UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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xý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20192020
Or
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¨☐ | 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)
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Pennsylvania | | | 25-1428528 |
(State or other jurisdiction of | | | (I.R.S. Employer |
incorporation or organization) | | | Identification No.) |
| | | |
601 Philadelphia Street Indiana, PA | | 15701 | |
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 3, 2019,7, 2020, was 98,499,937.98,134,697.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
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PART I. | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II. | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (Unaudited) | | |
| (dollars in thousands, except share data) |
Assets | | | |
Cash and due from banks | $ | 100,724 |
| | $ | 95,934 |
|
Interest-bearing bank deposits | 23,168 |
| | 3,013 |
|
Securities available for sale, at fair value | 893,101 |
| | 909,247 |
|
Securities held to maturity, at amortized cost (Fair value of $380,443 and $383,993 at March 31, 2019 and December 31, 2018, respectively) | 384,909 |
| | 393,855 |
|
Other investments | 25,378 |
| | 32,126 |
|
Loans held for sale | 9,627 |
| | 11,881 |
|
Loans: | | | |
Portfolio loans | 5,871,070 |
| | 5,774,139 |
|
Allowance for credit losses | (49,653 | ) | | (47,764 | ) |
Net loans | 5,821,417 |
| | 5,726,375 |
|
Premises and equipment, net | 129,107 |
| | 80,474 |
|
Other real estate owned | 3,993 |
| | 3,935 |
|
Goodwill | 274,202 |
| | 274,202 |
|
Amortizing intangibles, net | 12,876 |
| | 13,038 |
|
Bank owned life insurance | 217,192 |
| | 215,766 |
|
Other assets | 76,979 |
| | 68,409 |
|
Total assets | $ | 7,972,673 |
| | $ | 7,828,255 |
|
Liabilities | | | |
Deposits (all domestic): | | | |
Noninterest-bearing | $ | 1,510,566 |
| | $ | 1,466,213 |
|
Interest-bearing | 4,620,194 |
| | 4,431,779 |
|
Total deposits | 6,130,760 |
| | 5,897,992 |
|
Short-term borrowings | 565,616 |
| | 721,823 |
|
Subordinated debentures | 170,328 |
| | 170,288 |
|
Other long-term debt | 7,395 |
| | 7,551 |
|
Capital lease obligation | 7,118 |
| | 7,217 |
|
Total long-term debt | 184,841 |
| | 185,056 |
|
Other liabilities | 93,437 |
| | 47,995 |
|
Total liabilities | 6,974,654 |
| | 6,852,866 |
|
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, 2019 and December 31, 2018, and 98,625,806 and 98,518,668 shares outstanding at March 31, 2019 and December 31, 2018, respectively | 113,915 |
| | 113,915 |
|
Additional paid-in capital | 493,664 |
| | 492,273 |
|
Retained earnings | 526,136 |
| | 511,409 |
|
Accumulated other comprehensive loss, net | (4,102 | ) | | (11,341 | ) |
Treasury stock (15,289,096 and 15,396,234 shares at March 31, 2019 and December 31, 2018, respectively) | (131,594 | ) | | (130,867 | ) |
Total shareholders’ equity | 998,019 |
| | 975,389 |
|
Total liabilities and shareholders’ equity | $ | 7,972,673 |
| | $ | 7,828,255 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
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| | PAGE |
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PART I. | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II. | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| (Unaudited) | | |
| (dollars in thousands, except share data) | | |
Assets | | | |
Cash and due from banks | $ | 118,413 | | | $ | 102,346 | |
Interest-bearing bank deposits | 15,762 | | | 19,510 | |
Securities available for sale, at fair value | 972,626 | | | 902,292 | |
Securities held to maturity, at amortized cost (Fair value of $327,592 and $338,718 at March 31, 2020 and December 31,2019, respectively) | 318,256 | | | 337,123 | |
Other investments | 19,415 | | | 16,761 | |
Loans held for sale | 25,783 | | | 15,989 | |
Loans: | | | |
Portfolio loans | 6,313,944 | | | 6,189,148 | |
Allowance for credit losses | (79,075) | | | (51,637) | |
Net loans | 6,234,869 | | | 6,137,511 | |
Premises and equipment, net | 136,896 | | | 137,268 | |
Other real estate owned | 2,697 | | | 2,228 | |
Goodwill | 303,328 | | | 303,328 | |
Amortizing intangibles, net | 15,563 | | | 16,366 | |
Bank owned life insurance | 222,132 | | | 220,723 | |
Other assets | 129,365 | | | 97,328 | |
Total assets | $ | 8,515,105 | | | $ | 8,308,773 | |
Liabilities | | | |
Deposits (all domestic): | | | |
Noninterest-bearing | $ | 1,751,524 | | | $ | 1,690,247 | |
Interest-bearing | 5,171,564 | | | 4,987,368 | |
Total deposits | 6,923,088 | | | 6,677,615 | |
Short-term borrowings | 146,971 | | | 201,853 | |
Subordinated debentures | 170,490 | | | 170,450 | |
Other long-term debt | 56,755 | | | 56,917 | |
Capital lease obligation | 6,710 | | | 6,815 | |
Total long-term debt | 233,955 | | | 234,182 | |
Other liabilities | 153,167 | | | 139,458 | |
Total liabilities | 7,457,181 | | | 7,253,108 | |
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, 2020 and December 31, 2019, and 98,015,396 and 98,311,840 shares outstanding at March 31, 2020 and December 31, 2019, respectively | 113,915 | | | 113,915 | |
Additional paid-in capital | 494,181 | | | 493,737 | |
Retained earnings | 571,256 | | | 577,348 | |
Accumulated other comprehensive income, net | 17,352 | | | 5,579 | |
Treasury stock (15,899,506 and 15,603,062 shares at March 31, 2020 and December 31, 2019, respectively) | (138,780) | | | (134,914) | |
| | | |
Total shareholders’ equity | 1,057,924 | | | 1,055,665 | |
Total liabilities and shareholders’ equity | $ | 8,515,105 | | | $ | 8,308,773 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
| | | For the Three Months Ended | | | For the Three Months Ended | |
| March 31, | | | March 31, | |
| 2019 | | 2018 | | | 2020 | | 2019 |
| (dollars in thousands, except share data) | | | (dollars in thousands, except share data) | |
Interest Income | | | | Interest Income | | |
Interest and fees on loans | $ | 70,421 |
| | $ | 58,483 |
| Interest and fees on loans | | $ | 71,740 | | | $ | 70,421 | |
Interest and dividends on investments: | | | | Interest and dividends on investments: | | |
Taxable interest | 8,164 |
| | 7,056 |
| Taxable interest | | 6,973 | | | 8,164 | |
Interest exempt from federal income taxes | 418 |
| | 410 |
| Interest exempt from federal income taxes | | 315 | | | 418 | |
Dividends | 537 |
| | 519 |
| Dividends | | 264 | | | 537 | |
Interest on bank deposits | 54 |
| | 31 |
| Interest on bank deposits | | 37 | | | 54 | |
Total interest income | 79,594 |
| | 66,499 |
| Total interest income | | 79,329 | | | 79,594 | |
Interest Expense | | | | Interest Expense | | |
Interest on deposits | 8,175 |
| | 3,541 |
| Interest on deposits | | 8,449 | | | 8,175 | |
Interest on short-term borrowings | 3,438 |
| | 2,295 |
| Interest on short-term borrowings | | 588 | | | 3,438 | |
Interest on subordinated debentures | 2,354 |
| | 827 |
| Interest on subordinated debentures | | 2,146 | | | 2,354 | |
Interest on other long-term debt | 71 |
| | 77 |
| Interest on other long-term debt | | 355 | | | 71 | |
Interest on lease obligations | 70 |
| | 74 |
| Interest on lease obligations | | 67 | | | 70 | |
| Total interest expense | 14,108 |
| | 6,814 |
| Total interest expense | | 11,605 | | | 14,108 | |
Net Interest Income | 65,486 |
| | 59,685 |
| Net Interest Income | | 67,724 | | | 65,486 | |
Provision for credit losses | 4,095 |
| | 6,903 |
| Provision for credit losses | | 30,967 | | | 4,095 | |
Net Interest Income after Provision for Credit Losses | 61,391 |
| | 52,782 |
| Net Interest Income after Provision for Credit Losses | | 36,757 | | | 61,391 | |
Noninterest Income | | | | Noninterest Income | | |
| Net securities gains | — |
| | 2,840 |
| Net securities gains | | 19 | | | — | |
Trust income | 1,926 |
| | 1,928 |
| Trust income | | 2,111 | | | 1,926 | |
Service charges on deposit accounts | 4,245 |
| | 4,406 |
| Service charges on deposit accounts | | 4,745 | | | 4,245 | |
Insurance and retail brokerage commissions | 1,961 |
| | 1,868 |
| Insurance and retail brokerage commissions | | 1,995 | | | 1,961 | |
Income from bank owned life insurance | 1,426 |
| | 1,494 |
| Income from bank owned life insurance | | 1,616 | | | 1,426 | |
Gain on sale of mortgage loans | 1,428 |
| | 1,484 |
| Gain on sale of mortgage loans | | 2,546 | | | 1,428 | |
Gain on sale of other loans and assets | 1,084 |
| | 574 |
| Gain on sale of other loans and assets | | 699 | | | 1,084 | |
Card-related interchange income | 4,730 |
| | 4,742 |
| Card-related interchange income | | 5,262 | | | 4,730 | |
Derivatives mark to market | (26 | ) | | 789 |
| Derivatives mark to market | | (1,741) | | | (26) | |
| Swap fee income | 393 |
| | 290 |
| Swap fee income | | 214 | | | 393 | |
Other income | 1,705 |
| | 1,628 |
| Other income | | 1,807 | | | 1,705 | |
Total noninterest income | 18,872 |
| | 22,043 |
| Total noninterest income | | 19,273 | | | 18,872 | |
Noninterest Expense | | | | Noninterest Expense | | |
Salaries and employee benefits | 27,220 |
| | 24,873 |
| Salaries and employee benefits | | 29,977 | | | 27,220 | |
Net occupancy | 4,916 |
| | 4,369 |
| Net occupancy | | 4,973 | | | 4,916 | |
Furniture and equipment | 3,668 |
| | 3,540 |
| Furniture and equipment | | 3,778 | | | 3,668 | |
Data processing | 2,544 |
| | 2,433 |
| Data processing | | 2,467 | | | 2,544 | |
Advertising and promotion | 1,240 |
| | 809 |
| Advertising and promotion | | 1,150 | | | 1,240 | |
Pennsylvania shares tax | 916 |
| | 903 |
| Pennsylvania shares tax | | 738 | | | 916 | |
Intangible amortization | 754 |
| | 784 |
| Intangible amortization | | 934 | | | 754 | |
Collection and repossession | 547 |
| | 823 |
| Collection and repossession | | 564 | | | 547 | |
Other professional fees and services | 754 |
| | 1,007 |
| Other professional fees and services | | 910 | | | 754 | |
FDIC insurance | 574 |
| | 776 |
| FDIC insurance | | 28 | | | 574 | |
Loss on sale or write-down of assets | 65 |
| | 197 |
| Loss on sale or write-down of assets | | 213 | | | 65 | |
| Litigation and operational losses | 401 |
| | 179 |
| Litigation and operational losses | | 390 | | | 401 | |
Merger and acquisition related | — |
| | 337 |
| |
Unfunded commitment reserve | | Unfunded commitment reserve | | (2,539) | | | (381) | |
| Other operating | 6,131 |
| | 5,843 |
| Other operating | | 6,688 | | | 6,512 | |
Total noninterest expense | 49,730 |
| | 46,873 |
| Total noninterest expense | | 50,271 | | | 49,730 | |
Income Before Income Taxes | 30,533 |
| | 27,952 |
| Income Before Income Taxes | | 5,759 | | | 30,533 | |
Income tax provision | 5,944 |
| | 4,682 |
| Income tax provision | | 1,032 | | | 5,944 | |
Net Income | $ | 24,589 |
| | $ | 23,270 |
| Net Income | | $ | 4,727 | | | $ | 24,589 | |
Average Shares Outstanding | 98,479,041 |
| | 97,433,137 |
| Average Shares Outstanding | | 98,123,627 | | | 98,479,041 | |
Average Shares Outstanding Assuming Dilution | 98,706,827 |
| | 97,601,162 |
| Average Shares Outstanding Assuming Dilution | | 98,361,494 | | | 98,706,827 | |
Per Share Data: | | | | Per Share Data: | | |
Basic Earnings per Share | $ | 0.25 |
| | $ | 0.24 |
| Basic Earnings per Share | | $ | 0.05 | | | $ | 0.25 | |
Diluted Earnings per Share | $ | 0.25 |
| | $ | 0.24 |
| Diluted Earnings per Share | | $ | 0.05 | | | $ | 0.25 | |
Cash Dividends Declared per Common Share | $ | 0.10 |
| | $ | 0.08 |
| Cash Dividends Declared per Common Share | | $ | 0.11 | | | $ | 0.10 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
ITEM 1. Financial Statements and Supplementary Data(Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| | | | | | | | | | | | | | | |
| | | | | For the Three Months Ended | | |
| | | | | March 31, | | |
| | | | | 2020 | | 2019 |
| | | | | (dollars in thousands) | | |
Net Income | | | | | $ | 4,727 | | | $ | 24,589 | |
Other comprehensive income, before tax expense: | | | | | | | |
Unrealized holding gains on securities arising during the period | | | | | 19,503 | | | 9,030 | |
| | | | | | | |
Less: reclassification adjustment for gains on securities included in net income | | | | | (19) | | | — | |
Unrealized holding (losses) gains on derivatives arising during the period | | | | | (4,581) | | | 133 | |
| | | | | | | |
Total other comprehensive income, before tax expense | | | | | 14,903 | | | 9,163 | |
Income tax expense related to items of other comprehensive income | | | | | (3,130) | | | (1,924) | |
Total other comprehensive income | | | | | 11,773 | | | 7,239 | |
Comprehensive Income | | | | | $ | 16,500 | | | $ | 31,828�� | |
|
| | | | | | | |
| For the Three Months Ended |
| March 31, |
| 2019 | | 2018 |
| (dollars in thousands) |
Net Income | $ | 24,589 |
| | $ | 23,270 |
|
Other comprehensive income (loss), before tax (expense) benefit: | | | |
Unrealized holding gains (losses) on securities arising during the period | 9,030 |
| | (3,982 | ) |
Less: reclassification adjustment for gains on securities included in net income | — |
| | (2,840 | ) |
Unrealized holding gains (losses) on derivatives arising during the period | 133 |
| | (130 | ) |
Less: reclassification adjustment for losses on derivatives included in net income | — |
| | — |
|
Total other comprehensive income (loss), before tax (expense) benefit | 9,163 |
| | (6,952 | ) |
Income tax (expense) benefit related to items of other comprehensive income (loss) | (1,924 | ) | | 1,460 |
|
Total other comprehensive income (loss) | 7,239 |
| | (5,492 | ) |
Comprehensive Income | $ | 31,828 |
| | $ | 17,778 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
ITEM 1. Financial Statements and Supplementary Data(Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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, 2019 | 98,311,840 | | | $ | 113,915 | | | $ | 493,737 | | | $ | 577,348 | | | $ | 5,579 | | | $ | (134,914) | | | | | $ | 1,055,665 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net income | | | | | | | 4,727 | | | | | | | | | 4,727 | |
Other comprehensive income | | | | | | | | | 11,773 | | | | | | | 11,773 | |
Cash dividends declared ($0.11 per share) | | | | | | | (10,819) | | | | | | | | | (10,819) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Treasury stock acquired | (430,896) | | | | | | | | | | | (5,220) | | | | | (5,220) | |
Treasury stock reissued | 134,452 | | | | | 444 | | | — | | | | | 1,150 | | | | | 1,594 | |
Restricted stock | — | | | — | | | — | | | — | | | | | 204 | | | | | 204 | |
| | | | | | | | | | | | | | | |
Balance at March 31, 2020 | 98,015,396 | | | $ | 113,915 | | | $ | 494,181 | | | $ | 571,256 | | | $ | 17,352 | | | $ | (138,780) | | | | | $ | 1,057,924 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2018 | 98,518,668 |
| | $ | 113,915 |
| | $ | 492,273 |
| | $ | 511,409 |
| | $ | (11,341 | ) | | $ | (130,867 | ) | | $ | 975,389 |
|
Net income | | | | | | | 24,589 |
| | | | | | 24,589 |
|
Other comprehensive income | | | | | | | | | 7,239 |
| | | | 7,239 |
|
Cash dividends declared ($0.10 per share) | | | | | | | (9,862 | ) | | | | | | (9,862 | ) |
Treasury stock acquired | (159,562 | ) | | | | | | | | | | (2,074 | ) | | (2,074 | ) |
Treasury stock reissued | 188,700 |
| | | | 941 |
| | — |
| | | | 1,590 |
| | 2,531 |
|
Restricted stock | 78,000 |
| | — |
| | 450 |
| | — |
| | | | (243 | ) | | 207 |
|
Balance at March 31, 2019 | 98,625,806 |
| | $ | 113,915 |
| | $ | 493,664 |
| | $ | 526,136 |
| | $ | (4,102 | ) | | $ | (131,594 | ) | | $ | 998,019 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2018 | 98,518,668 | | | $ | 113,915 | | | $ | 492,273 | | | $ | 511,409 | | | $ | (11,341) | | | $ | (130,867) | | | | | $ | 975,389 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net income | | | | | | | 24,589 | | | | | | | | | 24,589 | |
Other comprehensive income | | | | | | | | | 7,239 | | | | | | | 7,239 | |
Cash dividends declared ($0.10 per share) | | | | | | | (9,862) | | | | | | | | | (9,862) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Treasury stock acquired | (159,562) | | | | | | | | | | | (2,074) | | | | | (2,074) | |
Treasury stock reissued | 188,700 | | | | | 941 | | | — | | | | | 1,590 | | | | | 2,531 | |
Restricted stock | 78,000 | | | — | | | 450 | | | — | | | | | (243) | | | | | 207 | |
| | | | | | | | | | | | | | | |
Balance at March 31, 2019 | 98,625,806 | | | $ | 113,915 | | | $ | 493,664 | | | $ | 526,136 | | | $ | (4,102) | | | $ | (131,594) | | | | | $ | 998,019 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
ITEM 1. Financial Statements and Supplementary Data(Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
ITEM 1. Financial Statements and Supplementary Data(Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | |
| For the Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 |
Operating Activities | (dollars in thousands) | | |
Net income | $ | 4,727 | | | $ | 24,589 | |
Adjustment to reconcile net income to net cash provided by operating activities: | | | |
Provision for credit losses | 30,967 | | | 4,095 | |
Deferred tax (benefit) expense | (3,551) | | | 1,443 | |
Depreciation and amortization | 2,926 | | | 2,478 | |
Net gains on securities and other assets | (1,645) | | | (2,218) | |
Net amortization of premiums and discounts on securities | 1,310 | | | 784 | |
| | | |
Income from increase in cash surrender value of bank owned life insurance | (1,610) | | | (1,426) | |
Increase in interest receivable | (761) | | | (2,346) | |
Mortgage loans originated for sale | (65,236) | | | (34,985) | |
Proceeds from sale of mortgage loans | 61,777 | | | 35,255 | |
Increase in interest payable | 1,122 | | | 1,522 | |
Increase in income taxes payable | 4,528 | | | 4,454 | |
| | | |
Other-net | (1,438) | | | (14,956) | |
Net cash provided by operating activities | 33,116 | | | 18,689 | |
Investing Activities | | | |
Transactions with securities held to maturity: | | | |
Proceeds from maturities and redemptions | 18,504 | | | 8,641 | |
| | | |
Transactions with securities available for sale: | | | |
| | | |
Proceeds from maturities and redemptions | 50,107 | | | 31,099 | |
Purchases | (127,368) | | | (6,401) | |
Purchases of FHLB stock | (18,682) | | | (10,293) | |
Proceeds from the redemption of FHLB stock | 16,028 | | | 17,041 | |
Proceeds from bank owned life insurance | 557 | | | — | |
Proceeds from sale of loans | 7,960 | | | 8,559 | |
Proceeds from sale of other assets | 1,361 | | | 1,144 | |
| | | |
| | | |
Net increase in loans | (140,013) | | | (104,189) | |
| | | |
Purchases of premises and equipment and other assets | (3,654) | | | (4,128) | |
Net cash used in investing activities | (195,200) | | | (58,527) | |
Financing Activities | | | |
Net increase (decrease) in federal funds purchased | 27,000 | | | (11,000) | |
Net decrease in other short-term borrowings | (81,882) | | | (145,207) | |
Net increase in deposits | 245,591 | | | 232,892 | |
Repayments of other long-term debt | (162) | | | (156) | |
Repayments of capital lease obligation | (105) | | | (99) | |
| | | |
| | | |
| | | |
Dividends paid | (10,819) | | | (9,862) | |
| | | |
Purchase of treasury stock | (5,220) | | | (1,785) | |
| | | |
Net cash provided by financing activities | 174,403 | | | 64,783 | |
Net increase in cash and cash equivalents | 12,319 | | | 24,945 | |
Cash and cash equivalents at January 1 | 121,856 | | | 98,947 | |
Cash and cash equivalents at March 31 | $ | 134,175 | | | $ | 123,892 | |
|
| | | | | | | |
| For the Three Months Ended |
| March 31, |
| 2019 | | 2018 |
Operating Activities | (dollars in thousands) |
Net income | $ | 24,589 |
| | $ | 23,270 |
|
Adjustment to reconcile net income to net cash provided by operating activities: | | | |
Provision for credit losses | 4,095 |
| | 6,903 |
|
Deferred tax expense | 1,443 |
| | 1,097 |
|
Depreciation and amortization | 2,478 |
| | 2,380 |
|
Net gains on securities and other assets | (2,218 | ) | | (5,143 | ) |
Net amortization of premiums and discounts on securities | 784 |
| | 775 |
|
Income from increase in cash surrender value of bank owned life insurance | (1,426 | ) | | (1,494 | ) |
Increase in interest receivable | (2,346 | ) | | (620 | ) |
Mortgage loans originated for sale | (34,985 | ) | | (38,218 | ) |
Proceeds from sale of mortgage loans | 35,255 |
| | 46,134 |
|
Increase (decrease) in interest payable | 1,522 |
| | (235 | ) |
Increase in income taxes payable | 4,454 |
| | 3,557 |
|
Other-net | (14,956 | ) | | (17,004 | ) |
Net cash provided by operating activities | 18,689 |
| | 21,402 |
|
Investing Activities | | | |
Transactions with securities held to maturity: | | | |
Proceeds from maturities and redemptions | 8,641 |
| | 11,335 |
|
Purchases | — |
| | — |
|
Transactions with securities available for sale: | | | |
Proceeds from sales | — |
| | — |
|
Proceeds from maturities and redemptions | 31,099 |
| | 44,067 |
|
Purchases | (6,401 | ) | | (130,012 | ) |
Purchases of FHLB stock | (10,293 | ) | | (13,491 | ) |
Proceeds from the redemption of FHLB stock | 17,041 |
| | 18,928 |
|
Proceeds from sale of loans | 8,559 |
| | 6,647 |
|
Proceeds from sale of other assets | 1,144 |
| | 1,141 |
|
Net (increase) decrease in loans | (104,189 | ) | | 16,012 |
|
Purchases of premises and equipment and other assets | (4,128 | ) | | (1,974 | ) |
Net cash used in investing activities | (58,527 | ) | | (47,347 | ) |
Financing Activities | | | |
Net (decrease) increase in federal funds purchased | (11,000 | ) | | 6,000 |
|
Net decrease in other short-term borrowings | (145,207 | ) | | (125,450 | ) |
Net increase in deposits | 232,892 |
| | 122,849 |
|
Repayments of other long-term debt | (156 | ) | | (150 | ) |
Repayments of capital lease obligation | (99 | ) | | (92 | ) |
Dividends paid | (9,862 | ) | | (7,803 | ) |
Purchase of treasury stock | (1,785 | ) | | (1,079 | ) |
Net cash provided by (used in) financing activities | 64,783 |
| | (5,725 | ) |
Net increase (decrease) in cash and cash equivalents | 24,945 |
| | (31,670 | ) |
Cash and cash equivalents at January 1 | 98,947 |
| | 107,292 |
|
Cash and cash equivalents at March 31 | $ | 123,892 |
| | $ | 75,622 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED 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 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. Certain information and Note disclosures normally included in Consolidated Financial Statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.
