to be distributed among the class members and class counsel, First Commonwealth has agreed to satisfy the remaining deficiency balances of the class members and request that credit reporting agencies delete the tradeline relating to the repossession from each class member’s credit report, and the class members will release all claims against First Commonwealth and its insurer. The Court granted preliminary approval of the settlement on March 29, 2018, and has scheduled a hearing on July 23, 2018 to consider final approval of the settlement. The estimated cost of the settlement to First Commonwealth was recorded as a liability in the second quarter of 2016. As set forth in the preceding paragraph, all current litigation matters, including this action, are believed to be within the range of reasonably possible losses set forth in the preceding paragraph. 
Note 6 Investment Securities
Securities Available for Sale
Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:
 
March 31, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(dollars in thousands)
Obligations of U.S. Government Agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
$
10,100

 
$
646

 
$
(81
)
 
$
10,665

 
$
10,556

 
$
789

 
$
(7
)
 
$
11,338

Mortgage-Backed Securities – Commercial
73,389

 

 
(1,252
)
 
72,137

 
24,611

 

 
(462
)
 
24,149

Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 

 
 
 
 
 
 
 

Mortgage-Backed Securities – Residential
681,343

 
1,913

 
(18,468
)
 
664,788

 
632,422

 
2,622

 
(9,489
)
 
625,555

Other Government-Sponsored Enterprises
1,100

 

 
(2
)
 
1,098

 
1,098

 

 
(1
)
 
1,097

Obligations of States and Political Subdivisions
27,086

 
121

 
(46
)
 
27,161

 
27,083

 
327

 

 
27,410

Corporate Securities
20,898

 
542

 
(214
)
 
21,226

 
15,907

 
590

 
(4
)
 
16,493

Pooled Trust Preferred Collateralized Debt Obligations
13,602

 
1,252

 
(722
)
 
14,132

 
27,499

 
526

 
(4,379
)
 
23,646

Total Debt Securities
827,518

 
4,474

 
(20,785
)
 
811,207

 
739,176

 
4,854

 
(14,342
)
 
729,688

Equities
1,670

 

 

 
1,670

 
1,670

 

 

 
1,670

Total Securities Available for Sale
$
829,188

 
$
4,474

 
$
(20,785
)
 
$
812,877

 
$
740,846

 
$
4,854

 
$
(14,342
)
 
$
731,358


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.

12

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The amortized cost and estimated fair value of debt securities available for sale at March 31, 2018, by contractual maturity, are shown below.
 
Amortized
Cost
 
Estimated
Fair Value
 
(dollars in thousands)
Due within 1 year
$
5,099

 
$
5,073

Due after 1 but within 5 years
15,727

 
15,541

Due after 5 but within 10 years
26,337

 
26,409

Due after 10 years
15,523

 
16,594

 
62,686

 
63,617

Mortgage-Backed Securities (a)
764,832

 
747,590

Total Debt Securities
$
827,518

 
$
811,207

 
(a)
Mortgage-Backed Securities include an amortized cost of $83.5 million and a fair value of $82.8 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $681.3 million and a fair value of $664.8 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
 
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the three months ended March 31:
 
2018
 
2017
 
(dollars in thousands)
Proceeds from sales
$

 
$

Gross gains (losses) realized:
 
 
 
Sales Transactions:
 
 
 
Gross gains
$

 
$

Gross losses

 

 

 

Maturities and impairment
 
 
 
Gross gains
2,840

 
652

Gross losses

 

 
2,840

 
652

Net gains and impairment
$
2,840

 
$
652


Gross gains from maturities and impairment of $2.8 million were recognized in 2018 as a result of the successful auction call on PreSTL XIV, one of our pooled trust preferred securities. Gross gains of $0.7 million were recognized in 2017 due to the early redemption of another of our trust preferred securities, PreSTL VII. Securities available for sale with an estimated fair value of $609.9 million and $569.0 million were pledged as of March 31, 2018 and December 31, 2017, respectively, to secure public deposits and for other purposes required or permitted by law.