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.
The results of operations for the three months endedMarch 31, 20192020 are not necessarily indicative of the results that may be expected for the full year of 2019.2020. These interim financial statements should be read in conjunction with First Commonwealth’s 20182019 Annual Report on Form 10-K.
Adoption of New Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Additionally, the FASB issued ASU No. 2018-01, "Leases (Topic 842)" in January 2018, ASU No. 2018-11, "Leases - Targeted Improvements" in July 2018 and ASU 2018-20, "Leases - Narrow-Scope Improvements for Lessors" in December 2018. These ASU's provide certain improvements and optional practical expedients to Topic 842. First Commonwealth adopted this guidance on January 1, 2019. Under this new guidance, all entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. First Commonwealth has elected the transition option provided in ASU No. 2018-11, which provides for the modified retrospective approach to be applied on January 1, 2019. Upon adoption of this standard on January 1, 2019, we recognized right-of-use ("ROU") assets and related lease liabilities totaling $38.5 million and $41.8 million, respectively. Additionally, during the first quarter of 2019, we recognized an additional right-of-use asset and related lease liability totaling $10.0 million in connection with the relocation of leased space that includes a corporate loan production office and some administrative offices. We have 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 initial impact of this standard primarily relates to operating leases of certain real estate properties. First Commonwealth has no material leasing arrangements for which it is the lessor of property or equipment.
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 unaudited 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"operating" line in the unaudited Consolidated Statements of Income.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
| Pretax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | | Pretax Amount | | Tax (Expense) Benefit | | Net of Tax Amount |
| (dollars in thousands) | | | | | | | | | | |
Unrealized gains on securities: | | | | | | | | | | | |
Unrealized holding gains on securities arising during the period | $ | 19,503 | | | $ | (4,096) | | | $ | 15,407 | | | $ | 9,030 | | | $ | (1,896) | | | $ | 7,134 | |
| | | | | | | | | | | |
Reclassification adjustment for gains on securities included in net income | (19) | | | 4 | | | (15) | | | — | | | — | | | — | |
Total unrealized gains on securities | 19,484 | | | (4,092) | | | 15,392 | | | 9,030 | | | (1,896) | | | 7,134 | |
Unrealized (losses) gains on derivatives: | | | | | | | | | | | |
Unrealized holding (losses) gains on derivatives arising during the period | (4,581) | | | 962 | | | (3,619) | | | 133 | | | (28) | | | 105 | |
Reclassification adjustment for losses on derivatives included in net income | — | | | — | | | — | | | — | | | — | | | — | |
Total unrealized (losses) gains on derivatives | (4,581) | | | 962 | | | (3,619) | | | 133 | | | (28) | | | 105 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total other comprehensive income | $ | 14,903 | | | $ | (3,130) | | | $ | 11,773 | | | $ | 9,163 | | | $ | (1,924) | | | $ | 7,239 | |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table details the change in components of OCI for the three months ended March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | 2019 | | | |
| 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 | $ | 4,580 | | $ | 365 | | $ | 634 | | $ | 5,579 | | | $ | (11,697) | | $ | 461 | | $ | (105) | | $ | (11,341) | |
| | | | | | | | | |
| | | | | | | | | |
Other comprehensive income before reclassification adjustment | 15,407 | | — | | (3,619) | | 11,788 | | | 7,134 | | — | | 105 | | 7,239 | |
Amounts reclassified from accumulated other comprehensive (loss) income | (15) | | — | | — | | (15) | | | — | | — | | — | | — | |
Net other comprehensive income during the period | 15,392 | | — | | (3,619) | | 11,773 | | | 7,134 | | — | | 105 | | 7,239 | |
Balance at March 31 | $ | 19,972 | | $ | 365 | | $ | (2,985) | | $ | 17,352 | | | $ | (4,563) | | $ | 461 | | $ | — | | $ | (4,102) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| Pretax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | | Pretax Amount | | Tax (Expense) Benefit | | Net of Tax Amount |
| (dollars in thousands) |
Unrealized gains (losses) on securities: | | | | | | | | | | | |
Unrealized holding gains (losses) on securities arising during the period | $ | 9,030 |
| | $ | (1,896 | ) | | $ | 7,134 |
| | $ | (3,982 | ) | | $ | 837 |
| | $ | (3,145 | ) |
Reclassification adjustment for gains on securities included in net income | — |
| | — |
| | — |
| | (2,840 | ) | | 596 |
| | (2,244 | ) |
Total unrealized gains (losses) on securities | 9,030 |
| | (1,896 | ) | | 7,134 |
| | (6,822 | ) | | 1,433 |
| | (5,389 | ) |
Unrealized gains (losses) on derivatives: | | | | | | | | | | | |
Unrealized holding gains (losses) on derivatives arising during the period | 133 |
| | (28 | ) | | 105 |
| | (130 | ) | | 27 |
| | (103 | ) |
Reclassification adjustment for losses on derivatives included in net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total unrealized gains (losses) on derivatives | 133 |
| | (28 | ) | | 105 |
| | (130 | ) | | 27 |
| | (103 | ) |
Total other comprehensive income (loss) | $ | 9,163 |
| | $ | (1,924 | ) | | $ | 7,239 |
| | $ | (6,952 | ) | | $ | 1,460 |
| | $ | (5,492 | ) |
The following table details the change in components of OCI for the three months endedMarch 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| 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 | $ | (11,697 | ) | $ | 461 |
| $ | (105 | ) | $ | (11,341 | ) | | $ | (6,166 | ) | $ | 299 |
| $ | (306 | ) | $ | (6,173 | ) |
Cumulative effect of adoption of ASU 2018-02 | — |
| — |
| — |
| — |
| | (1,344 | ) | — |
| — |
| (1,344 | ) |
Balance at January 1 | (11,697 | ) | 461 |
| (105 | ) | (11,341 | ) | | (7,510 | ) | 299 |
| (306 | ) | (7,517 | ) |
Other comprehensive income (loss) before reclassification adjustment | 7,134 |
| — |
| 105 |
| 7,239 |
| | (3,145 | ) | — |
| (103 | ) | (3,248 | ) |
Amounts reclassified from accumulated other comprehensive (loss) income | — |
| — |
| — |
| — |
| | (2,244 | ) | — |
| — |
| (2,244 | ) |
Net other comprehensive income (loss) during the period | 7,134 |
| — |
| 105 |
| 7,239 |
| | (5,389 | ) | — |
| (103 | ) | (5,492 | ) |
Balance at March 31 | $ | (4,563 | ) | $ | 461 |
| $ | — |
| $ | (4,102 | ) | | $ | (12,899 | ) | $ | 299 |
| $ | (409 | ) | $ | (13,009 | ) |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3 Supplemental Cash Flow Disclosures
The following table presents information related to cash paid during the period for interest and income taxes, as well as detail on non-cash investing and financing activities for the three months ended March 31:
| | | | | | | | | | | |
| 2020 | | 2019 |
| (dollars in thousands) | | |
Cash paid during the period for: | | | |
Interest | $ | 10,551 | | | $ | 12,660 | |
Income taxes | 80 | | | 61 | |
Non-cash investing and financing activities: | | | |
| | | |
Loans transferred to other real estate owned and repossessed assets | 1,961 | | | 982 | |
Loans transferred from held to maturity to held for sale | 10,858 | | | 4,156 | |
| | | |
Loans transferred from available for sale to held to maturity | 385 | | | — | |
Gross increase in market value adjustment to securities available for sale | 19,484 | | | 9,030 | |
Gross (decrease) increase in market value adjustment to derivatives | (4,581) | | | 133 | |
| | | |
Noncash treasury stock reissuance | 1,594 | | | 2,531 | |
| | | |
Unsettled treasury stock repurchases | — | | | 289 | |
Proceeds from death benefit on bank owned life insurance not received | (356) | | | — | |
|
| | | | | | | |
| 2019 | | 2018 |
| (dollars in thousands) |
Cash paid during the period for: | | | |
Interest | $ | 12,660 |
| | $ | 7,072 |
|
Income taxes | 61 |
| | 28 |
|
Non-cash investing and financing activities: | | | |
Loans transferred to other real estate owned and repossessed assets | 982 |
| | 1,186 |
|
Loans transferred from held to maturity to held for sale | 4,156 |
| | 8,019 |
|
Gross increase (decrease) in market value adjustment to securities available for sale | 9,030 |
| | (6,822 | ) |
Gross increase (decrease) in market value adjustment to derivatives | 133 |
| | (131 | ) |
Noncash treasury stock reissuance | 2,531 |
| | 2,257 |
|
Unsettled treasury stock repurchases | 289 |
| | — |
|
Proceeds from death benefit on bank-owned life insurance not received | — |
| | 2,306 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, | | | For the Three Months Ended March 31, | |
| 2019 | | 2018 | | | 2020 | | 2019 |
Weighted average common shares issued | 113,914,902 |
| | 113,914,902 |
| Weighted average common shares issued | | 113,914,902 | | | 113,914,902 | |
Average treasury stock shares | (15,291,253 | ) | | (16,369,144 | ) | Average treasury stock shares | | (15,672,850) | | | (15,291,253) | |
Average deferred compensation shares | (37,411 | ) | | (37,411 | ) | Average deferred compensation shares | | (38,453) | | | (37,411) | |
Average unearned nonvested shares | (107,197 | ) | | (75,210 | ) | Average unearned nonvested shares | | (79,972) | | | (107,197) | |
Weighted average common shares and common stock equivalents used to calculate basic earnings per share | 98,479,041 |
| | 97,433,137 |
| Weighted average common shares and common stock equivalents used to calculate basic earnings per share | | 98,123,627 | | | 98,479,041 | |
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share | 190,375 |
| | 130,614 |
| Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share | | 196,441 | | | 190,375 | |
Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share | 37,411 |
| | 37,411 |
| Additional common stock equivalents (deferred compensation) used to calculate diluted earnings per share | | 41,426 | | | 37,411 | |
| Weighted average common shares and common stock equivalents used to calculate diluted earnings per share | 98,706,827 |
| | 97,601,162 |
| Weighted average common shares and common stock equivalents used to calculate diluted earnings per share | | 98,361,494 | | | 98,706,827 | |
Basic Earnings per Share | $ | 0.25 |
| | $ | 0.24 |
| Basic Earnings per Share | | $ | 0.05 | | | $ | 0.25 | |
Diluted Earnings per Share | $ | 0.25 |
| | $ | 0.24 |
| Diluted Earnings per Share | | $ | 0.05 | | | $ | 0.25 | |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
| | | Price Range | | | | | | Price Range | | |
| Shares | | From | | To | | Shares | | From | | To |
| | | | | | | | | | | |
Restricted Stock | 75,208 | | | $ | 13.82 | | | $ | 15.44 | | | 95,403 | | | $ | 12.99 | | | $ | 14.49 | |
Restricted Stock Units | 42,509 | | | $ | 13.72 | | | $ | 15.37 | | | 39,618 | | | $ | 14.22 | | | $ | 16.62 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| | | Price Range | | | | Price Range |
| Shares | | From | | To | | Shares | | From | | To |
Restricted Stock | 95,403 |
| | $ | 12.99 |
| | $ | 14.49 |
| | 37,298 |
| | $ | 9.84 |
| | $ | 14.49 |
|
Restricted Stock Units | 39,618 |
| | $ | 14.22 |
| | $ | 16.62 |
| | 43,067 |
| | $ | 13.25 |
| | $ | 15.83 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED 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, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
| (dollars in thousands) | | (dollars in thousands) | |
Financial instruments whose contract amounts represent credit risk: | | | | Financial instruments whose contract amounts represent credit risk: | |
Commitments to extend credit | $ | 1,881,445 |
| | $ | 1,883,914 |
| Commitments to extend credit | $ | 1,988,601 | | | $ | 1,981,275 | |
Financial standby letters of credit | 18,121 |
| | 18,298 |
| Financial standby letters of credit | 17,325 | | | 16,630 | |
Performance standby letters of credit | 28,520 |
| | 22,027 |
| Performance standby letters of credit | 20,074 | | | 23,293 | |
Commercial letters of credit | 887 |
| | 887 |
| Commercial letters of credit | 782 | | | 783 | |
The notional amounts outstanding as of March 31, 20192020 include amounts issued in 20192020 of $8.1 million$19 thousand in performance standby letters of credit and $52 thousand in financial standby letters of credit. There were no financial standby or0 commercial letters of credit issued in 2019.2020. A liability of $0.3$0.2 million and $0.2$0.1 million has been recorded as of March 31, 20192020 and December 31, 2018, 2019,
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 related to these commitments resulted in the recording of a liability of $4.6$2.0 million and $5.0$4.5 million as of March 31, 20192020 and December 31, 2018,2019, respectively. This liability is reflected in "Other liabilities" in the unaudited 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, 2019,2020, 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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2020 | | | | | | | | December 31, 2019 | | | | | | |
| 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 | $ | 7,395 | | | $ | 721 | | | $ | — | | | $ | 8,116 | | | $ | 7,745 | | | $ | 596 | | | $ | — | | | $ | 8,341 | |
Mortgage-Backed Securities – Commercial | 235,884 | | | 5,088 | | | (215) | | | 240,757 | | | 186,316 | | | 2,983 | | | (166) | | | 189,133 | |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | | | | | | | | | | | |
Mortgage-Backed Securities – Residential | 670,251 | | | 18,973 | | | — | | | 689,224 | | | 660,777 | | | 4,113 | | | (2,943) | | | 661,947 | |
| | | | | | | | | | | | | | | |
Other Government-Sponsored Enterprises | 1,000 | | | 4 | | | — | | | 1,004 | | | 1,000 | | | — | | | — | | | 1,000 | |
Obligations of States and Political Subdivisions | 9,891 | | | 136 | | | — | | | 10,027 | | | 17,738 | | | 171 | | | — | | | 17,909 | |
Corporate Securities | 22,924 | | | 574 | | | — | | | 23,498 | | | 22,919 | | | 1,043 | | | — | | | 23,962 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total Securities Available for Sale | $ | 947,345 | | | $ | 25,496 | | | $ | (215) | | | $ | 972,626 | | | $ | 896,495 | | | $ | 8,906 | | | $ | (3,109) | | | $ | 902,292 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| 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 | $ | 8,731 |
| | $ | 539 |
| | $ | (24 | ) | | $ | 9,246 |
| | $ | 9,011 |
| | $ | 479 |
| | $ | (84 | ) | | $ | 9,406 |
|
Mortgage-Backed Securities – Commercial | 169,153 |
| | 457 |
| | (1,490 | ) | | 168,120 |
| | 169,633 |
| | 214 |
| | (2,103 | ) | | 167,744 |
|
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | |
| | | | | | | |
|
Mortgage-Backed Securities – Residential | 660,080 |
| | 2,749 |
| | (8,863 | ) | | 653,966 |
| | 686,906 |
| | 1,846 |
| | (15,391 | ) | | 673,361 |
|
Other Government-Sponsored Enterprises | 10,000 |
| | 6 |
| | — |
| | 10,006 |
| | 10,000 |
| | 12 |
| | — |
| | 10,012 |
|
Obligations of States and Political Subdivisions | 28,010 |
| | 204 |
| | — |
| | 28,214 |
| | 27,592 |
| | 126 |
| | (6 | ) | | 27,712 |
|
Corporate Securities | 22,903 |
| | 665 |
| | (19 | ) | | 23,549 |
| | 20,912 |
| | 321 |
| | (221 | ) | | 21,012 |
|
Total Securities Available for Sale | $ | 898,877 |
| | $ | 4,620 |
| | $ | (10,396 | ) | | $ | 893,101 |
| | $ | 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
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated fair value of debt securities available for sale at March 31, 2019,2020, by contractual maturity, are shown below.
| | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (dollars in thousands) | | (dollars in thousands) | |
Due within 1 year | $ | — |
| | $ | — |
| Due within 1 year | $ | 5,597 | | | $ | 5,601 | |
Due after 1 but within 5 years | 27,333 |
| | 27,588 |
| Due after 1 but within 5 years | 23,248 | | | 23,536 | |
Due after 5 but within 10 years | 33,580 |
| | 34,181 |
| Due after 5 but within 10 years | 4,970 | | | 5,392 | |
Due after 10 years | — |
| | — |
| Due after 10 years | — | | | — | |
| 60,913 |
| | 61,769 |
| | 33,815 | | | 34,529 | |
Mortgage-Backed Securities (a) | 837,964 |
| | 831,332 |
| Mortgage-Backed Securities (a) | 913,530 | | | 938,097 | |
Total Debt Securities | $ | 898,877 |
| | $ | 893,101 |
| Total Debt Securities | $ | 947,345 | | | $ | 972,626 | |
| |
(a) | Mortgage-Backed Securities include an amortized cost of $177.9 million and a fair value of $177.4 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $660.1 million and a fair value of $654.0 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
|
(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $243.3 million and a fair value of $248.9 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $670.3 million and a fair value of $689.2 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:
| | | | | | | | | | | |
| 2020 | | 2019 |
| (dollars in thousands) | | |
Proceeds from sales | $ | — | | | $ | — | |
Gross gains (losses) realized: | | | |
Sales transactions: | | | |
Gross gains | $ | — | | | $ | — | |
Gross losses | — | | | — | |
| — | | | — | |
Maturities | | | |
Gross gains | 19 | | | — | |
Gross losses | — | | | — | |
| | | |
| 19 | | | — | |
Net gains and impairment | $ | 19 | | | $ | — | |
|
| | | | | | | |
| 2019 | | 2018 |
| (dollars in thousands) |
Proceeds from sales | $ | — |
| | $ | — |
|
Gross gains (losses) realized: | | | |
Sales Transactions: | | | |
Gross gains | $ | — |
| | $ | — |
|
Gross losses | — |
| | — |
|
| — |
| | — |
|
Maturities and impairment | | | |
Gross gains | — |
| | 2,840 |
|
Gross losses | — |
| | — |
|
| — |
| | 2,840 |
|
Net gains and impairment | $ | — |
| | $ | 2,840 |
|
Gross gains of $2.8 million were recognized in 2018 as a result of a successful auction call on PreSTL XIV, one of our pooled trust preferred securities. There were no gains or losses recognized in 2019.