13

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Securities Held to Maturity
Below is an analysis of the amortized cost and fair values of debt securities held to maturity at:
 
March 31, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(dollars in thousands)
Obligations of U.S. Government Agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
$
3,895

 
$

 
$
(109
)
 
$
3,786

 
$
3,925

 
$

 
$
(14
)
 
$
3,911

Mortgage-Backed Securities- Commercial
57,762

 

 
(2,224
)
 
55,538

 
58,249

 

 
(1,394
)
 
56,855

Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
294,205

 

 
(7,645
)
 
286,560

 
305,126

 
10

 
(2,552
)
 
302,584

Mortgage-Backed Securities – Commercial
13,859

 

 
(299
)
 
13,560

 
14,056

 

 
(71
)
 
13,985

Obligations of States and Political Subdivisions
40,509

 
38

 
(660
)
 
39,887

 
40,540

 
335

 
(161
)
 
40,714

Debt Securities Issued by Foreign Governments
200

 

 
(3
)
 
197

 
200

 

 

 
200

Total Securities Held to Maturity
$
410,430

 
$
38

 
$
(10,940
)
 
$
399,528

 
$
422,096

 
$
345

 
$
(4,192
)
 
$
418,249

The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2018, 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.
 
Amortized
Cost
 
Estimated
Fair Value
 
(dollars in thousands)
Due within 1 year
$
87

 
$
86

Due after 1 but within 5 years
3,646

 
3,626

Due after 5 but within 10 years
35,350

 
34,764

Due after 10 years
1,626

 
1,608

 
40,709

 
40,084

Mortgage-Backed Securities (a)
369,721

 
359,444

Total Debt Securities
$
410,430

 
$
399,528

(a)
Mortgage-Backed Securities include an amortized cost of $61.7 million and a fair value of $59.3 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $308.1 million and a fair value of $300.1 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 $369.4 million and $338.3 million were pledged as of March 31, 2018 and December 31, 2017, respectively, to secure public deposits and for other purposes required or permitted by law.


14

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 7 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 OCI. During the three months ended March 31, 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, or be required 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, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note 10, “Fair Values of Assets and Liabilities,” for additional information.
The following table presents the gross unrealized losses and estimated fair values at March 31, 2018 for both available for sale and held to maturity securities by investment category and time frame for which securities have 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
$
7,923

 
$
(190
)
 
$

 
$

 
$
7,923

 
$
(190
)
Mortgage-Backed Securities – Commercial
95,862

 
(2,120
)
 
31,813

 
(1,356
)
 
127,675

 
(3,476
)
Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
500,625

 
(10,277
)
 
378,709

 
(15,836
)
 
879,334

 
(26,113
)
Mortgage-Backed Securities – Commercial
13,560

 
(299
)
 

 

 
13,560

 
(299
)
Other Government-Sponsored Enterprises
999

 
(1
)
 
99

 
(1
)
 
1,098

 
(2
)
Obligations of States and Political Subdivisions
31,032

 
(413
)
 
3,489

 
(293
)
 
34,521

 
(706
)
Debt securities issued by foreign governments
197

 
(3
)
 

 

 
197

 
(3
)
Corporate Securities
18,764

 
(214
)
 

 

 
18,764

 
(214
)
Pooled Trust Preferred Collateralized Debt Obligations

 

 
6,362

 
(722
)
 
6,362

 
(722
)
Total Securities
$
668,962

 
$
(13,517
)
 
$
420,472

 
$
(18,208
)
 
$
1,089,434

 
$
(31,725
)
    
At March 31, 2018, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 83% and 12%, respectively, of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 2% of the unrealized losses primarily due to the illiquid market for this investment type. At March 31, 2018, there are 155 debt securities in an unrealized loss position.

15

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table presents the gross unrealized losses and estimated fair values at December 31, 2017 by investment category and time frame for which securities have 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
$
5,584

 
$
(21
)
 
$

 
$

 
$
5,584

 
$
(21
)
Mortgage-Backed Securities - Commercial
48,322

 
(962
)
 
32,683

 
(894
)
 
81,005

 
(1,856
)
Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
351,222

 
(2,295
)
 
400,984

 
(9,746
)
 
752,206

 
(12,041
)
Mortgage-Backed Securities – Commercial
13,985

 
(71
)
 

 

 
13,985

 
(71
)
Other Government-Sponsored Enterprises
997

 
(1
)
 
99

 

 
1,096

 
(1
)
Obligation of States and Political Subdivisions
7,144

 
(32
)
 
3,653

 
(129
)
 
10,797

 
(161
)
Corporate Securities
3,993

 
(4
)
 

 

 
3,993

 
(4
)
Pooled Trust Preferred Collateralized Debt Obligations

 

 
19,120

 
(4,379
)
 
19,120

 
(4,379
)
Total Securities
$
431,247

 
$
(3,386
)
 
$
456,539

 
$
(15,148
)
 
$
887,786

 
$
(18,534
)
As of March 31, 2018, our corporate securities had an amortized cost and an estimated fair value of $20.9 million and $21.2 million, respectively. As of December 31, 2017, our corporate securities had an amortized cost and estimated fair value of $15.9 million and $16.5 million, respectively. Corporate securities are comprised of debt for large regional banks. There were four corporate securities in an unrealized loss position as of March 31, 2018 and one corporate security in an unrealized loss position as of December 31, 2017. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.
As of March 31, 2018, the book value of our pooled trust preferred collateralized debt obligations totaled $13.6 million with an estimated fair value of $14.1 million, which includes securities comprised of 164 banks and other financial institutions. All of our pooled securities are mezzanine tranches, two of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of March 31, 2018, after taking into account management’s best estimates of future interest deferrals and defaults, two of our securities had no excess subordination in the tranches we own and four of our securities had excess subordination which ranged from 2% to 114% of the current performing collateral.
 
The following table provides information related to our pooled trust preferred collateralized debt obligations as of March 31, 2018:
Deal
Class
 
Book
Value
 
Estimated Fair
Value
 
Unrealized
Gain
(Loss)
 
Moody’s/
Fitch
Ratings
 
Number
of
Banks
 
Deferrals
and
Defaults
as a % of
Current
Collateral
 
Excess
Subordination
as a % of
Current
Performing
Collateral
(dollars in thousands)
Pre TSL IV
Mezzanine
 
$
933

 
$
738

 
$
(195
)
 
Ba1/BB
 
5

 
%
 
113.79
%
Pre TSL VIII
Mezzanine
 
2,072

 
2,295

 
223

 
C/C
 
26

 
38.52

 
0.00

Pre TSL IX
Mezzanine
 
2,457

 
3,000

 
543

 
B1/C
 
37

 
27.83

 
19.46

Pre TSL X
Mezzanine
 
1,894

 
2,301

 
407

 
Caa1/C
 
41

 
26.29

 
1.73

Pre TSL XII
Mezzanine
 
6,151

 
5,624

 
(527
)
 
B3/C
 
64

 
23.39

 
0.00

MMCap I
Mezzanine
 
95

 
174

 
79

 
Ca/C
 
7

 
69.35

 
69.99

Total
 
 
$
13,602

 
$
14,132

 
$
530

 
 
 
 
 
 
 
 
Lack of liquidity in the market for trust preferred collateralized debt obligations, below investment grade credit ratings and market uncertainties related to the financial industry are factors contributing to the impairment on these securities.

16

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies and therefore are not considered covered funds under the Volcker Rule.
During the three months ended March 31, 2018, an auction call was successfully completed on PreTSL XIV. This resulted in the security being called at par providing a gain of $2.8 million.
On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three months ended March 31, 2018 and 2017, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.
Additional information related to the discounted cash flow analysis follows:
Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at March 31, 2018. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.
 