Securities available for sale with an estimated fair value of $625.2$713.0 million and $636.3$584.8 million were pledged as of March 31, 20192020 and December 31, 2018,2019, respectively, to secure public deposits and for other purposes required or permitted by law.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED 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, 2019 | | December 31, 2018 | | March 31, 2020 | | | December 31, 2019 | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | 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) | | (dollars in thousands) | |
Obligations of U.S. Government Agencies: | | | | | | | | | | | | | | | | Obligations of U.S. Government Agencies: | |
Mortgage-Backed Securities – Residential | $ | 3,606 |
| | $ | — |
| | $ | (26 | ) | | $ | 3,580 |
| | $ | 3,635 |
| | $ | — |
| | $ | (97 | ) | | $ | 3,538 |
| Mortgage-Backed Securities – Residential | $ | 3,298 | | | $ | 164 | | | $ | — | | | $ | 3,462 | | | $ | 3,392 | | | $ | 57 | | | $ | — | | | $ | 3,449 | |
Mortgage-Backed Securities- Commercial | 54,898 |
| | — |
| | (1,763 | ) | | 53,135 |
| | 55,221 |
| | — |
| | (2,327 | ) | | 52,894 |
| Mortgage-Backed Securities- Commercial | 48,554 | | | 512 | | | — | | | 49,066 | | | 51,291 | | | 18 | | | (184) | | | 51,125 | |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | | | | | | | | | | Obligations of U.S. Government-Sponsored Enterprises: | |
Mortgage-Backed Securities – Residential | 270,807 |
| | 352 |
| | (3,303 | ) | | 267,856 |
| | 279,109 |
| | 212 |
| | (7,254 | ) | | 272,067 |
| Mortgage-Backed Securities – Residential | 216,547 | | | 7,712 | | | — | | | 224,259 | | | 229,667 | | | 1,377 | | | (294) | | | 230,750 | |
Mortgage-Backed Securities – Commercial | 12,894 |
| | — |
| | (95 | ) | | 12,799 |
| | 13,159 |
| | — |
| | (258 | ) | | 12,901 |
| Mortgage-Backed Securities – Commercial | 11,793 | | | 417 | | | — | | | 12,210 | | | 12,081 | | | 67 | | | — | | | 12,148 | |
| Obligations of States and Political Subdivisions | 42,304 |
| | 400 |
| | (31 | ) | | 42,673 |
| | 42,331 |
| | 175 |
| | (313 | ) | | 42,193 |
| Obligations of States and Political Subdivisions | 37,464 | | | 531 | | | — | | | 37,995 | | | 40,092 | | | 554 | | | — | | | 40,646 | |
Debt Securities Issued by Foreign Governments | 400 |
| | — |
| | — |
| | 400 |
| | 400 |
| | — |
| | — |
| | 400 |
| Debt Securities Issued by Foreign Governments | 600 | | | — | | | — | | | 600 | | | 600 | | | — | | | — | | | 600 | |
| Total Securities Held to Maturity | $ | 384,909 |
| | $ | 752 |
| | $ | (5,218 | ) | | $ | 380,443 |
| | $ | 393,855 |
| | $ | 387 |
| | $ | (10,249 | ) | | $ | 383,993 |
| Total Securities Held to Maturity | $ | 318,256 | | | $ | 9,336 | | | $ | — | | | $ | 327,592 | | | $ | 337,123 | | | $ | 2,073 | | | $ | (478) | | | $ | 338,718 | |
The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2019,2020, 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 | $ | 1,019 | | | $ | 1,023 | |
Due after 1 but within 5 years | 10,428 | | | 10,533 | |
Due after 5 but within 10 years | 26,617 | | | 27,039 | |
Due after 10 years | — | | | — | |
| 38,064 | | | 38,595 | |
Mortgage-Backed Securities (a) | 280,192 | | | 288,997 | |
Total Debt Securities | $ | 318,256 | | | $ | 327,592 | |
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (dollars in thousands) |
Due within 1 year | $ | 518 |
| | $ | 518 |
|
Due after 1 but within 5 years | 7,922 |
| | 7,965 |
|
Due after 5 but within 10 years | 34,264 |
| | 34,590 |
|
Due after 10 years | — |
| | — |
|
| 42,704 |
| | 43,073 |
|
Mortgage-Backed Securities (a) | 342,205 |
| | 337,370 |
|
Total Debt Securities | $ | 384,909 |
| | $ | 380,443 |
|
(a)Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Mortgage-Backed Securities include an amortized cost of $51.9 million and a fair value of $52.5 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $228.3 million and a fair value of $236.5 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac. | |
(a) | Mortgage-Backed Securities include an amortized cost of $58.5 million and a fair value of $56.7 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $283.7 million and a fair value of $280.7 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 $324.7$290.5 million and $250.3$306.8 million were pledged as of March 31, 20192020 and December 31, 2018,2019, respectively, to secure public deposits and for other purposes required or permitted by law.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED 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 endedMarch 31, 20192020 and 2018, no2019, 0 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 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 March 31, 20192020 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 | $ | — |
| | $ | — |
| | $ | 7,336 |
| | $ | (50 | ) | | $ | 7,336 |
| | $ | (50 | ) |
Mortgage-Backed Securities – Commercial | 48,274 |
| | (28 | ) | | 124,003 |
| | (3,225 | ) | | 172,277 |
| | (3,253 | ) |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | | | | | |
Mortgage-Backed Securities – Residential | 4 |
| | — |
| | 710,446 |
| | (12,166 | ) | | 710,450 |
| | (12,166 | ) |
Mortgage-Backed Securities – Commercial | — |
| | — |
| | 12,799 |
| | (95 | ) | | 12,799 |
| | (95 | ) |
Obligations of States and Political Subdivisions | — |
| | — |
| | 5,925 |
| | (31 | ) | | 5,925 |
| | (31 | ) |
Debt Securities Issued by Foreign Governments | 200 |
| | — |
| | — |
| | — |
| | 200 |
| | — |
|
Corporate Securities | — |
| | — |
| | 4,976 |
| | (19 | ) | | 4,976 |
| | (19 | ) |
Total Securities | $ | 48,478 |
| | $ | (28 | ) | | $ | 865,485 |
| | $ | (15,586 | ) | | $ | 913,963 |
| | $ | (15,614 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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-Sponsored Enterprises: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities – Commercial | $ | 25,481 | | | $ | (215) | | | | $ | — | | | $ | — | | | | $ | 25,481 | | | $ | (215) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Securities | $ | 25,481 | | | $ | (215) | | | | $ | — | | | $ | — | | | | $ | 25,481 | | | $ | (215) | |
At March 31, 2019,2020, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 79% and 21%, respectively,100% of total unrealized losses due to changes in market interest rates. At March 31, 2019,2020, there are 98is 1 debt securitiessecurity in an unrealized loss position.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the gross unrealized losses and estimated fair values at December 31, 20182019 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 - Commercial | $ | 54,501 | | | $ | (201) | | | | $ | 16,365 | | | $ | (149) | | | | $ | 70,866 | | | $ | (350) | |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | | | | | | | |
Mortgage-Backed Securities – Residential | 111,969 | | | (436) | | | | 219,015 | | | (2,801) | | | | 330,984 | | | (3,237) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Securities | $ | 166,470 | | | $ | (637) | | | | $ | 235,380 | | | $ | (2,950) | | | | $ | 401,850 | | | $ | (3,587) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | $ | (41 | ) | | $ | 5,028 |
| | $ | (140 | ) | | $ | 7,317 |
| | $ | (181 | ) |
Mortgage-Backed Securities - Commercial | 95,826 |
| | (925 | ) | | 75,959 |
| | (3,505 | ) | | 171,785 |
| | (4,430 | ) |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | | | | | |
Mortgage-Backed Securities – Residential | 156,732 |
| | (1,856 | ) | | 626,003 |
| | (20,789 | ) | | 782,735 |
| | (22,645 | ) |
Mortgage-Backed Securities – Commercial | — |
| | — |
| | 12,901 |
| | (258 | ) | | 12,901 |
| | (258 | ) |
Obligation of States and Political Subdivisions | 8,591 |
| | (85 | ) | | 9,338 |
| | (234 | ) | | 17,929 |
| | (319 | ) |
Corporate Securities | 14,769 |
| | (214 | ) | | 3,993 |
| | (7 | ) | | 18,762 |
| | (221 | ) |
Total Securities | $ | 278,207 |
| | $ | (3,121 | ) | | $ | 733,222 |
| | $ | (24,933 | ) | | $ | 1,011,429 |
| | $ | (28,054 | ) |
As of March 31, 2019,2020, our corporate securities had an amortized cost and an estimated fair value of $22.9$22.9 million and $23.5$23.5 million,, respectively. As of December 31, 2018,2019, our corporate securities had an amortized cost and estimated fair value of $20.9$22.9 million and $21.0$24.0 million, respectively. Corporate securities are comprised of debt forissued by large regional banks. There was one corporate security in an unrealized loss position as of March 31, 2019 and fourwere 0 corporate securities in an unrealized loss position as of March 31, 2020 and 4 corporate securities in an unrealized loss position as of December 31, 2018.2019. 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.
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 Three Months Ended March 31, |
| 2019 | | 2018 |
| (dollars in thousands) |
Balance, beginning (a) | $ | — |
| | $ | 12,208 |
|
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 | ) |
Reduction for debt securities sold during the period | — |
| | — |
|
Reduction for debt securities called during the period | — |
| | (2,302 | ) |
Balance, ending | $ | — |
| | $ | 9,759 |
|
14
| |
(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. |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 20192020 and December 31, 2018,2019, our FHLB stock totaled $23.7$17.7 million and $30.5$15.1 million, respectively, and is included in “Other investments” on the unaudited Consolidated Statements of Financial Condition.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2019.2020.
As of both March 31, 20192020 and 2018,December 31, 2019, "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. During the three-months ended March 31, 20192020 and 2018,2019, there were no0 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 8 Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
| Originated | | Acquired | | Total | | Originated | | Acquired | | Total |
| (dollars in thousands) | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 1,242,909 | | | $ | 29,331 | | | $ | 1,272,240 | | | $ | 1,212,026 | | | $ | 29,827 | | | $ | 1,241,853 | |
Real estate construction | 408,234 | | | 5,224 | | | 413,458 | | | 442,777 | | | 6,262 | | | 449,039 | |
Residential real estate | 1,439,306 | | | 251,834 | | | 1,691,140 | | | 1,415,808 | | | 265,554 | | | 1,681,362 | |
Commercial real estate | 2,041,339 | | | 148,759 | | | 2,190,098 | | | 1,958,346 | | | 159,173 | | | 2,117,519 | |
Loans to individuals | 734,608 | | | 12,400 | | | 747,008 | | | 685,416 | | | 13,959 | | | 699,375 | |
Total loans | $ | 5,866,396 | | | $ | 447,548 | | | $ | 6,313,944 | | | $ | 5,714,373 | | | $ | 474,775 | | | $ | 6,189,148 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Originated | | Acquired | | Total | | Originated | | Acquired | | Total |
| (dollars in thousands) |
Commercial, financial, agricultural and other | $ | 1,143,885 |
| | $ | 36,435 |
| | $ | 1,180,320 |
| | $ | 1,100,947 |
| | $ | 37,526 |
| | $ | 1,138,473 |
|
Real estate construction | 383,164 |
| | 6,223 |
| | 389,387 |
| | 353,008 |
| | 5,970 |
| | 358,978 |
|
Residential real estate | 1,325,740 |
| | 239,609 |
| | 1,565,349 |
| | 1,313,645 |
| | 248,760 |
| | 1,562,405 |
|
Commercial real estate | 1,946,482 |
| | 191,894 |
| | 2,138,376 |
| | 1,922,349 |
| | 201,195 |
| | 2,123,544 |
|
Loans to individuals | 593,481 |
| | 4,157 |
| | 597,638 |
| | 585,347 |
| | 5,392 |
| | 590,739 |
|
Total loans | $ | 5,392,752 |
| | $ | 478,318 |
| | $ | 5,871,070 |
| | $ | 5,275,296 |
| | $ | 498,843 |
| | $ | 5,774,139 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables represent our credit risk profile by creditworthiness:
| | | March 31, 2019 | | March 31, 2020 | |
| Commercial, financial, agricultural and other | | Real estate construction | | Residential real estate | | Commercial real estate | | Loans to individuals | | Total | | Commercial, financial, agricultural and other | | Real estate construction | | Residential real estate | | Commercial real estate | | Loans to individuals | | Total |
| (dollars in thousands) | | (dollars in thousands) | |
Originated loans | | | | | | | | | | | | Originated loans | |
Pass | $ | 1,107,013 |
| | $ | 374,201 |
| | $ | 1,315,339 |
| | $ | 1,894,745 |
| | $ | 593,253 |
| | $ | 5,284,551 |
| Pass | $ | 1,183,879 | | | $ | 408,210 | | | $ | 1,431,760 | | | $ | 2,001,296 | | | $ | 734,333 | | | $ | 5,759,478 | |
Non-Pass | | | | | | | | | | | | Non-Pass | |
OAEM | 31,225 |
| | 8,963 |
| | 809 |
| | 32,635 |
| | — |
| | 73,632 |
| OAEM | 21,674 | | | 24 | | | 466 | | | 3,847 | | | 7 | | | 26,018 | |
Substandard | 5,647 |
| | — |
| | 9,592 |
| | 19,102 |
| | 228 |
| | 34,569 |
| Substandard | 37,356 | | | — | | | 7,080 | | | 36,196 | | | 268 | | | 80,900 | |
Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | |
Total Non-Pass | 36,872 |
| | 8,963 |
| | 10,401 |
| | 51,737 |
| | 228 |
| | 108,201 |
| Total Non-Pass | 59,030 | | | 24 | | | 7,546 | | | 40,043 | | | 275 | | | 106,918 | |
Total | $ | 1,143,885 |
| | $ | 383,164 |
| | $ | 1,325,740 |
| | $ | 1,946,482 |
| | $ | 593,481 |
| | $ | 5,392,752 |
| Total | $ | 1,242,909 | | | $ | 408,234 | | | $ | 1,439,306 | | | $ | 2,041,339 | | | $ | 734,608 | | | $ | 5,866,396 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Acquired loans | | | | | | | | | | | | Acquired loans | |
Pass | $ | 30,627 |
| | $ | 5,602 |
| | $ | 236,594 |
| | $ | 189,052 |
| | $ | 4,143 |
| | $ | 466,018 |
| Pass | $ | 27,330 | | | $ | 4,679 | | | $ | 249,022 | | | $ | 143,512 | | | $ | 12,388 | | | $ | 436,931 | |
Non-Pass | | | | | | | | | | | | Non-Pass | |
OAEM | 5,672 |
| | 621 |
| | 725 |
| | 423 |
| | — |
| | 7,441 |
| OAEM | 211 | | | 545 | | | 528 | | | — | | | — | | | 1,284 | |
Substandard | 136 |
| | — |
| | 2,290 |
| | 2,419 |
| | 14 |
| | 4,859 |
| Substandard | 1,790 | | | — | | | 2,284 | | | 5,247 | | | 12 | | | 9,333 | |
Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | |
Total Non-Pass | 5,808 |
| | 621 |
| | 3,015 |
| | 2,842 |
| | 14 |
| | 12,300 |
| Total Non-Pass | 2,001 | | | 545 | | | 2,812 | | | 5,247 | | | 12 | | | 10,617 | |
Total | $ | 36,435 |
| | $ | 6,223 |
| | $ | 239,609 |
| | $ | 191,894 |
| | $ | 4,157 |
| | $ | 478,318 |
| Total | $ | 29,331 | | | $ | 5,224 | | | $ | 251,834 | | | $ | 148,759 | | | $ | 12,400 | | | $ | 447,548 | |
| | | December 31, 2018 | | December 31, 2019 | |
| Commercial, financial, agricultural and other | | Real estate construction | | Residential real estate | | Commercial real estate | | Loans to individuals | | Total | | Commercial, financial, agricultural and other | | Real estate construction | | Residential real estate | | Commercial real estate | | Loans to individuals | | Total |
| (dollars in thousands) | | (dollars in thousands) | |
Originated loans | | | | | | | | | | | | Originated loans | |
Pass | $ | 1,055,394 |
| | $ | 337,367 |
| | $ | 1,302,912 |
| | $ | 1,880,139 |
| | $ | 585,141 |
| | $ | 5,160,953 |
| Pass | $ | 1,171,363 | | | $ | 442,751 | | | $ | 1,406,845 | | | $ | 1,918,690 | | | $ | 685,108 | | | $ | 5,624,757 | |
Non-Pass | | | | | | | | | | | | Non-Pass | |
OAEM | 33,723 |
| | 15,641 |
| | 1,026 |
| | 28,904 |
| | — |
| | 79,294 |
| OAEM | 29,359 | | | 26 | | | 475 | | | 13,533 | | | — | | | 43,393 | |
Substandard | 11,830 |
| | — |
| | 9,707 |
| | 13,306 |
| | 206 |
| | 35,049 |
| Substandard | 11,304 | | | — | | | 8,488 | | | 26,123 | | | 308 | | | 46,223 | |
Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | |
Total Non-Pass | 45,553 |
| | 15,641 |
| | 10,733 |
| | 42,210 |
| | 206 |
| | 114,343 |
| Total Non-Pass | 40,663 | | | 26 | | | 8,963 | | | 39,656 | | | 308 | | | 89,616 | |
Total | $ | 1,100,947 |
| | $ | 353,008 |
| | $ | 1,313,645 |
| | $ | 1,922,349 |
| | $ | 585,347 |
| | $ | 5,275,296 |
| Total | $ | 1,212,026 | | | $ | 442,777 | | | $ | 1,415,808 | | | $ | 1,958,346 | | | $ | 685,416 | | | $ | 5,714,373 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Acquired loans | | | | | | | | | | | | Acquired loans | |
Pass | $ | 31,399 |
| | $ | 5,337 |
| | $ | 245,637 |
| | $ | 198,201 |
| | $ | 5,377 |
| | $ | 485,951 |
| Pass | $ | 27,696 | | | $ | 5,697 | | | $ | 262,630 | | | $ | 153,814 | | | $ | 13,947 | | | $ | 463,784 | |
Non-Pass | | | | | | | | | | | | Non-Pass | |
OAEM | 5,890 |
| | 633 |
| | 736 |
| | 441 |
| | — |
| | 7,700 |
| OAEM | 2,009 | | | 565 | | | 537 | | | 2,072 | | | — | | | 5,183 | |
Substandard | 237 |
| | — |
| | 2,387 |
| | 2,553 |
| | 15 |
| | 5,192 |
| Substandard | 122 | | | — | | | 2,387 | | | 3,287 | | | 12 | | | 5,808 | |
Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | |
Total Non-Pass | 6,127 |
| | 633 |
| | 3,123 |
| | 2,994 |
| | 15 |
| | 12,892 |
| Total Non-Pass | 2,131 | | | 565 | | | 2,924 | | | 5,359 | | | 12 | | | 10,991 | |
Total | $ | 37,526 |
| | $ | 5,970 |
| | $ | 248,760 |
| | $ | 201,195 |
| | $ | 5,392 |
| | $ | 498,843 |
| Total | $ | 29,827 | | | $ | 6,262 | | | $ | 265,554 | | | $ | 159,173 | | | $ | 13,959 | | | $ | 474,775 | |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Portfolio Risks
The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital and liquidity. First Commonwealth devotes substantial resources to 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.
Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of March 31, 2019.2020. 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 March 31, 20192020 and December 31, 2018.2019. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | | | | | |
| 30 - 59 days past due | | 60 - 89 days past due | | 90 days or greater and still accruing | | Nonaccrual | | Total past due and nonaccrual | | Current | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Originated loans | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 417 | | | $ | 71 | | | $ | 28 | | | $ | 7,154 | | | $ | 7,670 | | | $ | 1,235,239 | | | $ | 1,242,909 | |
Real estate construction | — | | | — | | | — | | | — | | | — | | | 408,234 | | | 408,234 | |
Residential real estate | 3,350 | | | 1,036 | | | 506 | | | 6,160 | | | 11,052 | | | 1,428,254 | | | 1,439,306 | |
Commercial real estate | 375 | | | 66 | | | 31 | | | 34,021 | | | 34,493 | | | 2,006,846 | | | 2,041,339 | |
Loans to individuals | 3,145 | | | 885 | | | 720 | | | 267 | | | 5,017 | | | 729,591 | | | 734,608 | |
Total | $ | 7,287 | | | $ | 2,058 | | | $ | 1,285 | | | $ | 47,602 | | | $ | 58,232 | | | $ | 5,808,164 | | | $ | 5,866,396 | |
| | | | | | | | | | | | | |
Acquired loans | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | — | | | $ | — | | | $ | — | | | $ | 74 | | | $ | 74 | | | $ | 29,257 | | | $ | 29,331 | |
Real estate construction | — | | | — | | | — | | | — | | | — | | | 5,224 | | | 5,224 | |
Residential real estate | 513 | | | 313 | | | 66 | | | 1,850 | | | 2,742 | | | 249,092 | | | 251,834 | |
Commercial real estate | 434 | | | — | | | 49 | | | 2,093 | | | 2,576 | | | 146,183 | | | 148,759 | |
Loans to individuals | 73 | | | 5 | | | 27 | | | 12 | | | 117 | | | 12,283 | | | 12,400 | |
Total | $ | 1,020 | | | $ | 318 | | | $ | 142 | | | $ | 4,029 | | | $ | 5,509 | | | $ | 442,039 | | | $ | 447,548 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| 30 - 59 days past due | | 60 - 89 days past due | | 90 days or greater and still accruing | | Nonaccrual | | Total past due and nonaccrual | | Current | | Total |
| (dollars in thousands) |
Originated loans | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 207 |
| | $ | 1,037 |
| | $ | 83 |
| | $ | 4,390 |
| | $ | 5,717 |
| | $ | 1,138,168 |
| | $ | 1,143,885 |
|
Real estate construction | 507 |
| | — |
| | — |
| | — |
| | 507 |
| | 382,657 |
| | 383,164 |
|
Residential real estate | 2,995 |
| | 1,739 |
| | 460 |
| | 6,126 |
| | 11,320 |
| | 1,314,420 |
| | 1,325,740 |
|
Commercial real estate | 1,161 |
| | 122 |
| | — |
| | 8,539 |
| | 9,822 |
| | 1,936,660 |
| | 1,946,482 |
|
Loans to individuals | 2,406 |
| | 481 |
| | 759 |
| | 228 |
| | 3,874 |
| | 589,607 |
| | 593,481 |
|
Total | $ | 7,276 |
| | $ | 3,379 |
| | $ | 1,302 |
| | $ | 19,283 |
| | $ | 31,240 |
| | $ | 5,361,512 |
| | $ | 5,392,752 |
|
| | | | | | | | | | | | | |
Acquired loans | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | — |
| | $ | — |
| | $ | — |
| | $ | 100 |
| | $ | 100 |
| | $ | 36,335 |
| | $ | 36,435 |
|
Real estate construction | — |
| | — |
| | — |
| | — |
| | — |
| | 6,223 |
| �� | 6,223 |
|
Residential real estate | 98 |
| | 35 |
| | 171 |
| | 1,816 |
| | 2,120 |
| | 237,489 |
| | 239,609 |
|
Commercial real estate | 185 |
| | — |
| | — |
| | 947 |
| | 1,132 |
| | 190,762 |
| | 191,894 |
|
Loans to individuals | 22 |
| | 7 |
| | 36 |
| | 14 |
| | 79 |
| | 4,078 |
| | 4,157 |
|
Total | $ | 305 |
| | $ | 42 |
| | $ | 207 |
| | $ | 2,877 |
| | $ | 3,431 |
| | $ | 474,887 |
| | $ | 478,318 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | December 31, 2018 | | December 31, 2019 | |
| 30 - 59 days past due | | 60 - 89 days past due | | 90 days or greater and still accruing | | Nonaccrual | | Total past due and nonaccrual | | Current | | Total | | 30 - 59 days past due | | 60 - 89 days past due | | 90 days or greater and still accruing | | Nonaccrual | | Total past due and nonaccrual | | Current | | Total |
| (dollars in thousands) | | (dollars in thousands) | |
Originated loans | | | | | | | | | | | | | | Originated loans | |
Commercial, financial, agricultural and other | $ | 130 |
| | $ | 247 |
| | $ | 92 |
| | $ | 10,223 |
| | $ | 10,692 |
| | $ | 1,090,255 |
| | $ | 1,100,947 |
| Commercial, financial, agricultural and other | $ | 391 | | | $ | 57 | | | $ | 140 | | | $ | 8,780 | | | $ | 9,368 | | | $ | 1,202,658 | | | $ | 1,212,026 | |
Real estate construction | 212 |
| | — |
| | — |
| | — |
| | 212 |
| | 352,796 |
| | 353,008 |
| Real estate construction | 198 | | | — | | | 9 | | | — | | | 207 | | | 442,570 | | | 442,777 | |
Residential real estate | 3,697 |
| | 710 |
| | 790 |
| | 6,238 |
| | 11,435 |
| | 1,302,210 |
| | 1,313,645 |
| Residential real estate | 3,757 | | | 749 | | | 736 | | | 6,646 | | | 11,888 | | | 1,403,920 | | | 1,415,808 | |
Commercial real estate | 492 |
| | 69 |
| | — |
| | 3,437 |
| | 3,998 |
| | 1,918,351 |
| | 1,922,349 |
| Commercial real estate | 227 | | | 114 | | | — | | | 6,609 | | | 6,950 | | | 1,951,396 | | | 1,958,346 | |
Loans to individuals | 2,362 |
| | 532 |
| | 662 |
| | 207 |
| | 3,763 |
| | 581,584 |
| | 585,347 |
| Loans to individuals | 4,070 | | | 1,020 | | | 931 | | | 307 | | | 6,328 | | | 679,088 | | | 685,416 | |
Total | $ | 6,893 |
| | $ | 1,558 |
| | $ | 1,544 |
| | $ | 20,105 |
| | $ | 30,100 |
| | $ | 5,245,196 |
| | $ | 5,275,296 |
| Total | $ | 8,643 | | | $ | 1,940 | | | $ | 1,816 | | | $ | 22,342 | | | $ | 34,741 | | | $ | 5,679,632 | | | $ | 5,714,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquired loans | | | | | | | | | | | | | | Acquired loans | |
Commercial, financial, agricultural and other | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 204 |
| | $ | 205 |
| | $ | 37,321 |
| | $ | 37,526 |
| Commercial, financial, agricultural and other | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 74 | | | $ | 76 | | | $ | 29,751 | | | $ | 29,827 | |
Real estate construction | — |
| | — |
| | — |
| | — |
| | — |
| | 5,970 |
| | 5,970 |
| Real estate construction | — | | | — | | | — | | | — | | | — | | | 6,262 | | | 6,262 | |
Residential real estate | 226 |
| | 24 |
| | 27 |
| | 1,904 |
| | 2,181 |
| | 246,579 |
| | 248,760 |
| Residential real estate | 304 | | | 207 | | | 221 | | | 1,949 | | | 2,681 | | | 262,873 | | | 265,554 | |
Commercial real estate | — |
| | — |
| | — |
| | 1,042 |
| | 1,042 |
| | 200,153 |
| | 201,195 |
| Commercial real estate | — | | | 107 | | | — | | | 298 | | | 405 | | | 158,768 | | | 159,173 | |
Loans to individuals | 46 |
| | 12 |
| | 11 |
| | 15 |
| | 84 |
| | 5,308 |
| | 5,392 |
| Loans to individuals | 87 | | | 89 | | | 35 | | | 12 | | | 223 | | | 13,736 | | | 13,959 | |
Total | $ | 273 |
| | $ | 36 |
| | $ | 38 |
| | $ | 3,165 |
| | $ | 3,512 |
| | $ | 495,331 |
| | $ | 498,843 |
| Total | $ | 392 | | | $ | 403 | | | $ | 257 | | | $ | 2,333 | | | $ | 3,385 | | | $ | 471,390 | | | $ | 474,775 | |
Nonaccrual Loans
The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans, which are placed on 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 becomes 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 for repayment of 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 also considered to be impaired loans.
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.
In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), along with a joint agency statement issued by banking regulators,
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provides that short-term modifications of up to 180 days made in response to COVID-19 do not need to be accounted for as a TDR. As of April 24, 2020, the Company has granted approximately 6,000 deferrals to its customers with aggregate principal balances of $1.1 billion.
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
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
At March 31, 20192020 and December 31, 2018,2019, there were no0 impaired loans held for sale. During the three months ended, March 31, 20192020 and 2018,2019, there were no0 gains or losses recognized on salesthe sale of impaired loans.
The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of March 31, 20192020 and December 31, 2018.2019. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on their period-end allowance position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
| Recorded investment | | Unpaid principal balance | | Related allowance | | Recorded investment | | Unpaid principal balance | | Related allowance |
| (dollars in thousands) | | | | | | | | | | |
Originated loans: | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 958 | | | $ | 1,143 | | | | | | $ | 1,848 | | | $ | 6,997 | | | | |
Real estate construction | — | | | — | | | | | | — | | | — | | | | |
Residential real estate | 9,909 | | | 12,056 | | | | | | 10,372 | | | 12,437 | | | | |
Commercial real estate | 4,447 | | | 4,965 | | | | | | 3,015 | | | 3,210 | | | | |
Loans to individuals | 473 | | | 840 | | | | | | 406 | | | 640 | | | | |
Subtotal | 15,787 | | | 19,004 | | | | | | 15,641 | | | 23,284 | | | | |
With an allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | 7,469 | | | 14,780 | | | $ | 2,727 | | | 8,290 | | | 10,032 | | | $ | 1,580 | |
Real estate construction | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | 255 | | | 358 | | | — | | | 474 | | | 498 | | | 1 | |
Commercial real estate | 31,451 | | | 31,484 | | | 6,868 | | | 5,293 | | | 5,308 | | | 851 | |
Loans to individuals | — | | | — | | | — | | | — | | | — | | | — | |
Subtotal | 39,175 | | | 46,622 | | | 9,595 | | | 14,057 | | | 15,838 | | | 2,432 | |
Total | $ | 54,962 | | | $ | 65,626 | | | $ | 9,595 | | | $ | 29,698 | | | $ | 39,122 | | | $ | 2,432 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Recorded investment | | Unpaid principal balance | | Related allowance | | Recorded investment | | Unpaid principal balance | | Related allowance |
| (dollars in thousands) |
Originated loans: | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 2,599 |
| | $ | 9,100 |
| |
|
| | $ | 8,735 |
| | $ | 16,442 |
| |
|
|
Real estate construction | — |
| | — |
| |
|
| | — |
| | — |
| |
|
|
Residential real estate | 10,545 |
| | 12,264 |
| |
|
| | 10,726 |
| | 12,571 |
| |
|
|
Commercial real estate | 3,752 |
| | 4,042 |
| |
|
| | 3,599 |
| | 3,812 |
| |
|
|
Loans to individuals | 339 |
| | 530 |
| |
|
| | 281 |
| | 408 |
| |
|
|
Subtotal | 17,235 |
| | 25,936 |
| |
|
| | 23,341 |
| | 33,233 |
| |
|
|
With an allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | 3,317 |
| | 3,479 |
| | $ | 1,012 |
| | 3,042 |
| | 3,181 |
| | $ | 797 |
|
Real estate construction | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 713 |
| | 713 |
| | 119 |
| | 486 |
| | 495 |
| | 107 |
|
Commercial real estate | 7,017 |
| | 7,035 |
| | 914 |
| | 1,866 |
| | 1,878 |
| | 596 |
|
Loans to individuals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 11,047 |
| | 11,227 |
| | 2,045 |
| | 5,394 |
| | 5,554 |
| | 1,500 |
|
Total | $ | 28,282 |
| | $ | 37,163 |
| | $ | 2,045 |
| | $ | 28,735 |
| | $ | 38,787 |
| | $ | 1,500 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
| Recorded investment | | Unpaid principal balance | | Related allowance | | Recorded investment | | Unpaid principal balance | | Related allowance |
| (dollars in thousands) | | | | | | | | | | |
Acquired loans | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 74 | | | $ | 74 | | | | | $ | 73 | | | $ | 73 | | | |
Real estate construction | — | | | — | | | | | — | | | — | | | |
Residential real estate | 2,000 | | | 2,468 | | | | | 2,136 | | | 2,585 | | | |
Commercial real estate | 245 | | | 261 | | | | | 298 | | | 320 | | | |
Loans to individuals | 12 | | | 15 | | | | | 12 | | | 15 | | | |
Subtotal | 2,331 | | | 2,818 | | | | | 2,519 | | | 2,993 | | | |
With an allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | — | | | — | | | $ | — | | | — | | | — | | | $ | — | |
Real estate construction | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | — | | | — | | | — | | | — | | | — | | | — | |
Commercial real estate | 1,847 | | | 1,862 | | | 204 | | | — | | | — | | | — | |
Loans to individuals | — | | | — | | | — | | | — | | | — | | | — | |
Subtotal | 1,847 | | | 1,862 | | | 204 | | | — | | | — | | | — | |
Total | $ | 4,178 | | | $ | 4,680 | | | $ | 204 | | | $ | 2,519 | | | $ | 2,993 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | | | | | | | | | | | |
| 2020 | | | | | | | | 2019 | | | | | | |
| Originated Loans | | | | Acquired Loans | | | | Originated Loans | | | | Acquired Loans | | |
| Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
| (dollars in thousands) | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 925 | | | $ | 4 | | | $ | 74 | | | $ | — | | | $ | 2,707 | | | $ | 13 | | | $ | 439 | | | $ | — | |
Real estate construction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | 10,529 | | | 78 | | | 2,090 | | | 2 | | | 10,798 | | | 72 | | | 1,981 | | | 1 | |
Commercial real estate | 4,086 | | | 22 | | | 229 | | | — | | | 3,994 | | | 36 | | | 982 | | | 1 | |
Loans to individuals | 445 | | | 3 | | | 12 | | | — | | | 324 | | | 1 | | | 14 | | | — | |
Subtotal | 15,985 | | | 107 | | | 2,405 | | | 2 | | | 17,823 | | | 122 | | | 3,416 | | | 2 | |
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | 7,838 | | | 18 | | | — | | | — | | | 3,068 | | | 3 | | | — | | | — | |
Real estate construction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | 325 | | | — | | | — | | | — | | | 604 | | | 5 | | | — | | | — | |
Commercial real estate | 13,114 | | | 1 | | | 616 | | | — | | | 3,278 | | | 1 | | | — | | | — | |
Loans to individuals | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Subtotal | 21,277 | | | 19 | | | 616 | | | — | | | 6,950 | | | 9 | | | — | | | — | |
Total | $ | 37,262 | | | $ | 126 | | | $ | 3,021 | | | $ | 2 | | | $ | 24,773 | | | $ | 131 | | | $ | 3,416 | | | $ | 2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Recorded investment | | Unpaid principal balance | | Related allowance | | Recorded investment | | Unpaid principal balance | | Related allowance |
| (dollars in thousands) |
Acquired loans | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 100 |
| | $ | 100 |
| | | | $ | 73 |
| | $ | 73 |
| | |
Real estate construction | — |
| | — |
| | | | — |
| | — |
| | |
Residential real estate | 1,937 |
| | 2,369 |
| | | | 2,031 |
| | 2,604 |
| | |
Commercial real estate | 947 |
| | 1,962 |
| | | | 1,042 |
| | 2,052 |
| | |
Loans to individuals | 14 |
| | 16 |
| | | | 15 |
| | 17 |
| | |
Subtotal | 2,998 |
| | 4,447 |
| | | | 3,161 |
| | 4,746 |
| | |
With an allowance recorded: | | | | | | | | | | | |
Commercial, financial, agricultural and other | — |
| | — |
| | $ | — |
| | 131 |
| | 131 |
| | $ | 131 |
|
Real estate construction | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to individuals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | — |
| | — |
| | — |
| | 131 |
| | 131 |
| | 131 |
|
Total | $ | 2,998 |
| | $ | 4,447 |
| | $ | — |
| | $ | 3,292 |
| | $ | 4,877 |
| | $ | 131 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| Originated Loans | | Acquired Loans | | Originated Loans | | Acquired Loans |
| Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
| (dollars in thousands) |
With no related allowance recorded: | | | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | $ | 2,707 |
| | $ | 13 |
| | $ | 439 |
| | $ | — |
| | $ | 8,130 |
| | $ | 10 |
| | $ | 411 |
| | $ | — |
|
Real estate construction | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 10,798 |
| | 72 |
| | 1,981 |
| | 1 |
| | 10,401 |
| | 63 |
| | 678 |
| | 1 |
|
Commercial real estate | 3,994 |
| | 36 |
| | 982 |
| | 1 |
| | 5,510 |
| | 31 |
| | 907 |
| | — |
|
Loans to individuals | 324 |
| | 1 |
| | 14 |
| | — |
| | 354 |
| | 2 |
| | 17 |
| | — |
|
Subtotal | 17,823 |
| | 122 |
| | 3,416 |
| | 2 |
| | 24,395 |
| | 106 |
| | 2,013 |
| | 1 |
|
With an allowance recorded: | | | | | | | | | | | | | | | |
Commercial, financial, agricultural and other | 3,068 |
| | 3 |
| | — |
| | — |
| | 17,720 |
| | 66 |
| | — |
| | — |
|
Real estate construction | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 604 |
| | 5 |
| | — |
| | — |
| | 706 |
| | — |
| | 93 |
| | — |
|
Commercial real estate | 3,278 |
| | 1 |
| | — |
| | — |
| | 1,960 |
| | 1 |
| | 118 |
| | — |
|
Loans to individuals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Subtotal | 6,950 |
| | 9 |
| | — |
| | — |
| | 20,386 |
| | 67 |
| | 211 |
| | — |
|
Total | $ | 24,773 |
| | $ | 131 |
| | $ | 3,416 |
| | $ | 2 |
| | $ | 44,781 |
| | $ | 173 |
| | $ | 2,224 |
| | $ | 1 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unfunded commitments related to nonperforming loans were $0.1$3.7 million at March 31, 20192020 and $1.6$1.7 million at December 31, 2018.2019. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $23
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
thousand and $12 thousand was established for these off balance sheet exposures at both March 31, 20192020 and December 31, 2018.2019, respectively.
The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:
| | | March 31, 2019 | | December 31, 2018 | | March 31, 2020 | | December 31, 2019 |
| (dollars in thousands) | | (dollars in thousands) | |
Troubled debt restructured loans | | | | Troubled debt restructured loans | |
Accrual status | $ | 9,120 |
| | $ | 8,757 |
| Accrual status | $ | 7,509 | | | $ | 7,542 | |
Nonaccrual status | 5,874 |
| | 11,761 |
| Nonaccrual status | 5,522 | | | 6,037 | |
Total | $ | 14,994 |
| | $ | 20,518 |
| Total | $ | 13,031 | | | $ | 13,579 | |
Commitments | | | | Commitments | | | |
Letters of credit | $ | 60 |
| | $ | 60 |
| Letters of credit | $ | 60 | | | $ | 60 | |
Unused lines of credit | 263 |
| | 1,027 |
| Unused lines of credit | 213 | | | 163 | |
Total | $ | 323 |
| | $ | 1,087 |
| Total | $ | 273 | | | $ | 223 | |
The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2020 | | | | | | | | | | | | |
| | | Type of Modification | | | | | | | | | | |
| 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 | 2 | | | — | | | — | | | 118 | | | 118 | | | 117 | | | — | |
Commercial real estate | 2 | | | — | | | — | | | 12 | | | 12 | | | 12 | | | — | |
Loans to individuals | 8 | | | — | | | 18 | | | 129 | | | 147 | | | 144 | | | — | |
Total | 12 | | | $ | — | | | $ | 18 | | | $ | 259 | | | $ | 277 | | | $ | 273 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2019 | | | | | | | | | | | | |
| | | Type of Modification | | | | | | | | | | |
| 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 | 1 | | | $ | — | | | $ | — | | | $ | 61 | | | $ | 61 | | | $ | 62 | | | $ | — | |
| | | | | | | | | | | | | |
Residential real estate | 6 | | | 17 | | | 49 | | | 514 | | | 580 | | | 570 | | | 40 | |
Commercial real estate | 2 | | | — | | | 556 | | | 242 | | | 798 | | | 767 | | | — | |
Loans to individuals | 3 | | | — | | | — | | | 48 | | | 48 | | | 46 | | | — | |
Total | 12 | | | $ | 17 | | | $ | 605 | | | $ | 865 | | | $ | 1,487 | | | $ | 1,445 | | | $ | 40 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2018 |
| | | Type of Modification | | | | | | |
| 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 | 2 |
| | $ | 4,709 |
| | $ | — |
| | $ | 162 |
| | $ | 4,871 |
| | $ | 3,942 |
| | $ | 531 |
|
Residential real estate | 11 |
| | 20 |
| | 75 |
| | 346 |
| | 441 |
| | 404 |
| | 17 |
|
Commercial real estate | 1 |
| | 3,017 |
| | — |
| | — |
| | 3,017 |
| | 2,994 |
| | 227 |
|
Loans to individuals | 4 |
| | — |
| | 28 |
| | 30 |
| | 58 |
| | 53 |
| | — |
|
Total | 18 |
| | $ | 7,746 |
| | $ | 103 |
| | $ | 538 |
| | $ | 8,387 |
| | $ | 7,393 |
| | $ | 775 |
|
The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as
a re-amortization of the principal and an extension of the maturity. For the three months ended March 31, 2020 and 2019, $18 thousand and $0.6 million, respectively, of total rate modifications represent loans with modifications to the rate as well as
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a re-amortization of the principal and an extension of the maturity. For the three months ended March 31, 2019 and 2018, $0.6 million and $0.1 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 20192020 and 20182019 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.