Results of a discounted cash flow test are significantly affected by other variables, such as the estimate of future cash flows, credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following provides additional information for each of these variables:
Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions, which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.
Credit Analysis – A quarterly credit evaluation is performed for each of the 164 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.
Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they will become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of March 31, 2018, default probabilities for performing collateral ranged from 0.33% to 50%.
Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying piece of collateral. Using the results of the credit evaluation, the next step of the process is to look at pricing of senior debt or credit default swaps for the issuer (or where such information is unavailable, for companies having similar credit profiles as the issuer). The pricing of these market indicators provides the information necessary to determine appropriate default probabilities for each bank.

17

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults that results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security. The results of the stress test allow management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.
Our cash flow analysis as of March 31, 2018, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the three months ended March 31, 2018. Based upon the analysis performed by management, it is probable that two of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the previous table with 0.00% “Excess Subordination as a % of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of March 31, 2018 indicates it is probable that we will collect all contractual principal and interest payments. For three of those securities, PreTSL IX, PreTSL X, and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.
During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of March 31, 2018, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities' current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from 19% to 101% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.
The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:
 
For the Three Months Ended March 31,
 
2018
 
2017
 
(dollars in thousands)
Balance, beginning (a)
$
12,208

 
$
17,056

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

 

Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized

 

Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)
(147
)
 
(228
)
Reduction for debt securities called during the period
(2,302
)
 

Balance, ending
$
9,759

 
$
16,828

 
(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 in interest income during the period.
In the first three months of 2018 and 2017, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment 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. As of March 31, 2018 and 2017, there were no equity securities in an unrealized loss position.
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 March 31, 2018 and

18

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


December 31, 2017, our FHLB stock totaled $24.4 million and $29.8 million, respectively, and is included in “Other investments” on the Condensed 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 during the three months ended March 31, 2018.
Note 8 Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types:
 
 
March 31, 2018
 
December 31, 2017
 
Originated
 
Acquired
 
Total
 
Originated
 
Acquired
 
Total
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
1,093,192

 
$
38,402

 
$
1,131,594

 
$
1,122,741

 
$
40,642

 
$
1,163,383

Real estate construction
245,841

 
1,120

 
246,961

 
242,905

 
5,963

 
248,868

Residential real estate
1,220,989

 
213,634

 
1,434,623

 
1,206,119

 
220,251

 
1,426,370

Commercial real estate
1,901,609

 
125,463

 
2,027,072

 
1,892,185

 
126,911

 
2,019,096

Loans to individuals
535,484

 
5,571

 
541,055

 
543,411

 
6,248

 
549,659

Total loans
$
4,997,115

 
$
384,190

 
$
5,381,305

 
$
5,007,361

 
$
400,015

 
$
5,407,376

Credit Quality Information
As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:
Pass
  
Acceptable levels of risk exist in the relationship. Includes all loans not classified as OAEM, substandard or doubtful.
Other Assets Especially Mentioned (OAEM)
  
Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Company’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.
Substandard
  
Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.
Doubtful
  
Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

19

ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following tables represent our credit risk profile by creditworthiness:
 
March 31, 2018
 
Commercial, financial, agricultural and other
 
Real estate construction
 
Residential real estate
 
Commercial real estate
 
Loans to individuals
 
Total
 
(dollars in thousands)
Originated loans
 
 
 
 
 
 
 
 
 
 
 
Pass
$
1,020,603

 
$
245,841

 
$
1,209,290

 
$
1,871,008

 
$
535,240

 
$
4,881,982

Non-Pass
 
 
 
 
 
 
 
 
 
 
 
OAEM
31,480

 

 
1,574

 
7,748

 

 
40,802

Substandard
34,140

 

 
10,125

 
22,853

 
244

 
67,362

Doubtful
6,969

 

 

 

 

 
6,969

Total Non-Pass
72,589

 

 
11,699

 
30,601

 
244

 
115,133

Total
$
1,093,192

 
$
245,841

 
$
1,220,989

 
$
1,901,609

 
$
535,484

 
$
4,997,115

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
Pass
$
32,439

 
$
1,120

 
$
211,361

 
$
122,411

 
$
5,554

 
$
372,885

Non-Pass
 
 
 
 
 
 
 
 
 
 
 
OAEM
5,486

 

 
745

 
1,251