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 three months ended March 31: | | | 2019 | | 2018 | | 2020 | | | 2019 | |
| Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| (dollars in thousands) | | (dollars in thousands) | |
Commercial, financial, agricultural and other | — |
| | $ | — |
| | 1 |
| | $ | 940 |
| |
| Residential real estate | | Residential real estate | 1 | | | $ | 71 | | | — | | | $ | — | |
| Loans to individuals | 1 |
| | 10 |
| | — |
| | — |
| Loans to individuals | — | | | — | | | 1 | | | 10 | |
Total | 1 |
| | $ | 10 |
| | 1 |
| | $ | 940 |
| Total | 1 | | | $ | 71 | | | 1 | | | $ | 10 | |
The following tables provide detail related to the allowance for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2020 | | | | | | | | | | | | |
| 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 | $ | 20,221 | | | $ | 2,558 | | | $ | 4,091 | | | $ | 19,731 | | | $ | 4,984 | | | | | $ | 51,585 | |
Charge-offs | (486) | | | — | | | (552) | | | (265) | | | (2,483) | | | | | (3,786) | |
Recoveries | 68 | | | — | | | 62 | | | 44 | | | 212 | | | | | 386 | |
Provision (credit) | 7,575 | | | 294 | | | 4,123 | | | 11,755 | | | 5,555 | | | | | 29,302 | |
Ending balance | 27,378 | | | 2,852 | | | 7,724 | | | 31,265 | | | 8,268 | | | | | 77,487 | |
Acquired loans: | | | | | | | | | | | | | |
Beginning balance | 13 | | | — | | | 2 | | | 37 | | | — | | | | | 52 | |
Charge-offs | — | | | — | | | (25) | | | (1) | | | (136) | | | | | (162) | |
Recoveries | 13 | | | — | | | 13 | | | — | | | 7 | | | | | 33 | |
Provision (credit) | 324 | | | — | | | 10 | | | 1,202 | | | 129 | | | | | 1,665 | |
Ending balance | 350 | | | — | | | — | | | 1,238 | | | — | | | | | 1,588 | |
Total ending balance | $ | 27,728 | | | $ | 2,852 | | | $ | 7,724 | | | $ | 32,503 | | | $ | 8,268 | | | | | $ | 79,075 | |
Ending balance: individually evaluated for impairment | $ | 2,727 | | | $ | — | | | $ | — | | | $ | 7,072 | | | $ | — | | | | | $ | 9,799 | |
Ending balance: collectively evaluated for impairment | 25,001 | | | 2,852 | | | 7,724 | | | 25,431 | | | 8,268 | | | | | 69,276 | |
Loans: | | | | | | | | | | | | | |
Ending balance | 1,272,240 | | | 413,458 | | | 1,691,140 | | | 2,190,098 | | | 747,008 | | | | | 6,313,944 | |
Ending balance: individually evaluated for impairment | 7,544 | | | — | | | 1,506 | | | 36,513 | | | — | | | | | 45,563 | |
Ending balance: collectively evaluated for impairment | 1,264,696 | | | 413,458 | | | 1,689,634 | | | 2,153,585 | | | 747,008 | | | | | 6,268,381 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2019 |
| 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 | $ | 19,235 |
| | $ | 2,002 |
| | $ | 3,934 |
| | $ | 18,382 |
| | $ | 4,033 |
| | $ | 47,586 |
|
Charge-offs | (483 | ) | | — |
| | (136 | ) | | (299 | ) | | (1,110 | ) | | (2,028 | ) |
Recoveries | 76 |
| | 42 |
| | 81 |
| | 41 |
| | 114 |
| | 354 |
|
Provision (credit) | 987 |
| | 210 |
| | 271 |
| | 1,094 |
| | 1,126 |
| | 3,688 |
|
Ending balance | 19,815 |
| | 2,254 |
| | 4,150 |
| | 19,218 |
| | 4,163 |
| | 49,600 |
|
Acquired loans: | | | | | | | | | | | |
Beginning balance | 139 |
| | — |
| | 35 |
| | 4 |
| | — |
| | 178 |
|
Charge-offs | (526 | ) | | — |
| | (45 | ) | | — |
| | (5 | ) | | (576 | ) |
Recoveries | 11 |
| | — |
| | 24 |
| | — |
| | 9 |
| | 44 |
|
Provision (credit) | 394 |
| | — |
| | 21 |
| | (4 | ) | | (4 | ) | | 407 |
|
Ending balance | 18 |
| | — |
| | 35 |
| | — |
| | — |
| | 53 |
|
Total ending balance | $ | 19,833 |
| | $ | 2,254 |
| | $ | 4,185 |
| | $ | 19,218 |
| | $ | 4,163 |
| | $ | 49,653 |
|
Ending balance: individually evaluated for impairment | $ | 1,012 |
| | $ | — |
| | $ | 119 |
| | $ | 914 |
| | $ | — |
| | $ | 2,045 |
|
Ending balance: collectively evaluated for impairment | 18,821 |
| | 2,254 |
| | 4,066 |
| | 18,304 |
| | 4,163 |
| | 47,608 |
|
Loans: | | | | | | | | | | | |
Ending balance | 1,180,320 |
| | 389,387 |
| | 1,565,349 |
| | 2,138,376 |
| | 597,638 |
| | 5,871,070 |
|
Ending balance: individually evaluated for impairment | 5,627 |
| | — |
| | 3,938 |
| | 11,111 |
| | — |
| | 20,676 |
|
Ending balance: collectively evaluated for impairment | 1,174,693 |
| | 389,387 |
| | 1,561,411 |
| | 2,127,265 |
| | 597,638 |
| | 5,850,394 |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2019 | | | | | | | | | | | | |
| 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 | $ | 19,235 | | | $ | 2,002 | | | $ | 3,934 | | | $ | 18,382 | | | $ | 4,033 | | | | | $ | 47,586 | |
Charge-offs | (483) | | | — | | | (136) | | | (299) | | | (1,110) | | | | | (2,028) | |
Recoveries | 76 | | | 42 | | | 81 | | | 41 | | | 114 | | | | | 354 | |
Provision (credit) | 987 | | | 210 | | | 271 | | | 1,094 | | | 1,126 | | | | | 3,688 | |
Ending balance | 19,815 | | | 2,254 | | | 4,150 | | | 19,218 | | | 4,163 | | | | | 49,600 | |
Acquired loans: | | | | | | | | | | | | | |
Beginning balance | 139 | | | — | | | 35 | | | 4 | | | — | | | | | 178 | |
Charge-offs | (526) | | | — | | | (45) | | | — | | | (5) | | | | | (576) | |
Recoveries | 11 | | — | | — | | | 24 | | | — | | | 9 | | | | | 44 | |
Provision (credit) | 394 | | | — | | | 21 | | | (4) | | | (4) | | | | | 407 | |
Ending balance | 18 | | | — | | | 35 | | | — | | | — | | | | | 53 | |
Total ending balance | $ | 19,833 | | | $ | 2,254 | | | $ | 4,185 | | | $ | 19,218 | | | $ | 4,163 | | | | | $ | 49,653 | |
Ending balance: individually evaluated for impairment | $ | 1,012 | | | $ | — | | | $ | 119 | | | $ | 914 | | | $ | — | | | | | $ | 2,045 | |
Ending balance: collectively evaluated for impairment | 18,821 | | | 2,254 | | | 4,066 | | | 18,304 | | | 4,163 | | | | | 47,608 | |
Loans: | | | | | | | | | | | | | |
Ending balance | 1,180,320 | | | 389,387 | | | 1,565,349 | | | 2,138,376 | | | 597,638 | | | | | 5,871,070 | |
Ending balance: individually evaluated for impairment | 5,627 | | | — | | | 3,938 | | | 11,111 | | | — | | | | | 20,676 | |
Ending balance: collectively evaluated for impairment | 1,174,693 | | | 389,387 | | | 1,561,411 | | | 2,127,265 | | | 597,638 | | | | | 5,850,394 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2018 |
| 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 | $ | 23,418 |
| | $ | 1,349 |
| | $ | 2,753 |
| | $ | 17,328 |
| | $ | 3,404 |
| | $ | 48,252 |
|
Charge-offs | (290 | ) | | — |
| | (455 | ) | | (168 | ) | | (1,169 | ) | | (2,082 | ) |
Recoveries | 256 |
| | 1 |
| | 75 |
| | 69 |
| | 195 |
| | 596 |
|
Provision (credit) | 4,148 |
| | (236 | ) | | 768 |
| | 1,265 |
| | 986 |
| | 6,931 |
|
Ending balance | 27,532 |
| | 1,114 |
| | 3,141 |
| | 18,494 |
| | 3,416 |
| | 53,697 |
|
Acquired loans: | | | | | | | | | | | |
Beginning balance | 11 |
| | — |
| | 6 |
| | 29 |
| | — |
| | 46 |
|
Charge-offs | — |
| | — |
| | (16 | ) | | — |
| | (4 | ) | | (20 | ) |
Recoveries | 7 |
|
| 6 |
| | 17 |
| | — |
| | 7 |
| | 37 |
|
Provision (credit) | 2 |
| | (6 | ) | | 6 |
| | (27 | ) | | (3 | ) | | (28 | ) |
Ending balance | 20 |
| | — |
| | 13 |
| | 2 |
| | — |
| | 35 |
|
Total ending balance | $ | 27,552 |
| | $ | 1,114 |
| | $ | 3,154 |
| | $ | 18,496 |
| | $ | 3,416 |
| | $ | 53,732 |
|
Ending balance: individually evaluated for impairment | $ | 9,045 |
| | $ | — |
| | $ | 287 |
| | $ | 2,141 |
| | $ | — |
| | $ | 11,473 |
|
Ending balance: collectively evaluated for impairment | 18,507 |
| | 1,114 |
| | 2,867 |
| | 16,355 |
| | 3,416 |
| | 42,259 |
|
Loans: | | | | | | | | | | | |
Ending balance | 1,131,594 |
| | 246,961 |
| | 1,434,623 |
| | 2,027,072 |
| | 541,055 |
| | 5,381,305 |
|
Ending balance: individually evaluated for impairment | 33,278 |
| | — |
| | 6,853 |
| | 10,360 |
| | — |
| | 50,491 |
|
Ending balance: collectively evaluated for impairment | 1,098,316 |
| | 246,961 |
| | 1,427,770 |
| | 2,016,712 |
| | 541,055 |
| | 5,330,814 |
|
Note 9 Leases
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.
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 assetright of-use ("ROU") assets of $38.5 million and a lease liability of $41.8 million on January 1, 2019.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents the unaudited Consolidated Statements of Condition classification of the Company’s ROU assets and lease liabilities, lease costs and other lease information as of and for the three months ended March 31, 2019 (dollars in thousands).information.
| | | | | | | | March 31, 2020 | December 31, 2019 |
Balance sheet: | | | Balance sheet: | | | |
Operating lease asset classified as premises and equipment | | $ | 47,566 |
| Operating lease asset classified as premises and equipment | | | $ | 47,777 | | $ | 48,642 | |
Operating lease liability classified as other liabilities | | 51,371 |
| Operating lease liability classified as other liabilities | | | 52,086 | | 52,894 | |
| | | | For the Three Months Ended | |
| | | | March 31, 2020 | March 31, 2019 |
Income statement: | | | Income statement: | | | |
Operating lease cost classified as occupancy and equipment expense | | $ | 1,337 |
| Operating lease cost classified as occupancy and equipment expense | | | $ | 1,368 | | $ | 1,337 | |
| Weighted average lease term, in years | | 16.28 |
| Weighted average lease term, in years | | | 15.11 | 16.28 |
Weighted average discount rate | | 3.49 | % | Weighted average discount rate | | | 3.42 | % | 3.49 | % |
Operating cash flows | | $ | 1,119 |
| Operating cash flows | | | $ | 1,312 | | $ | 1,119 | |
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.
Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 20192020 were as follows (dollars in thousands):
| | | | | | | | |
For the twelve months ended: | | |
March 31, 2021 | | $ | 5,177 | |
March 31, 2022 | | 5,064 | |
March 31, 2023 | | 4,960 | |
March 31, 2024 | | 4,901 | |
March 31, 2025 | | 4,771 | |
Thereafter | | 43,204 | |
Total future minimum lease payments | | 68,077 | |
Less remaining imputed interest | | 15,991 | |
Operating lease liability | | $ | 52,086 | |
|
| | | | |
For the twelve months ended: | | |
March 31, 2020 | | $ | 4,499 |
|
March 31, 2021 | | 4,517 |
|
March 31, 2022 | | 4,480 |
|
March 31, 2023 | | 4,413 |
|
March 31, 2024 | | 4,370 |
|
Thereafter | | 46,528 |
|
Total future minimum lease payments | | 68,807 |
|
Less remaining imputed interest | | 17,436 |
|
Present value of future minimum lease payments | | $ | 51,371 |
|
Note 10 Income Taxes
In accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes”,Taxes,” at March 31, 20192020 and December 31, 2018,2019, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense.
First Commonwealth is subject to routine audits of our tax returns by the Internal Revenue Service (“IRS”) as well as all states in which we conduct business. Generally, tax years prior to the year ended December 31, 20152016 are no longer open to examination by federal and state taxing authorities.
During the first quarter of 2018, First Commonwealth adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". Adoption of this ASU reclassified the stranded other accumulated income of $1.3 million resulting from the tax reform passed in December 2017 from accumulated other comprehensive income to retained earnings. There was no impact to total equity as a result of the adoption of this update.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11 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 unaudited Consolidated Statements of Financial Condition or in the “Other assets” category of the unaudited Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.
FASB ASC Topic 825, “Financial Instruments”,Instruments,” permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.
In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:
•Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
•Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, loans held for sale, interest rate derivatives (including interest rate caps, interest rate collars, interest rate swaps and risk participation agreements), certain other real estate owned and certain impaired loans.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
Management validates the market values provided by the third party service by having another recognized pricing service price 100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.
Other investments recorded in the unaudited Consolidated Statements of Financial Condition are primarily comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 7, “Impairment of Investment Securities.”
Loans held for sale primarily 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 commercial loans for which fair value is determined using an executed trade or market bid obtained from potential buyers.
Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' (loanand/or 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
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 12, “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 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 2019,2020, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.
Interest rate derivatives also include interest rate forwards entered into to hedge residential mortgage loans held for sale and the related interest-rate lock commitments. This includes forward commitments to sell mortgage loans. The fair value of these derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.
In addition, the Company hedges foreign currency risk through the use of foreign exchange forward contracts. The fair value of foreign exchange forward contracts is based on the differential between the contract price and the market-based forward rate.
The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.
•Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.
The estimated fair value of 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 the credit quality of the underlying counterparties (loan customers).
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with ASU No. 2011-42011-4, "Fair Value Measurements (Topic 820)," the following table provides information related to quantitative inputs and assumptions used in March 31, 20192020 Level 3 fair value measurements.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value (dollars in thousands) | | Valuation Technique | | Unobservable Inputs | | Range / (weighted average) |
March 31, 2020 | | | | | | | |
Other Investments | $ | 1,670 | | | CarryingValue | | N/A | | N/A |
Impaired Loans | 758 | (a) | | Gas Reserve Study | | Discount rate | | 10.00% |
| | | | | Gas per MMBTU | | $1.46 - $1.48 (b) |
| | | | | Oil per BBL/d | | $36.00 - $36.00 (b) |
| | | | | | | |
| | | | | | | |
Limited Partnership Investments | 6,223 | | | Par Value | | N/A | | N/A |
December 31, 2019 | | | | | | | |
Other Investments | $ | 1,670 | | | CarryingValue | | N/A | | N/A |
Impaired Loans | 884 | (a) | | Gas Reserve Study | | Discount rate | | 10.00% |
| | | | | Gas per MMBTU | | $2.61 - $3.49 (b) |
| | | | | Oil per BBL/d | | $47.09 - $53.14 (b) |
| 2,239 | | | Discounted Cash Flow | | Discount Rate | | $3.84 - $9.50 |
| | | | | | | |
Limited Partnership Investments | 5,795 | | | Par Value | | N/A | | N/A |
|
| | | | | | | | | |
| Fair Value (dollars in thousands) | | Valuation Technique | | Unobservable Inputs | | Range / (weighted average) |
Other Investments | $ | 1,670 |
| | CarryingValue | | N/A | | N/A |
Impaired Loans | 1,044 | (a) | | Reserve study | | Discount rate | | 10.00% |
| | | | | Gas per MMBTU | | $2.61 - $3.49 (b) |
| | | | | Oil per BBL/d | | $47.09 - $53.14 (b) |
| 3,187 | (a) | | Discounted Cash Flow | | Discount Rate | | 1.9% - 9.5% |
Limited Partnership Investments | 3,200 |
| | 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.
| |
(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 - million British thermal units; BBL/d - barrels per day. |
(b)Unobservable inputs are defined as follows: MMBTU - 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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) | | | | | | |
Obligations of U.S. Government Agencies: | | | | | | | |
Mortgage-Backed Securities - Residential | $ | — | | | $ | 8,116 | | | $ | — | | | $ | 8,116 | |
Mortgage-Backed Securities - Commercial | — | | | 240,757 | | | — | | | 240,757 | |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | |
Mortgage-Backed Securities - Residential | — | | | 689,224 | | | — | | | 689,224 | |
| | | | | | | |
Other Government-Sponsored Enterprises | — | | | 1,004 | | | — | | | 1,004 | |
Obligations of States and Political Subdivisions | — | | | 10,027 | | | — | | | 10,027 | |
Corporate Securities | — | | | 23,498 | | | — | | | 23,498 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total Securities Available for Sale | — | | | 972,626 | | | — | | | 972,626 | |
Other Investments | — | | | 17,745 | | | 1,670 | | | 19,415 | |
Loans Held for Sale | — | | | 25,783 | | | — | | | 25,783 | |
Other Assets(a) | — | | | 57,676 | | | 6,223 | | | 63,899 | |
Total Assets | $ | — | | | $ | 1,073,830 | | | $ | 7,893 | | | $ | 1,081,723 | |
Other Liabilities(a) | $ | — | | | $ | 63,976 | | | $ | — | | | $ | 63,976 | |
Total Liabilities | $ | — | | | $ | 63,976 | | | $ | — | | | $ | 63,976 | |
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Obligations of U.S. Government Agencies: | | | | | | | |
Mortgage-Backed Securities - Residential | $ | — |
| | $ | 9,246 |
| | $ | — |
| | $ | 9,246 |
|
Mortgage-Backed Securities - Commercial | — |
| | 168,120 |
| | — |
| | 168,120 |
|
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | |
Mortgage-Backed Securities - Residential | — |
| | 653,966 |
| | — |
| | 653,966 |
|
Other Government-Sponsored Enterprises | — |
| | 10,006 |
| | — |
| | 10,006 |
|
Obligations of States and Political Subdivisions | — |
| | 28,214 |
| | — |
| | 28,214 |
|
Corporate Securities | — |
| | 23,549 |
| | — |
| | 23,549 |
|
Total Securities Available for Sale | — |
| | 893,101 |
| | — |
| | 893,101 |
|
Other Investments | — |
| | 23,708 |
| | 1,670 |
| | 25,378 |
|
Loans Held for Sale | — |
| | 9,627 |
| | — |
| | 9,627 |
|
Other Assets(a) | — |
| | 7,613 |
| | 3,200 |
| | 10,813 |
|
Total Assets | $ | — |
| | $ | 934,049 |
| | $ | 4,870 |
| | $ | 938,919 |
|
Other Liabilities(a) | $ | — |
| | $ | 7,868 |
| | $ | — |
| | $ | 7,868 |
|
Total Liabilities | $ | — |
| | $ | 7,868 |
| | $ | — |
| | $ | 7,868 |
|
(a)Hedging and non-hedging interest rate derivatives and limited partnership investments | |
(a) | Hedging and non-hedging interest rate derivatives and limited partnership investments |
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Obligations of U.S. Government Agencies: | | | | | | | |
Mortgage-Backed Securities - Residential | $ | — |
| | $ | 9,406 |
| | $ | — |
| | $ | 9,406 |
|
Mortgage-Backed Securities - Commercial | — |
| | 167,744 |
| | — |
| | 167,744 |
|
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | |
Mortgage-Backed Securities - Residential | — |
| | 673,361 |
| | — |
| | 673,361 |
|
Other Government-Sponsored Enterprises | — |
| | 10,012 |
| | — |
| | 10,012 |
|
Obligations of States and Political Subdivisions | — |
| | 27,712 |
| | — |
| | 27,712 |
|
Corporate Securities | — |
| | 21,012 |
| | — |
| | 21,012 |
|
Total Securities Available for Sale | — |
| | 909,247 |
| | — |
| | 909,247 |
|
Other Investments | — |
| | 30,456 |
| | 1,670 |
| | 32,126 |
|
Loans Held for Sale | — |
| | 11,881 |
| | — |
| | 11,881 |
|
Other Assets(a) | — |
| | 1,769 |
| | 2,696 |
| | 4,465 |
|
Total Assets | $ | — |
| | $ | 953,353 |
| | $ | 4,366 |
| | $ | 957,719 |
|
Other Liabilities(a) | $ | — |
| | $ | 2,081 |
| | $ | — |
| | $ | 2,081 |
|
Total Liabilities | $ | — |
| | $ | 2,081 |
| | $ | — |
| | $ | 2,081 |
|
| |
(a) | Hedging and non-hedging interest rate derivatives and limited partnership investments |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) | | | | | | |
Obligations of U.S. Government Agencies: | | | | | | | |
Mortgage-Backed Securities - Residential | $ | — | | | $ | 8,341 | | | $ | — | | | $ | 8,341 | |
Mortgage-Backed Securities - Commercial | — | | | 189,133 | | | — | | | 189,133 | |
Obligations of U.S. Government-Sponsored Enterprises: | | | | | | | |
Mortgage-Backed Securities - Residential | — | | | 661,947 | | | — | | | 661,947 | |
| | | | | | | |
Other Government-Sponsored Enterprises | — | | | 1,000 | | | — | | | 1,000 | |
Obligations of States and Political Subdivisions | — | | | 17,909 | | | — | | | 17,909 | |
Corporate Securities | — | | | 23,962 | | | — | | | 23,962 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total Securities Available for Sale | — | | | 902,292 | | | — | | | 902,292 | |
Other Investments | — | | | 15,091 | | | 1,670 | | | 16,761 | |
Loans Held for Sale | — | | | 15,989 | | | — | | | 15,989 | |
Other Assets(a) | — | | | 21,894 | | | 5,795 | | | 27,689 | |
Total Assets | $ | — | | | $ | 955,266 | | | $ | 7,465 | | | $ | 962,731 | |
Other Liabilities(a) | $ | — | | | $ | 21,469 | | | $ | — | | | $ | 21,469 | |
Total Liabilities | $ | — | | | $ | 21,469 | | | $ | — | | | $ | 21,469 | |
(a)Hedging and non-hedging interest rate derivatives and limited partnership investments
For the three months endedMarch 31,, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
| | | 2019 | | | 2020 | |
| Other Investments | | Other Assets | | Total | | | Other Investments | | | Other Assets | | Total |
| (dollars in thousands) | | | (dollars in thousands) | |
Balance, beginning of period | $ | 1,670 |
| | $ | 2,696 |
| | $ | 4,366 |
| Balance, beginning of period | | $ | 1,670 | | | | $ | 5,795 | | | $ | 7,465 | |
Total gains or losses | | | | | | Total gains or losses | | | | |
Included in earnings | — |
| | — |
| | — |
| Included in earnings | | — | | | | — | | | — | |
Included in other comprehensive income | — |
| | (47 | ) | | (47 | ) | Included in other comprehensive income | | — | | | | — | | | — | |
Purchases, issuances, sales and settlements | | | | | | Purchases, issuances, sales and settlements | | | | |
Purchases | — |
| | 551 |
| | 551 |
| Purchases | | — | | | | 428 | | | 428 | |
Issuances | — |
| | — |
| | — |
| Issuances | | — | | | | — | | | — | |
Sales | — |
| | — |
| | — |
| Sales | | — | | | | — | | | — | |
Settlements | — |
| | — |
| | — |
| Settlements | | — | | | | — | | | — | |
Transfers from Level 3 | — |
| | — |
| | — |
| Transfers from Level 3 | | — | | | | — | | | — | |
Transfers into Level 3 | — |
| | — |
| | — |
| Transfers into Level 3 | | — | | | | — | | | — | |
Balance, end of period | $ | 1,670 |
| | $ | 3,200 |
| | $ | 4,870 |
| Balance, end of period | | $ | 1,670 | | | | $ | 6,223 | | | $ | 7,893 | |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | 2018 | | | 2019 | |
| Pooled Trust Preferred Collateralized Debt Obligations | | Other Investments | | Other Assets | | Total | | | Other Investments | | | Other Assets | | Total |
| (dollars in thousands) | | | (dollars in thousands) | |
Balance, beginning of period | $ | 23,646 |
| | $ | 1,670 |
| | $ | 2,143 |
| | $ | 27,459 |
| Balance, beginning of period | | $ | 1,670 | | | | $ | 2,696 | | | $ | 4,366 | |
Total gains or losses | | | | | | | | Total gains or losses | | | | |
Included in earnings | 2,840 |
| | — |
| | — |
| | 2,840 |
| Included in earnings | | — | | | | — | | | — | |
Included in other comprehensive income | 4,529 |
| | — |
| | — |
| | 4,529 |
| Included in other comprehensive income | | — | | | | (47) | | | (47) | |
Purchases, issuances, sales and settlements | | | | | | | | Purchases, issuances, sales and settlements | | | | |
Purchases | — |
| | — |
| | 149 |
| | 149 |
| Purchases | | — | | | | 551 | | | 551 | |
Issuances | — |
| | — |
| | — |
| | — |
| Issuances | | — | | | | — | | | — | |
Sales | — |
| | — |
| | — |
| | — |
| Sales | | — | | | | — | | | — | |
Settlements | (16,883 | ) | | — |
| | — |
| | (16,883 | ) | Settlements | | — | | | | — | | | — | |
Transfers from Level 3 | — |
| | — |
| | — |
| | — |
| Transfers from Level 3 | | — | | | | — | | | — | |
Transfers into Level 3 | — |
| | — |
| | — |
| | — |
| Transfers into Level 3 | | — | | | | — | | | — | |
Balance, end of period | $ | 14,132 |
| | $ | 1,670 |
| | $ | 2,292 |
| | $ | 18,094 |
| Balance, end of period | | $ | 1,670 | | | | $ | 3,200 | | | $ | 4,870 | |
During the three months endedMarch 31, 20192020 and 2018,2019, there were no0 transfers between fair value Levels 1,, 2 or 3. There were no0 gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at March 31, 20192020 and 2018.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2019.
The tables below present the balances of assets measured at fair value on a nonrecurring basis at:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) | | | | | | |
Impaired loans | $ | — | | | $ | 34,995 | | | $ | 14,346 | | | $ | 49,341 | |
Other real estate owned | — | | | 2,935 | | | — | | | 2,935 | |
Total Assets | $ | — | | | $ | 37,930 | | | $ | 14,346 | | | $ | 52,276 | |
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) |
Impaired loans | $ | — |
| | $ | 14,391 |
| | $ | 14,849 |
| | $ | 29,240 |
|
Other real estate owned | — |
| | 4,300 |
| | — |
| | 4,300 |
|
Total Assets | $ | — |
| | $ | 18,691 |
| | $ | 14,849 |
| | $ | 33,540 |
|
| | | December 31, 2018 | | December 31, 2019 | |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| (dollars in thousands) | | (dollars in thousands) | |
Impaired loans | $ | — |
| | $ | 15,076 |
| | $ | 15,320 |
| | $ | 30,396 |
| Impaired loans | $ | — | | | $ | 12,267 | | | $ | 17,518 | | | $ | 29,785 | |
Other real estate owned | — |
| | 4,035 |
| | — |
| | 4,035 |
| Other real estate owned | — | | | 2,608 | | | — | | | 2,608 | |
Total Assets | $ | — |
| | $ | 19,111 |
| | $ | 15,320 |
| | $ | 34,431 |
| Total Assets | $ | — | | | $ | 14,875 | | | $ | 17,518 | | | $ | 32,393 | |
The following gains(losses)losses were realized on the assets measured on a nonrecurring basis:
| | | | | | | | | | | | | | | | | |
| | | | | For the Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
| | | | (dollars in thousands) | | | |
Impaired loans | | | | | $ | (8,029) | | | $ | (969) | |
Other real estate owned | | | | | (101) | | | (49) | |
Total losses | | | | | $ | (8,130) | | | $ | (1,018) | |
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| (dollars in thousands) |
Impaired loans | $ | (969 | ) | | $ | (7,850 | ) |
Other real estate owned | (49 | ) | | (30 | ) |
Total losses | $ | (1,018 | ) | | $ | (7,880 | ) |
Impaired loans over $100$250 thousand are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. 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$250 thousand and over. For real estate secured loans with balances under $250$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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. OREO has a current carrying value of $4.0$2.7 million as of March 31, 20192020 and consists primarily of residential and 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 cost to sell, as determined by valuation techniques appropriate in the circumstances.
Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 13, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the three months endedMarch 31, 2019.2020.
FASB ASC 825-10, “Transition Related to FSP FAS 107-1”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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities available for sale and held to maturity are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock and other equity investments, is considered a reasonable estimate of fair value.
Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans.
Loans held for sale: The estimated fair value of loans held for sale is based on market bids obtained from potential buyers.
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 fair value for standby letters of credit was $0.3$0.2 million and $0.2$0.1 million at March 31, 20192020 and December 31, 2018,2019, respectively. See Note 5, “Commitments and Contingent Liabilities,” 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 their fair values at the report date. Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities.
Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental borrowing rate for similar type borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.
Subordinated debt, long-term debt and capital lease obligation: The fair value is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements or an announced redemption price.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | |
| | | Fair Value Measurements Using: | | | | | | |
| Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (dollars in thousands) | | | | | | | | |
Financial assets | | | | | | | | | |
Cash and due from banks | $ | 118,413 | | | $ | 118,413 | | | $ | 118,413 | | | $ | — | | | $ | — | |
Interest-bearing deposits | 15,762 | | | 15,762 | | | 15,762 | | | — | | | — | |
Securities available for sale | 972,626 | | | 972,626 | | | — | | | 972,626 | | | — | |
Securities held to maturity | 318,256 | | | 327,592 | | | — | | | 327,592 | | | — | |
Other investments | 19,415 | | | 19,415 | | | — | | | 17,745 | | | 1,670 | |
Loans held for sale | 25,783 | | | 25,783 | | | — | | | 25,783 | | | — | |
Loans | 6,313,944 | | | 6,702,184 | | | — | | | 34,995 | | | 6,667,189 | |
Financial liabilities | | | | | | | | | |
Deposits | 6,923,088 | | | 6,930,139 | | | — | | | 6,930,139 | | | — | |
Short-term borrowings | 146,971 | | | 146,405 | | | — | | | 146,405 | | | — | |
Subordinated debt | 170,490 | | | 156,508 | | | — | | | — | | | 156,508 | |
Long-term debt | 56,755 | | | 58,804 | | | — | | | 58,804 | | | — | |
Capital lease obligation | 6,710 | | | 6,710 | | | — | | | 6,710 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | |
| | | Fair Value Measurements Using: | | | | | | |
| Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (dollars in thousands) | | | | | | | | |
Financial assets | | | | | | | | | |
Cash and due from banks | $ | 102,346 | | | $ | 102,346 | | | $ | 102,346 | | | $ | — | | | $ | — | |
Interest-bearing deposits | 19,510 | | | 19,510 | | | 19,510 | | | — | | | — | |
Securities available for sale | 902,292 | | | 902,292 | | | — | | | 902,292 | | | — | |
Securities held to maturity | 337,123 | | | 338,718 | | | — | | | 338,718 | | | — | |
Other investments | 16,761 | | | 16,761 | | | — | | | 15,091 | | | 1,670 | |
Loans held for sale | 15,989 | | | 15,989 | | | — | | | 15,989 | | | — | |
Loans | 6,189,148 | | | 6,393,872 | | | — | | | 12,267 | | | 6,381,605 | |
Financial liabilities | | | | | | | | | |
Deposits | 6,677,615 | | | 6,677,595 | | | — | | | 6,677,595 | | | — | |
Short-term borrowings | 201,853 | | | 201,151 | | | — | | | 201,151 | | | — | |
Subordinated debt | 170,450 | | | 171,772 | | | — | | | — | | | 171,772 | |
Long-term debt | 56,917 | | | 58,051 | | | — | | | 58,051 | | | — | |
Capital lease obligation | 6,815 | | | 6,815 | | | — | | | 6,815 | | | — | |
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| | | Fair Value Measurements Using: |
| Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (dollars in thousands) |
Financial assets | | | | | | | | | |
Cash and due from banks | $ | 100,724 |
| | $ | 100,724 |
| | $ | 100,724 |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 23,168 |
| | 23,168 |
| | 23,168 |
| | — |
| | — |
|
Securities available for sale | 893,101 |
| | 893,101 |
| | — |
| | 893,101 |
| | — |
|
Securities held to maturity | 384,909 |
| | 380,443 |
| | — |
| | 380,443 |
| | — |
|
Other investments | 25,378 |
| | 25,378 |
| | — |
| | 23,708 |
| | 1,670 |
|
Loans held for sale | 9,627 |
| | 9,627 |
| | — |
| | 9,627 |
| | — |
|
Loans | 5,871,070 |
| | 5,921,319 |
| | — |
| | 14,391 |
| | 5,906,928 |
|
Financial liabilities | | | | | | | | | |
Deposits | 6,130,760 |
| | 6,135,980 |
| | — |
| | 6,135,980 |
| | — |
|
Short-term borrowings | 565,616 |
| | 565,522 |
| | — |
| | 565,522 |
| | — |
|
Subordinated debt | 170,328 |
| | 169,764 |
| | — |
| | — |
| | 169,764 |
|
Long-term debt | 7,395 |
| | 7,701 |
| | — |
| | 7,701 |
| | — |
|
Capital lease obligation | 7,118 |
| | 7,118 |
| | — |
| | 7,118 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| | | Fair Value Measurements Using: |
| Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (dollars in thousands) |
Financial assets | | | | | | | | | |
Cash and due from banks | $ | 95,934 |
| | $ | 95,934 |
| | $ | 95,934 |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 3,013 |
| | 3,013 |
| | 3,013 |
| | — |
| | — |
|
Securities available for sale | 909,247 |
| | 909,247 |
| | — |
| | 909,247 |
| | — |
|
Securities held to maturity | 393,855 |
| | 383,993 |
| | — |
| | 383,993 |
| | — |
|
Other investments | 32,126 |
| | 32,126 |
| | — |
| | 30,456 |
| | 1,670 |
|
Loans held for sale | 11,881 |
| | 11,881 |
| | — |
| | 11,881 |
| | — |
|
Loans | 5,774,139 |
| | 5,821,791 |
| | — |
| | 15,076 |
| | 5,806,715 |
|
Financial liabilities | | | | | | | | | |
Deposits | 5,897,992 |
| | 5,904,147 |
| | — |
| | 5,904,147 |
| | — |
|
Short-term borrowings | 721,823 |
| | 721,532 |
| | — |
| | 721,532 |
| | — |
|
Subordinated debt | 170,288 |
| | 168,067 |
| | — |
| | — |
| | 168,067 |
|
Long-term debt | 7,551 |
| | 7,720 |
| | — |
| | 7,720 |
| | — |
|
Capital lease obligation | 7,217 |
| | 7,217 |
| | — |
| | 7,217 |
| | — |
|
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12 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 3132 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 nine14 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 that was designated as a cash flow hedge. This contract, which had a notional amount of $65.0 million, matured on March 4, 2019. The periodic net settlement of interest rate swaps was recorded as an adjustment to "Interest and fees on loans" in the unaudited Consolidated Statements of Income. For the three months ended March 31, 2019 there was a $0.1 million$7 thousand negative impact on net interest income as a result of these interest rate swaps.
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 unaudited Consolidated Statements of Income. For the three months ended March 31, 2020 there was a $0.1 million positive impact on net interest income 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 unaudited Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at March 31, 2020, and changes in the fair value attributed to hedge ineffectiveness were not material.
The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Other noninterest expense"income" in the unaudited Consolidated Statements of Income. The impact to noninterest income for the three months ended March 31, 20192020 was a decreasean increase of $0.4$0.9 million.
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 March 31, 2019,2020, the underlying funded mortgage loan commitments had a carrying value of $7.2$13.6 million and a fair value of $8.2$15.8 million, while the underlying unfunded mortgage loan commitments had a notional amount of $25.2$41.4 million. At December 31, 2018,2019, the underlying funded mortgage loan commitments had a carrying value of $6.9$9.8 million and a fair value of $7.6$10.7 million, while the underlying unfunded mortgage loan commitments had a notional amount of $9.9$25.5 million. The interest rate lock commitments decreasedincreased other noninterest income by $0.1$0.5 million for the three months ended March 31, 2019.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2020.
In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the unaudited Consolidated Statements of Income. The impact onincrease in other noninterest expense for the three months ended March 31, 20192020 totaled $2$5 thousand. At March 31, 20192020 and December 31, 2018,2019, the underlying loans had a carrying value of $1.8$4.7 million and $1.9$4.8 million, respectively, and a fair value of $1.8$4.6 million and $1.9$4.8 million, respectively.
The following table depicts the credit value adjustmentand fair value adjustments recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks: |
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (dollars in thousands) |
Derivatives not Designated as Hedging Instruments | | | |
Credit value adjustment | $ | (29 | ) | | $ | (3 | ) |
Notional amount: | | | |
Interest rate derivatives | 370,693 |
| | 411,645 |
|
Interest rate caps | 36,028 |
| | 36,111 |
|
Interest rate collars | 35,354 |
| | — |
|
Risk participation agreements | 170,016 |
| | 162,139 |
|
Sold credit protection on risk participation agreements | (46,871 | ) | | (59,315 | ) |
Interest rate options | 25,215 |
| | 9,900 |
|
Derivatives Designated as Hedging Instruments | | | |
Interest rate swaps: | | | |
Fair value adjustment | — |
| | (133 | ) |
Notional amount | — |
| | 65,000 |
|
Interest rate forwards: | | | |
Fair value adjustment | (234 | ) | | (170 | ) |
Notional amount | 30,000 |
| | 15,000 |
|
Foreign exchange forwards: | | | |
Fair value adjustment | 7 |
| | (6 | ) |
Notional amount | 1,797 |
| | 1,927 |
|
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| (dollars in thousands) | | |
Derivatives not Designated as Hedging Instruments | | | |
Credit value adjustment | $ | (2,013) | | | $ | (272) | |
Notional amount: | | | |
Interest rate derivatives | 602,069 | | | 587,275 | |
Interest rate caps | 102,611 | | | 87,188 | |
Interest rate collars | 35,354 | | | 35,354 | |
Risk participation agreements | 165,499 | | | 164,632 | |
Sold credit protection on risk participation agreements | (78,862) | | | (69,011) | |
Interest rate options | 41,423 | | | 25,460 | |
Derivatives Designated as Hedging Instruments | | | |
Interest rate swaps: | | | |
Fair value adjustment | (3,779) | | | 801 | |
Notional amount | 70,000 | | | 70,000 | |
Interest rate forwards: | | | |
Fair value adjustment | (544) | | | (63) | |
Notional amount | 40,000 | | | 30,000 | |
Foreign exchange forwards: | | | |
Fair value adjustment | 37 | | | (41) | |
Notional amount | 4,670 | | | 4,789 | |
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents
the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk
or fair value changes included in "Other
income"income," 'Other expense," "Interest on
subordinated debentures" or "Interest and fees on loans" in the
unaudited Consolidated Statements of Income:
| | | For the Three Months Ended March 31, | | | | For the Three Months Ended March 31, | |
| 2019 | | 2018 | | | | 2020 | | 2019 |
| (dollars in thousands) | | | (dollars in thousands) | |
Non-hedging interest rate derivatives | | | | Non-hedging interest rate derivatives | | |
(Decrease) increase in other income | $ | (470 | ) | | $ | 789 |
| |
Decrease in other income | | Decrease in other income | | | $ | (811) | | | $ | (470) | |
Increase in other expense | | Increase in other expense | | | — | | | — | |
Hedging interest rate derivatives | | | | Hedging interest rate derivatives | | |
Decrease in interest and fees on loans | (118 | ) | | (81 | ) | Decrease in interest and fees on loans | | | — | | | (118) | |
Decrease in interest from subordinated debentures | | Decrease in interest from subordinated debentures | | | (54) | | | — | |
Increase in other expense | 7 |
| | — |
| Increase in other expense | | | — | | | 7 | |
Hedging interest rate forwards | | | | Hedging interest rate forwards | | |
Decrease in other income | (64 | ) | | — |
| |
Decrease in other expense | — |
| | (62 | ) | |
Increase (decrease) in other income | | Increase (decrease) in other income | | | 481 | | | (64) | |
Increase in other expense | | Increase in other expense | | | — | | | — | |
Hedging foreign exchange forwards | | | | Hedging foreign exchange forwards | | |
Increase (decrease) in other expense | 2 |
| | (3 | ) | |
Increase in other expense | | Increase in other expense | | | 5 | | | 2 | |
The fair value of our derivatives is included in a table in Note 11, “Fair Values of Assets and Liabilities,” in the line items
“Other assets” and “Other liabilities.”
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13 Goodwill
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 that goodwill testing is required, an assessment of qualitative factors can be completed before performing the two step goodwill impairment test. ASU No. 2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value ofis less than carrying value, a reporting unit exceeds its carrying amount, then the two step goodwilltriggering event has occurred and a quantitative impairment test is not required.would be performed.
We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as both of March 31, 20192020 and December 31, 20182019 was $274.2$303.3 million. NoNaN impairment charges on goodwill or other intangible assets were incurred in 20192020 or 2018.2019.
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.
As a result of the COVID-19 pandemic and its impact on the Company's stock price as well as the potential impact on future earnings, Management evaluated whether a triggering event had occurred as of March 31, 2019, goodwill2020. The evaluation concluded that it was more likely than not considered impaired; however,that First Commonwealth's fair value exceeded its book value and therefore there was no triggering event. 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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14 Subordinated Debentures
Subordinated debentures outstanding are as follows: | | | | March 31, 2019 | | December 31, 2018 | | | March 31, 2020 | | | December 31, 2019 | |
| Due | Amount | | Rate | | Amount | | Rate | | Due | Amount | | Rate | | Amount | | Rate |
| | (dollars in thousands) | | | (dollars in thousands) | |
Owed to: | | | | | | Owed to: | |
| First Commonwealth Bank | 2028 | $ | 49,152 |
| | 4.875% until June 1, 2023, then LIBOR + 1.845% | | $ | 49,131 |
| | 4.875% until June 1, 2023, then LIBOR + 1.845% | First Commonwealth Bank | 2028 | $ | 49,245 | | | 4.875% until June 1, 2023, then LIBOR + 1.845% | | $ | 49,222 | | | 4.875% until June 1, 2023, then LIBOR + 1.845% |
First Commonwealth Bank | 2033 | $ | 49,009 |
| | 5.50% until June 1, 2028, then LIBOR + 2.37% | | $ | 48,990 |
| | 5.50% until June 1, 2028, then LIBOR + 2.37% | First Commonwealth Bank | 2033 | 49,078 | | | 5.50% until June 1, 2028, then LIBOR + 2.37% | | 49,061 | | | 5.50% until June 1, 2028, then LIBOR + 2.37% |
First Commonwealth Capital Trust II | 2034 | $ | 30,929 |
| | LIBOR + 2.85% | | $ | 30,929 |
| | LIBOR + 2.85% | First Commonwealth Capital Trust II | 2034 | 30,929 | | | LIBOR + 2.85% | | 30,929 | | | LIBOR + 2.85% |
First Commonwealth Capital Trust III | 2034 | 41,238 |
| | LIBOR + 2.85% | | 41,238 |
| | LIBOR + 2.85% | First Commonwealth Capital Trust III | 2034 | 41,238 | | | LIBOR + 2.85% | | 41,238 | | | LIBOR + 2.85% |
Total | | $ | 170,328 |
| | $ | 170,288 |
| | Total | | $ | 170,490 | | | $ | 170,450 | | |
On May 21, 2018, First Commonwealth issued ten-year subordinated notes with an aggregate principal amount of $50.0 million and a fixed-to-floating rate of 4.875%. 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 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.
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
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $0.6 million 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 $0.5 million are being amortized on a straight-line basis over the term of the securities.
Note 15 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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 March 31, 20192020 and December 31, 2018,2019, 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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 $0.3 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 $0.7$0.8 million and $0.4$0.7 million in commission expense as of March 31, 20192020 and 2018,2019, 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 daily as the customer transactions are settled.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606:
| | | | | | | | | | | | | | | | | |
| | | | | For the Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
| | | | (dollars in thousands) | | | |
Noninterest Income | | | | | | | |
In-scope of Topic 606: | | | | | | | |
Trust income | | | | | $ | 2,111 | | | $ | 1,926 | |
Service charges on deposit accounts | | | | | 4,745 | | | 4,245 | |
Insurance and retail brokerage commissions | | | | | 1,995 | | | 1,961 | |
Card-related interchange income | | | | | 5,262 | | | 4,730 | |
Gain on sale of other loans and assets | | | | | 159 | | | 258 | |
Other income | | | | | 944 | | | 862 | |
Noninterest Income (in-scope of Topic 606) | | | | | 15,216 | | | 13,982 | |
Noninterest Income (out-of-scope of Topic 606) | | | | | 4,057 | | | 4,890 | |
Total Noninterest Income | | | | | $ | 19,273 | | | $ | 18,872 | |
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| (dollars in thousands) |
Noninterest Income | | | |
In-scope of Topic 606: | | | |
Trust income | $ | 1,926 |
| | $ | 1,928 |
|
Service charges on deposit accounts | 4,245 |
| | 4,406 |
|
Insurance and retail brokerage commissions | 1,961 |
| | 1,868 |
|
Card-related interchange income | 4,730 |
| | 4,742 |
|
Gain on sale of other loans and assets | 258 |
| | 207 |
|
Other income | 862 |
| | 892 |
|
Noninterest Income (in-scope of Topic 606) | 13,982 |
| | 14,043 |
|
Noninterest Income (out-of-scope of Topic 606) | 4,890 |
| | 8,000 |
|
Total Noninterest Income | $ | 18,872 |
| | $ | 22,043 |
|
Note 16 New Accounting PronouncementsSubsequent Event
In June 2016,On March 27, 2020, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amendsCARES Act was signed into law and authorized the guidanceSmall Business Administration ("SBA") to guarantee loans under the Paycheck Protection Program (“PPP”) 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 requiressmall businesses who meet the usenecessary eligibility requirements. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the modified retrospective transition method by meansPPP. These loans carry a fixed rate of 1.00% and a cumulative-effect adjustment to equity asterm of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the beginningloan. The loans are 100% guaranteed by the SBA and the SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the period in whichloan. From April 3, 2020, the guidance is adopted. The standard is effective fordate the SBA began accepting applications, the Company as of January 1, 2020. We have established a CECL implementation team, which includes membershas secured authorization from the finance and credit areas, with oversightSBA to fund 4,600 PPP loans totaling approximately $600 million.Although the Company believes that the majority of these loans will ultimately be forgiven by the Chief Executive Officer, Chief Financial Officer and Chief Credit Officer. DuringSBA in accordance with the third quarter of 2018, Management completed the implementation of third party software to assist with this ASU. In the fourth quarter of 2018, a third party was engaged to assist with evaluation of data and methodologies related to this standard. Management continued its implementation plan during the first quarter of 2019 with primary emphasis on the evaluation of data and methodologies. Management is currently evaluating the impactterms of the amended guidance on First Commonwealth’s financial condition or results of operations.program, there could be risks and liability to the Company associated with participation in the program that cannot be determined at this time.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill
ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
allocated to the reporting unit. Income tax effects from any tax deductible goodwill should be taken into consideration of the carrying amount of the reporting unit when measuring for goodwill impairment, if applicable. An entity still has the option to perform the qualitative assessment for the reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
In August 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.
Note 17 Subsequent Event
On April 22, 2019, the Company announced that its banking subsidiary, First Commonwealth Bank, has signed a definitive agreement to acquire 14 branches located in State College, Lock Haven, Williamsport and Lewisburg, Pennsylvania, with approximately $525 million of deposits and $120 million of retail and business loans from Santander Bank, N.A. The transaction is subject to regulatory approval and is expected to close in the third quarter of 2019.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three months endedMarch 31, 20192020 and 2018,2019, and should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Forward-Looking Statements
Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, 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” as well. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including uncertainties regarding the impact of the COVID-19 pandemic, and could be affected by many factors, including, but not limited to: (1) local, regional, nationalthe length and internationalextent of the economic conditionscontraction as a result of the COVID-19 pandemic and the impact they may haveof such contraction on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth or its customers must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth’s goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth’s borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth’s ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth’s markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) 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; (19) the reliability of First Commonwealth’s vendors, internal control systems or information systems; (20) 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; and (21) other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K. Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Explanation of Use of Non-GAAP Financial Measure
In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe these non-GAAP financial measures provide information that is useful to investors in understanding our underlying operational performance and our business and performance trends as
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
they facilitate comparison with the performance of others in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the unaudited Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 4543 for the three months ended March 31, 20192020 and 2018,2019, respectively.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Financial Data
The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the unaudited Consolidated Financial Statements and related notes.
| | | | | | | | | | | | | | | | | |
| | | | | For the Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
| | | | (dollars in thousands, except per share data) | | | |
Net Income | | | | | $ | 4,727 | | | $ | 24,589 | |
Per Share Data: | | | | | | | |
Basic Earnings per Share | | | | | | $ | 0.05 | | | $ | 0.25 | |
Diluted Earnings per Share | | | | | | 0.05 | | | 0.25 | |
Cash Dividends Declared per Common Share | | | | | 0.11 | | | 0.10 | |
Average Balance: | | | | | | | |
Total assets | | | | | $ | 8,337,321 | | | $ | 7,878,908 | |
Total equity | | | | | 1,071,318 | | | 986,836 | |
End of Period Balance: | | | | | | | |
Net loans (1) | | | | | $ | 6,260,652 | | | $ | 5,831,044 | |
Total assets | | | | | 8,515,105 | | | 7,972,673 | |
Total deposits | | | | | 6,923,088 | | | 6,130,760 | |
Total equity | | | | | 1,057,924 | | | 998,019 | |
Key Ratios: | | | | | | | |
Return on average assets | | | | | 0.23 | % | | 1.27 | % |
Return on average equity | | | | | 1.77 | % | | 10.11 | % |
Dividends payout ratio | | | | | 220.00 | % | | 40.00 | % |
Average equity to average assets ratio | | | | | 12.85 | % | | 12.53 | % |
Net interest margin | | | | | 3.65 | % | | 3.75 | % |
Net loans to deposits ratio | | | | | 90.43 | % | | 95.11 | % |
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| (dollars in thousands, except per share data) |
Net Income | $ | 24,589 |
| | $ | 23,270 |
|
Per Share Data: | | | |
Basic Earnings per Share | $ | 0.25 |
| | $ | 0.24 |
|
Diluted Earnings per Share | 0.25 |
| | 0.24 |
|
Cash Dividends Declared per Common Share | 0.10 |
| | 0.08 |
|
Average Balance: | | | |
Total assets | $ | 7,878,908 |
| | $ | 7,300,382 |
|
Total equity | 986,836 |
| | 892,618 |
|
End of Period Balance: | | | |
Net loans (1) | $ | 5,831,044 |
| | $ | 5,337,332 |
|
Total assets | 7,972,673 |
| | 7,320,767 |
|
Total deposits | 6,130,760 |
| | 5,703,522 |
|
Total equity | 998,019 |
| | 899,349 |
|
Key Ratios: | | | |
Return on average assets | 1.27 | % | | 1.29 | % |
Return on average equity | 10.11 | % | | 10.57 | % |
Dividends payout ratio | 40.00 | % | | 33.33 | % |
Average equity to average assets ratio | 12.53 | % | | 12.23 | % |
Net interest margin | 3.75 | % | | 3.69 | % |
Net loans to deposits ratio | 95.11 | % | | 93.58 | % |
(1) Includes loans held for sale.
Results of Operations
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019 Compared to Three Months EndedMarch 31, 2018
Net Income
For the three months endedMarch 31, 2019,2020, First Commonwealth had net income of $24.6$4.7 million,, or $0.25$0.05 diluted earnings per share, compared to net income of $23.3$24.6 million,, or $0.24$0.25 diluted earnings per share, in the three months endedMarch 31, 2018. Growth2019. The decline in net income is awas primarily the result of an increase in net interest income as well as a decrease in the$31.0 million provision for credit losses recognized in order to provide for estimated probable losses related to the COVID-19 pandemic. This was partially offset by an increase in noninterest expense and a $4.9 million decrease in noninterest income.the income tax provision due to lower income before income taxes.
For the three months ended March 31, 2019,2020, the Company’s return on average equity was 10.11%1.77% and its return on average assets was 1.27%0.23%, compared to 10.57%10.11% and 1.29%1.27%, respectively, for the three months ended March 31, 2018.2019.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $65.9$68.1 million in the first three months of 2019,2020, compared to $60.2$65.9 million for the same period in 2018.2019. This increase was due to both growth in average interest earninginterest-earning assets of $515.6$383.5 million andoffset by a 4410 basis point increasedecrease in the yieldnet interest margin, on interest earning assets.a fully taxable equivalent basis. Net interest income comprises the majority of our operating revenue (net interest income before provision expense plus noninterest income), at 78%77.8% and 73%77.6% for the three months endedMarch 31, 20192020 and 2018,2019, respectively.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The net interest margin, on a fully taxable equivalent basis, was 3.75%3.65% and 3.69%3.75% for the three months ended March 31, 20192020 and March 31, 2018,2019, respectively. The 6 basis point increasedecline in the net interest margin is attributable to both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The taxable equivalent yield on interest-earning assets was 4.55%4.27% for the three months endedMarch 31, 2019, an increase2020, a decrease of 4428 basis points compared to the 4.11%4.55% yield for the same period in 2018.2019. This increasedecrease is largely due to an increase in the loan portfolio yield, which improveddecreased by 5331 basis points when compared to the three months ended March 31, 2018.2019. Contributing to this increasedecrease was an increase in the yield on our adjustable and variable rate commercial loan portfolio, which increased 69declined 64 basis points largely due to the Federal Reserve increasing short termdecreasing short-term interest ratesrates. During the first quarter of 2020, the Federal Reserve decreased the Federal Funds target rate by 100150 basis points in 2018.addition to the 75 basis point rate decreases made during 2019. Although the impact of the 2020 rate decreases are not fully 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 yield on the investment portfolio increased 10yield decreased 39 basis points in comparison to the prior year. The majority of this increase can be attributed to investment security runoff being replaced with higher yielding investment securities.year primarily due the decrease in the Federal Reserve short-term rates. Investment portfolio purchases during the three months ended March 31, 20192020 have been primarily in corporate securitiesobligations of U.S. government agencies and obligations of other government-sponsored enterprises with durations of approximately five years and municipal securities with a duration of approximately ten4 to 6 years.
The cost of interest-bearing liabilities increaseddecreased to 1.07%0.85% for the three months endedMarch 31, 2019,2020, from 0.56%1.07% for the same period in 2018,2019, primarily due to an increasea decrease in the cost of short-term borrowings and an increase in long term debt as a resultthe cost of the issuance of $100 million of subordinated debt in the second quarter of 2018.interest-bearing deposits. Deposits acquired in our recent acquisitions, along with approximately $50 million of the subordinated debt proceeds and organic growth in consumer checking and savings deposits, contributed to a decline in average short-term borrowings of $57.0$412.8 million for the three months ended March 31, 20192020 compared to the same period in 2018. Higher2019. Lower market interest rates resulted in the cost of interest-bearing deposits increasing 28decreasing 17 basis points and short-term borrowings increasing 89decreasing 110 basis points in comparison to the same period last year. The impact of the subordinated debt on the cost of interest-bearing liabilities was 6 basis points for
For the three months ended March 31, 2019.
For the three months endedMarch 31, 2019,2020, changes in interest rates positivelynegatively impacted net interest income by $2.1$3.9 million when compared with the same period in 2018.2019. The higherlower yield on interest-earning assets negatively impacted net interest income by $5.3 million, while the decrease in the cost of interest-bearing liabilities positively impacted net interest income by $7.9 million, while the increase in the cost of interest-bearing liabilities negatively impacted net interest income by $5.9 million.$1.4 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $3.7$6.1 million in for the three months endedMarch 31, 2019,2020, as compared to the same period in 2018.2019. Higher levels of interest-earning assets resulted in an increase of $5.1$5.0 million in interest income, and changes in the volume of interest-bearing liabilities increaseddecreased interest expense by $1.4$1.1 million,, primarily due to an increasea decrease in long term borrowings as a result of the subordinated debt issued in May 2018.short-term borrowings. Average earning assets for the three months ended March 31, 20192020 increased $515.6$383.5 million, or 7.8%5.4%, compared to the same period in 2018.2019. Average loans for the comparable period increased $397.9$444.2 million, or 7.4%7.6%.
Net interest income also benefited from a $138.5$249.2 million increase in average net free funds at March 31, 20192020 as compared to March 31, 2018.2019. 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 an increase of $64.5$211.6 million, or 4.6%14.4%, in noninterest-bearing demand deposit average balances.balances, of which $86.6 million can be attributed to the Santander branch acquisition completed in the third quarter of 2019. Average time deposits for the three months endedMarch 31, 2019 increased2020 decreased by $232.7$40.0 million at higher costs compared to the comparable period in 2018, increasing interest expense by $2.0 million. Increases2019, while the average rate paid on time deposits increased 8 basis points compared to the comparable period in 2019. Decreases in market interest rates negativelypositively impacted interest expense by $5.9$1.4 million whileand changes in the mix of interest-bearing liabilities had a $1.4$1.1 million negativepositive impact.
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 three months ended March 31:
| | | | | | | | | | | |
| 2020 | | 2019 |
| (dollars in thousands) | | |
Interest income per Consolidated Statements of Income | $ | 79,329 | | | $ | 79,594 | |
Adjustment to fully taxable equivalent basis | 397 | | | 457 | |
Interest income adjusted to fully taxable equivalent basis (non-GAAP) | 79,726 | | | 80,051 | |
Interest expense | 11,605 | | | 14,108 | |
Net interest income adjusted to fully taxable equivalent basis (non-GAAP) | $ | 68,121 | | | $ | 65,943 | |
|
| | | | | | |
| 2019 | 2018 |
| (dollars in thousands) |
Interest income per Consolidated Statements of Income | $ | 79,594 |
| $ | 66,499 |
|
Adjustment to fully taxable equivalent basis | 457 |
| 493 |
|
Interest income adjusted to fully taxable equivalent basis (non-GAAP) | 80,051 |
| 66,992 |
|
Interest expense | 14,108 |
| 6,814 |
|
Net interest income adjusted to fully taxable equivalent basis (non-GAAP) | $ | 65,943 |
| $ | 60,178 |
|
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis for the three months ended March 31:
| | | | | | | | | | | | | | | | | | | | |
| 2020 | | | 2019 | | |
| Average Balance | Income / Expense (a) | Yield or Rate | Average Balance | Income / Expense (a) | Yield or Rate |
| (dollars in thousands) | | | | | |
Assets | | | | | | |
Interest-earning assets: | | | | | | |
Interest-bearing deposits with banks | $ | 7,327 | | $ | 37 | | 2.03 | % | $ | 4,700 | | $ | 54 | | 4.66 | % |
Tax-free investment securities | 51,729 | | 399 | | 3.10 | | 68,226 | | 529 | | 3.14 | |
Taxable investment securities | 1,196,643 | | 7,237 | | 2.43 | | 1,243,519 | | 8,701 | | 2.84 | |
Loans, net of unearned income (b)(c)(e) | 6,255,825 | | 72,053 | | 4.63 | | 5,811,587 | | 70,767 | | 4.94 | |
Total interest-earning assets | 7,511,524 | | 79,726 | | 4.27 | | 7,128,032 | | 80,051 | | 4.55 | |
Noninterest-earning assets: | | | | | | |
Cash | 100,034 | | | | 93,120 | | | |
Allowance for credit losses | (52,693) | | | | (49,472) | | | |
Other assets | 778,456 | | | | 707,228 | | | |
Total noninterest-earning assets | 825,797 | | | | 750,876 | | | |
Total Assets | $ | 8,337,321 | | | | $ | 7,878,908 | | | |
Liabilities and Shareholders’ Equity | | | | | | |
Interest-bearing liabilities: | | | | | | |
Interest-bearing demand deposits (d) | $ | 1,358,206 | | $ | 1,215 | | 0.36 | % | $ | 1,186,907 | | $ | 1,565 | | 0.53 | % |
Savings deposits (d) | 2,857,117 | | 3,847 | | 0.54 | | 2,490,480 | | 3,265 | | 0.53 | |
Time deposits | 825,966 | | 3,387 | | 1.65 | | 865,944 | | 3,345 | | 1.57 | |
Short-term borrowings | 202,314 | | 588 | | 1.17 | | 615,140 | | 3,438 | | 2.27 | |
Long-term debt | 234,050 | | 2,568 | | 4.41 | | 184,931 | | 2,495 | | 5.47 | |
Total interest-bearing liabilities | 5,477,653 | | 11,605 | | 0.85 | | 5,343,402 | | 14,108 | | 1.07 | |
Noninterest-bearing liabilities and shareholders’ equity: | | | | | | |
Noninterest-bearing demand deposits (d) | 1,676,362 | | | | 1,464,750 | | | |
Other liabilities | 111,988 | | | | 83,920 | | | |
Shareholders’ equity | 1,071,318 | | | | 986,836 | | | |
Total Noninterest-Bearing Funding Sources | 2,859,668 | | | | 2,535,506 | | | |
Total Liabilities and Shareholders’ Equity | $ | 8,337,321 | | | | $ | 7,878,908 | | | |
Net Interest Income and Net Yield on Interest-Earning Assets | | $ | 68,121 | | 3.65 | % | | $ | 65,943 | | 3.75 | % |
|
| | | | | | | | | | | | | | | | |
| 2019 | 2018 |
| Average Balance | Income / Expense (a) | Yield or Rate | Average Balance | Income / Expense (a) | Yield or Rate |
| (dollars in thousands) |
Assets | | | | | | |
Interest-earning assets: | | | | | | |
Interest-bearing deposits with banks | $ | 4,700 |
| $ | 54 |
| 4.66 | % | $ | 7,026 |
| $ | 31 |
| 1.79 | % |
Tax-free investment securities | 68,226 |
| 529 |
| 3.14 |
| 67,809 |
| 519 |
| 3.10 |
|
Taxable investment securities | 1,243,519 |
| 8,701 |
| 2.84 |
| 1,123,893 |
| 7,575 |
| 2.73 |
|
Loans, net of unearned income (b)(c) | 5,811,587 |
| 70,767 |
| 4.94 |
| 5,413,677 |
| 58,867 |
| 4.41 |
|
Total interest-earning assets | 7,128,032 |
| 80,051 |
| 4.55 |
| 6,612,405 |
| 66,992 |
| 4.11 |
|
Noninterest-earning assets: | | | | | | |
Cash | 93,120 |
| | | 86,916 |
| | |
Allowance for credit losses | (49,472 | ) | | | (50,249 | ) | | |
Other assets | 707,228 |
| | | 651,310 |
| | |
Total noninterest-earning assets | 750,876 |
| | | 687,977 |
| | |
Total Assets | $ | 7,878,908 |
| | | $ | 7,300,382 |
| | |
Liabilities and Shareholders’ Equity | | | | | | |
Interest-bearing liabilities: | | | | | | |
Interest-bearing demand deposits (d) | $ | 1,186,907 |
| $ | 1,565 |
| 0.53 | % | $ | 1,132,069 |
| $ | 699 |
| 0.25 | % |
Savings deposits (d) | 2,490,480 |
| 3,265 |
| 0.53 |
| 2,441,084 |
| 1,542 |
| 0.26 |
|
Time deposits | 865,944 |
| 3,345 |
| 1.57 |
| 633,214 |
| 1,300 |
| 0.83 |
|
Short-term borrowings | 615,140 |
| 3,438 |
| 2.27 |
| 672,135 |
| 2,295 |
| 1.38 |
|
Long-term debt | 184,931 |
| 2,495 |
| 5.47 |
| 87,780 |
| 978 |
| 4.52 |
|
Total interest-bearing liabilities | 5,343,402 |
| 14,108 |
| 1.07 |
| 4,966,282 |
| 6,814 |
| 0.56 |
|
Noninterest-bearing liabilities and shareholders’ equity: | | | | | | |
Noninterest-bearing demand deposits (d) | 1,464,750 |
| | | 1,400,218 |
| | |
Other liabilities | 83,920 |
| | | 41,264 |
| | |
Shareholders’ equity | 986,836 |
| | | 892,618 |
| | |
Total Noninterest-Bearing Funding Sources | 2,535,506 |
| | | 2,334,100 |
| | |
Total Liabilities and Shareholders’ Equity | $ | 7,878,908 |
| | | $ | 7,300,382 |
| | |
Net Interest Income and Net Yield on Interest-Earning Assets | | $ | 65,943 |
| 3.75 | % | | $ | 60,178 |
| 3.69 | % |
(a)Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the three months ended March 31, 2020 and 2019. | |
(a) | Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate for the three months ended March 31, 2019 and 2018. |
| |
(b) | Loan balances include held for sale and nonaccrual loans. Income on nonaccrual loans is accounted for on the cash basis. |
| |
(c) | Loan income includes loan fees earned. |
| |
(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. |
(b)Loan balances include held for sale and nonaccrual loans. Income on nonaccrual loans is accounted for on the cash basis.
(c)Loan income includes loan fees earned.
(d)Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.
(e)Includes held for sale loans.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three months endedMarch 31, 20192020 compared with March 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | |
| | Analysis of Year-to-Year Changes in Net Interest Income | | | | |
| | Total Change | | Change Due To Volume | | Change Due To Rate (a) |
| | (dollars in thousands) | | | | |
Interest-earning assets: | | | | | | |
Interest-bearing deposits with banks | | $ | (17) | | | $ | 30 | | | $ | (47) | |
Tax-free investment securities | | (130) | | | (128) | | | (2) | |
Taxable investment securities | | (1,464) | | | (328) | | | (1,136) | |
Loans | | 1,286 | | | 5,411 | | | (4,125) | |
Total interest income (b) | | (325) | | | 4,985 | | | (5,310) | |
Interest-bearing liabilities: | | | | | | |
Interest-bearing demand deposits | | (350) | | | 224 | | | (574) | |
Savings deposits | | 582 | | | 479 | | | 103 | |
Time deposits | | 42 | | | (155) | | | 197 | |
Short-term borrowings | | (2,850) | | | (2,311) | | | (539) | |
Long-term debt | | 73 | | | 663 | | | (590) | |
Total interest expense | | (2,503) | | | (1,100) | | | (1,403) | |
Net interest income | | $ | 2,178 | | | $ | 6,085 | | | $ | (3,907) | |
|
| | | | | | | | | | | | |
| | Analysis of Year-to-Year Changes in Net Interest Income |
| | Total Change | | Change Due To Volume | | Change Due To Rate (a) |
| | (dollars in thousands) |
Interest-earning assets: | | | | | | |
Interest-bearing deposits with banks | | $ | 23 |
| | $ | (10 | ) | | $ | 33 |
|
Tax-free investment securities | | 10 |
| | 3 |
| | 7 |
|
Taxable investment securities | | 1,126 |
| | 805 |
| | 321 |
|
Loans | | 11,900 |
| | 4,327 |
| | 7,573 |
|
Total interest income (b) | | 13,059 |
| | 5,125 |
| | 7,934 |
|
Interest-bearing liabilities: | | | | | | |
Interest-bearing demand deposits | | 866 |
| | 34 |
| | 832 |
|
Savings deposits | | 1,723 |
| | 32 |
| | 1,691 |
|
Time deposits | | 2,045 |
| | 476 |
| | 1,569 |
|
Short-term borrowings | | 1,143 |
| | (194 | ) | | 1,337 |
|
Long-term debt | | 1,517 |
| | 1,083 |
| | 434 |
|
Total interest expense | | 7,294 |
| | 1,431 |
| | 5,863 |
|
Net interest income | | $ | 5,765 |
| | $ | 3,694 |
| | $ | 2,071 |
|
(a)Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
| |
(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. |
(b)Changes in interest income have been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate. Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed for probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.
The table below provides a breakout of the provision for credit losses by loan category for the three months endedMarch 31:31:
| | | | | | | | | | | | | | | | | |
| 2020 | | | 2019 | |
| Dollars | Percentage | | Dollars | Percentage |
| (dollars in thousands) | | | | |
Commercial, financial, agricultural and other | $ | 7,899 | | 26 | % | | $ | 1,381 | | 34 | % |
Real estate construction | 294 | | 1 | | | 210 | | 5 | |
Residential real estate | 4,133 | | 13 | | | 292 | | 7 | |
Commercial real estate | 12,957 | | 42 | | | 1,090 | | 27 | |
Loans to individuals | 5,684 | | 18 | | | 1,122 | | 27 | |
| | | | | |
Total | $ | 30,967 | | 100 | % | | $ | 4,095 | | 100 | % |
|
| | | | | | | | | | | |
| 2019 | | 2018 |
| Dollars | Percentage | | Dollars | Percentage |
| (dollars in thousands) |
Commercial, financial, agricultural and other | $ | 1,381 |
| 34 | % | | $ | 4,150 |
| 60 | % |
Real estate construction | 210 |
| 5 |
| | (242 | ) | (3 | ) |
Residential real estate | 292 |
| 7 |
| | 774 |
| 11 |
|
Commercial real estate | 1,090 |
| 27 |
| | 1,238 |
| 18 |
|
Loans to individuals | 1,122 |
| 27 |
| | 983 |
| 14 |
|
Total | $ | 4,095 |
| 100 | % | | $ | 6,903 |
| 100 | % |
The provision for credit losses for the three months endedMarch 31, 2019decreased2020 increased in comparison to the three months ended March 31, 20182019 by $2.8$26.9 million. The level of provision expense in the first three months of 2020 is primarily to build up the allowance for loan loss in order to provide for estimated credit risks related to the COVID-19 pandemic. Contributing to the higher provision in the first quarter was $7.4 million in specific reserves, of which $4.4 million related to loans for three commercial real estate borrowers that were placed on nonaccrual status as of March 31, 2020. Additionally, $16.7 million of the provision expense is attributable to higher qualitative reserves due to the uncertain economic environment, additional risks related to the large volume of consumer forbearances as of March 31, 2020 and consideration of the estimated probable losses incurred in certain loan categories, such as hospitality and senior living. Net charge-offs during the first quarter of 2020 totaled $3.5 million.
The level of provision expense in the first three months of 2019 iswas primarily a result of $2.2 million in net charge-offs, a $0.4 million increase in specific reserves and 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.portfolio. .
The level of provision expense in the first three months of 2018 was primarily due to a $5.6 million specific reserve related to a commercial, financial, agricultural and other borrower as well as a $2.0 million specific reserve related to a commercial real estate borrower. The increase in specific reserves were partially offset by decreases in qualitative factors related to the lending environment and associated risks in the loan portfolio.
The allowance for credit losses was $49.7 million, or 0.85%, of total loans outstanding and 0.92% of total originated loans outstanding at March 31, 2019, compared to $47.8 million, or 0.83%, and 0.91%, respectively, at December 31, 2018 and $53.7 million, or 1.00%, and 1.08%, respectively, at March 31, 2018. Nonperforming loans as a percentage of total loans decreased to
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
0.53%The allowance for credit losses was $79.1 million, or 1.25%, of total loans outstanding and 1.35% of total originated loans outstanding at March 31, 2019 from 0.55%2020, compared to $51.6 million, or 0.83%, and 0.90%, respectively, at December 31, 20182019 and 1.06%$49.7 million, or 0.85%, and 0.92%, respectively, at March 31, 2019. Nonperforming loans as a percentage of total loans increased to 0.93% at March 31, 2020 from 0.52% at December 31, 2019 and 0.53% as of March 31, 2018.2019. The allowance to nonperforming loan ratio was 158.74%133.71%, 149.14%160.28% and 93.84%158.74% as of March 31, 2020, December 31, 2019 and March 31, 2019,, December 31, 2018 and March 31, 2018, respectively.
Below is an analysis of the consolidated allowance for credit losses for the three months endedMarch 31, 20192020 and 20182019 and the year-ended December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | December 31, 2019 |
| | (dollars in thousands) | | | | |
Balance, beginning of period | | $ | 51,637 | | | $ | 47,764 | | | $ | 47,764 | |
Loans charged off: | | | | | | |
Commercial, financial, agricultural and other | | 486 | | | 1,009 | | | 3,393 | |
Real estate construction | | — | | | — | | | — | |
Residential real estate | | 577 | | | 181 | | | 1,042 | |
Commercial real estate | | 266 | | | 299 | | | 2,008 | |
Loans to individuals | | 2,619 | | | 1,115 | | | 5,831 | |
Total loans charged off | | 3,948 | | | 2,604 | | | 12,274 | |
Recoveries of loans previously charged off: | | | | | | |
Commercial, financial, agricultural and other | | 81 | | | 87 | | | 326 | |
Real estate construction | | — | | | 42 | | | 158 | |
Residential real estate | | 75 | | | 105 | | | 315 | |
Commercial real estate | | 44 | | | 41 | | | 189 | |
Loans to individuals | | 219 | | | 123 | | | 626 | |
Total recoveries | | 419 | | | 398 | | | 1,614 | |
Net credit losses | | 3,529 | | | 2,206 | | | 10,660 | |
Provision charged to expense | | 30,967 | | | 4,095 | | | 14,533 | |
Balance, end of period | | $ | 79,075 | | | $ | 49,653 | | | $ | 51,637 | |
|
| | | | | | | | | | | | |
| | March 31, 2019 | | March 31, 2018 | | December 31, 2018 |
| | (dollars in thousands) |
Balance, beginning of period | | $ | 47,764 |
| | $ | 48,298 |
| | $ | 48,298 |
|
Loans charged off: | | | | | | |
Commercial, financial, agricultural and other | | 1,009 |
| | 290 |
| | 5,294 |
|
Real estate construction | | — |
| | — |
| | — |
|
Residential real estate | | 181 |
| | 471 |
| | 1,313 |
|
Commercial real estate | | 299 |
| | 168 |
| | 3,930 |
|
Loans to individuals | | 1,115 |
| | 1,173 |
| | 4,576 |
|
Total loans charged off | | 2,604 |
| | 2,102 |
| | 15,113 |
|
Recoveries of loans previously charged off: | | | | | | |
Commercial, financial, agricultural and other | | 87 |
| | 263 |
| | 788 |
|
Real estate construction | | 42 |
| | 7 |
| | 141 |
|
Residential real estate | | 105 |
| | 92 |
| | 361 |
|
Commercial real estate | | 41 |
| | 69 |
| | 153 |
|
Loans to individuals | | 123 |
| | 202 |
| | 605 |
|
Total recoveries | | 398 |
| | 633 |
| | 2,048 |
|
Net credit losses | | 2,206 |
| | 1,469 |
| | 13,065 |
|
Provision charged to expense | | 4,095 |
| | 6,903 |
| | 12,531 |
|
Balance, end of period | | $ | 49,653 |
| | $ | 53,732 |
| | $ | 47,764 |
|
Noninterest Income
The following table presents the components of noninterest income for the three months endedMarch 31:31:
| | | | 2019 | | 2018 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
| | (dollars in thousands) | | | (dollars in thousands) | |
Noninterest Income: | | | | | | | | | Noninterest Income: | |
Trust income | | $ | 1,926 |
| | $ | 1,928 |
| | $ | (2 | ) | | — | % | Trust income | | $ | 2,111 | | | $ | 1,926 | | | $ | 185 | | | 10 | % |
Service charges on deposit accounts | | 4,245 |
| | 4,406 |
| | (161 | ) | | (4 | ) | Service charges on deposit accounts | | 4,745 | | | 4,245 | | | 500 | | | 12 | |
Insurance and retail brokerage commissions | | 1,961 |
| | 1,868 |
| | 93 |
| | 5 |
| Insurance and retail brokerage commissions | | 1,995 | | | 1,961 | | | 34 | | | 2 | |
Income from bank owned life insurance | | 1,426 |
| | 1,494 |
| | (68 | ) | | (5 | ) | Income from bank owned life insurance | | 1,616 | | | 1,426 | | | 190 | | | 13 | |
Card-related interchange income | | 4,730 |
| | 4,742 |
| | (12 | ) | | — |
| Card-related interchange income | | 5,262 | | | 4,730 | | | 532 | | | 11 | |
Swap fee income | | 393 |
| | 290 |
| | 103 |
| | 36 |
| Swap fee income | | 214 | | | 393 | | | (179) | | | (46) | |
Other income | | 1,705 |
| | 1,628 |
| | 77 |
| | 5 |
| Other income | | 1,807 | | | 1,705 | | | 102 | | | 6 | |
Subtotal | | 16,386 |
| | 16,356 |
| | 30 |
| | — |
| Subtotal | | 17,750 | | | 16,386 | | | 1,364 | | | 8 | |
Net securities gains | | — |
| | 2,840 |
| | (2,840 | ) | | (100 | ) | Net securities gains | | 19 | | | — | | | 19 | | | N/A | |
Gain on sale of mortgage loans | | 1,428 |
| | 1,484 |
| | (56 | ) | | (4 | ) | Gain on sale of mortgage loans | | 2,546 | | | 1,428 | | | 1,118 | | | 78 | |
Gain on sale of other loans and assets | | 1,084 |
| | 574 |
| | 510 |
| | 89 |
| Gain on sale of other loans and assets | | 699 | | | 1,084 | | | (385) | | | (36) | |
Derivatives mark to market | | (26 | ) | | 789 |
| | (815 | ) | | (103 | ) | Derivatives mark to market | | (1,741) | | | (26) | | | (1,715) | | | 6,596 | |
| Total noninterest income | | $ | 18,872 |
| | $ | 22,043 |
| | $ | (3,171 | ) | | (14 | )% | Total noninterest income | | $ | 19,273 | | | $ | 18,872 | | | $ | 401 | | | 2 | % |
Total noninterest income for the three months endedMarch 31, 2019 decreased $3.2 million in comparison to the three months endedMarch 31, 2018. The most significant changes include a $2.8 million decrease in net securities gains resulting from the redemption of one of our pooled trust preferred securities in the first quarter of 2018 and an $0.8 million decrease in the mark to
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Total noninterest income, excluding net securities gains, gain on sale of mortgage loans, gain on sale of other loans and assets and derivatives mark to market for the three months ended March 31, 2020 increased $1.4 million, or 8%, compared to the three months ended March 31, 2019. Card-related interchange income increased $0.5 million due to growth in customer accounts and transactions, including $0.4 million attributable to the Santander branch acquisition in the third quarter of 2019. Service charges on deposit accounts increased $0.5 million due to growth in customer accounts, as well as $0.3 million attributable to the Santander branch acquisition..
Total noninterest income increased $0.4 million, or 2%, compared to the same period in the prior year. The most significant changes, other than the changes noted above, include a $1.1 million increase in gain on sale of mortgage loans as a result of growth in our mortgage lending area. The mark to market adjustment on interest rate swaps entered into for our commercial loan customers.customers resulted in a decrease of $1.7 million. This adjustment does not reflect a realized gain or loss on the swaps, but rather relates to a change in fair value due to movements in corporate bond spreads and swap rates. Partially offsetting these decreases is a $0.5 million increase in the gain on sale of loans and other assets primarily due to gains recognized in conjunction with the sale of the guaranteed portion of Small Business Administration ("SBA") loans.
Noninterest Expense
The following table presents the components of noninterest expense for the three months endedMarch 31:31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | $ Change | | % Change |
| | (dollars in thousands) | | | | | | |
Noninterest Expense: | | | | | | | | |
Salaries and employee benefits | | $ | 29,977 | | | $ | 27,220 | | | $ | 2,757 | | | 10 | % |
Net occupancy | | 4,973 | | | 4,916 | | | 57 | | | 1 | |
Furniture and equipment | | 3,778 | | | 3,668 | | | 110 | | | 3 | |
Data processing | | 2,467 | | | 2,544 | | | (77) | | | (3) | |
Advertising and promotion | | 1,150 | | | 1,240 | | | (90) | | | (7) | |
Pennsylvania shares tax | | 738 | | | 916 | | | (178) | | | (19) | |
Intangible amortization | | 934 | | | 754 | | | 180 | | | 24 | |
Collection and repossession | | 564 | | | 547 | | | 17 | | | 3 | |
Other professional fees and services | | 910 | | | 754 | | | 156 | | | 21 | |
FDIC insurance | | 28 | | | 574 | | | (546) | | | (95) | |
Unfunded commitment reserve | | (2,539) | | | (381) | | | (2,158) | | | 566 | |
Other operating | | 6,688 | | | 6,512 | | | 176 | | | 3 | |
Subtotal | | 49,668 | | | 49,264 | | | 404 | | | 1 | |
Loss on sale or write-down of assets | | 213 | | | 65 | | | 148 | | | 228 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Litigation and operational losses | | 390 | | | 401 | | | (11) | | | (3) | |
Total noninterest expense | | $ | 50,271 | | | $ | 49,730 | | | $ | 541 | | | 1 | % |
|
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | $ Change | | % Change |
| | (dollars in thousands) |
Noninterest Expense: | | | | | | | | |
Salaries and employee benefits | | $ | 27,220 |
| | $ | 24,873 |
| | $ | 2,347 |
| | 9 | % |
Net occupancy | | 4,916 |
| | 4,369 |
| | 547 |
| | 13 |
|
Furniture and equipment | | 3,668 |
| | 3,540 |
| | 128 |
| | 4 |
|
Data processing | | 2,544 |
| | 2,433 |
| | 111 |
| | 5 |
|
Advertising and promotion | | 1,240 |
| | 809 |
| | 431 |
| | 53 |
|
Pennsylvania shares tax | | 916 |
| | 903 |
| | 13 |
| | 1 |
|
Intangible amortization | | 754 |
| | 784 |
| | (30 | ) | | (4 | ) |
Collection and repossession | | 547 |
| | 823 |
| | (276 | ) | | (34 | ) |
Other professional fees and services | | 754 |
| | 1,007 |
| | (253 | ) | | (25 | ) |
FDIC insurance | | 574 |
| | 776 |
| | (202 | ) | | (26 | ) |
Other operating | | 6,131 |
| | 5,843 |
| | 288 |
| | 5 |
|
Subtotal | | 49,264 |
| | 46,160 |
| | 3,104 |
| | 7 |
|
Loss on sale or write-down of assets | | 65 |
| | 197 |
| | (132 | ) | | (67 | ) |
Merger and acquisition related | | — |
| | 337 |
| | (337 | ) | | (100 | ) |
Litigation and operational losses | | 401 |
| | 179 |
| | 222 |
| | 124 |
|
Total noninterest expense | | $ | 49,730 |
| | $ | 46,873 |
| | $ | 2,857 |
| | 6 | % |
Noninterest expense excluding loss on saleincreased $0.5 million, or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $3.1 million, or 7%1%, for the three months endedMarch 31, 20192020 compared to the same period in 2018.2019. Contributing to the higher expenses in 20192020 is a $2.3$2.8 million increase in salaries and employee benefits as a result of a higher number of full-time equivalent employees, annual merit increases and a $1.4$0.7 million increase in hospitalization expense. The higher number of employees is primarily a result of the acquisition of Garfield Acquisition Corp. and its wholly-owned subsidiary, Foundation Bank,14 branches from Santander in May 2018September 2019 and continued expansion of our mortgage and commercial banking businesses. The GarfieldSantander acquisition also accounted for $0.1$1.0 million of the salaries and employee benefits increase. Offsetting the increase in salaries and employee benefits was a $2.2 million decrease in unfunded commitment expense. This decrease is a result of updates made in the first quarter of 2020 to the probability of default and loss given default information incorporated into the calculation. FDIC insurance decreased $0.5 million increase in net occupancy expense. Collection and repossession expense decreased $0.3comparison to the prior period as a result of a $0.6 million assessment credit received due to costs related to several OREO propertiesthe FDIC deposit insurance fund reaching the required minimum reserve ratio. The company has $79 thousand in remaining credits that occurred in 2018 with no similar activity in 2019.will offset future FDIC expense.
Income Tax
The provision for income taxes increased$1.3decreased $4.9 million, or 82.6%, for the three months endedMarch 31, 2019,2020, compared to the corresponding period in 2018.2019. The increaseeffective tax rate decreased 160 basis points, or 8.2%, primarily due to a $24.8 million decrease in the provision forincome before income taxes can be attributed tooffset by a $2.6$0.2 million increase decrease in the level oftax-free income before taxes.from bank owned life insurance.
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the three months endedMarch 31, 20192020 and 2018.2019.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
We generate an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest, income from bank-ownedbank owned life insurance and tax benefits associated with low income housing tax credits, all of which are relatively consistent regardless of the level of pretax income. Additionally, the three months ended March 31, 2018, included a $0.6 million reduction in tax expense due to an adjustment to the deferred tax asset adjustment recorded in the fourth quarter of 2017 as a result of the reduction in the statutory tax rate. These provided for an annual effective tax rate of 19.5%17.9% and 18.9%19.5% for the three months endedMarch 31, 20192020 and 2018,2019, respectively.
As of March 31, 2019,2020, our deferred tax assets totaled $20.2 million.$17.3 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
recorded. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earning levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.
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. We generate funds to meet these needs primarily through the core deposit base of First Commonwealth Bank and the maturity or repayment of loans and other interest-earning assets, including investments. During the first three months of 2019,2020, the maturity and redemption of investment securities provided $39.7$68.6 million in liquidity. These funds contributed to the liquidity used in the first quarter to pay down of short-term borrowings, originate loans, purchase investment securities and fund depositor withdrawals.
We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland (“FRB”) and access to certificates of deposit through brokers.
We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of March 31, 2019,2020, our maximum borrowing capacity under this program was $1.2$1.3 billion and as of that date there was $5.5$4.2 million outstanding with an average weighted rate of 1.40%0.95% and an average original term of 339332 days. These deposits are part of a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.
An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program, which enables us to pledge certain loans that are not being used as collateral at the FHLB as collateral for borrowings at the FRB. At March 31, 2019,2020, the borrowing capacity under this program totaled $822.9$803.3 million and there were no amountswas $27.0 million outstanding. As of March 31, 2019,2020, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.6$1.5 billion and as of that date amounts used against this capacity included $0.4$0.1 billion in outstanding borrowings and no outstanding letters of credit.
We also have available unused federal funds lines with six correspondent banks. These lines have an aggregate commitment of $205.0$180.0 million with no outstanding balance as of March 31, 2019.2020. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $514.9$506.1 million with no outstanding balance as of March 31, 2019.2020.
First Commonwealth Financial Corporation has an unsecured $15.0$20.0 million line of credit with another financial institution. As of March 31, 2019,2020, there are no amounts outstanding on this line.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The following table shows a breakdown of the components of First Commonwealth’s deposits:
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | (dollars in thousands) | | |
Noninterest-bearing demand deposits(a) | | $ | 1,751,524 | | | $ | 1,690,247 | |
Interest-bearing demand deposits(a) | | 326,122 | | | 254,981 | |
Savings deposits(a) | | 4,034,759 | | | 3,896,536 | |
Time deposits | | 810,683 | | | 835,851 | |
Total | | $ | 6,923,088 | | | $ | 6,677,615 | |
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | (dollars in thousands) |
Noninterest-bearing demand deposits(a) | | $ | 1,510,566 |
| | $ | 1,466,213 |
|
Interest-bearing demand deposits(a) | | 211,548 |
| | 180,209 |
|
Savings deposits(a) | | 3,517,350 |
| | 3,401,354 |
|
Time deposits | | 891,296 |
| | 850,216 |
|
Total | | $ | 6,130,760 |
| | $ | 5,897,992 |
|
(a)Balances include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes. | |
(a) | Balances include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes. |
The level of deposits during any period is 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.
During the first three months of 2019,2020, total deposits increased $232.8$245.5 million. Interest bearingInterest-bearing demand and savings deposits increased $147.3$209.4 million, noninterest-bearing demand deposits increased $44.4$61.3 million and time deposits increased $41.1 million. The increase in time deposits is the result of an increase in core certificates of deposit of $42.3 million offset by a decline in CDARs deposits of $1.2decreased $25.2 million.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Market Risk
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 0.760.86 and 0.740.80 at March 31, 20192020 and December 31, 2018,2019, 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.
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 is the gap analysis as of March 31, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | | | | | | | |
| | 0-90 Days | | 91-180 Days | | 181-365 Days | | Cumulative 0-365 Days | | Over 1 Year Through 5 Years | | Over 5 Years |
| | (dollars in thousands) | | | | | | | | | | |
Loans | | $ | 2,890,222 | | | $ | 363,268 | | | $ | 595,956 | | | $ | 3,849,446 | | | $ | 1,973,756 | | | $ | 421,916 | |
Investments | | 157,369 | | | 174,933 | | | 259,271 | | | 591,573 | | | 581,227 | | | 118,248 | |
Other interest-earning assets | | 15,762 | | | — | | | — | | | 15,762 | | | — | | | — | |
Total interest-sensitive assets (ISA) | | 3,063,353 | | | 538,201 | | | 855,227 | | | 4,456,781 | | | 2,554,983 | | | 540,164 | |
Certificates of deposit | | 176,926 | | | 145,159 | | | 302,616 | | | 624,701 | | | 182,870 | | | 2,126 | |
Other deposits | | 4,360,880 | | | — | | | — | | | 4,360,880 | | | — | | | — | |
Borrowings | | 219,332 | | | 194 | | | 387 | | | 219,913 | | | 103,096 | | | 52,884 | |
Total interest-sensitive liabilities (ISL) | | 4,757,138 | | | 145,353 | | | 303,003 | | | 5,205,494 | | | 285,966 | | | 55,010 | |
Gap | | $ | (1,693,785) | | | $ | 392,848 | | | $ | 552,224 | | | $ | (748,713) | | | $ | 2,269,017 | | | $ | 485,154 | |
ISA/ISL | | 0.64 | | | 3.70 | | | 2.82 | | | 0.86 | | | 8.93 | | | 9.82 | |
Gap/Total assets | | 19.89 | % | | 4.61 | % | | 6.49 | % | | 8.79 | % | | 26.65 | % | | 5.70 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 |
| | 0-90 Days | | 91-180 Days | | 181-365 Days | | Cumulative 0-365 Days | | Over 1 Year Through 5 Years | | Over 5 Years |
| | (dollars in thousands) |
Loans | | $ | 2,690,255 |
| | $ | 262,448 |
| | $ | 452,147 |
| | $ | 3,404,850 |
| | $ | 1,890,725 |
| | $ | 562,633 |
|
Investments | | 89,131 |
| | 57,056 |
| | 103,709 |
| | 249,896 |
| | 638,071 |
| | 404,031 |
|
Other interest-earning assets | | 23,168 |
| | — |
| | — |
| | 23,168 |
| | — |
| | — |
|
Total interest-sensitive assets (ISA) | | 2,802,554 |
| | 319,504 |
| | 555,856 |
| | 3,677,914 |
| | 2,528,796 |
| | 966,664 |
|
Certificates of deposit | | 124,256 |
| | 134,315 |
| | 242,492 |
| | 501,063 |
| | 387,181 |
| | 3,052 |
|
Other deposits | | 3,728,898 |
| | — |
| | — |
| | 3,728,898 |
| | — |
| | — |
|
Borrowings | | 638,001 |
| | 220 |
| | 451 |
| | 638,672 |
| | 54,140 |
| | 57,644 |
|
Total interest-sensitive liabilities (ISL) | | 4,491,155 |
| | 134,535 |
| | 242,943 |
| | 4,868,633 |
| | 441,321 |
| | 60,696 |
|
Gap | | $ | (1,688,601 | ) | | $ | 184,969 |
| | $ | 312,913 |
| | $ | (1,190,719 | ) | | $ | 2,087,475 |
| | $ | 905,968 |
|
ISA/ISL | | 0.62 |
| | 2.37 |
| | 2.29 |
| | 0.76 |
| | 5.73 |
| | 15.93 |
|
Gap/Total assets | | 21.18 | % | | 2.32 | % | | 3.92 | % | | 14.94 | % | | 26.18 | % | | 11.36 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | 0-90 Days | | 91-180 Days | | 181-365 Days | | Cumulative 0-365 Days | | Over 1 Year Through 5 Years | | Over 5 Years |
| | (dollars in thousands) |
Loans | | $ | 2,659,890 |
| | $ | 291,134 |
| | $ | 439,098 |
| | $ | 3,390,122 |
| | $ | 1,802,605 |
| | $ | 569,659 |
|
Investments | | 81,971 |
| | 60,654 |
| | 99,288 |
| | 241,913 |
| | 612,407 |
| | 468,916 |
|
Other interest-earning assets | | 3,013 |
| | — |
| | — |
| | 3,013 |
| | — |
| | — |
|
Total interest-sensitive assets (ISA) | | 2,744,874 |
| | 351,788 |
| | 538,386 |
| | 3,635,048 |
| | 2,415,012 |
| | 1,038,575 |
|
Certificates of deposit | | 116,469 |
| | 116,664 |
| | 276,101 |
| | 509,234 |
| | 338,148 |
| | 2,834 |
|
Other deposits | | 3,581,563 |
| | — |
| | — |
| | 3,581,563 |
| | — |
| | — |
|
Borrowings | | 794,206 |
| | 218 |
| | 443 |
| | 794,867 |
| | 54,080 |
| | 57,932 |
|
Total interest-sensitive liabilities (ISL) | | 4,492,238 |
| | 116,882 |
| | 276,544 |
| | 4,885,664 |
| | 392,228 |
| | 60,766 |
|
Gap | | $ | (1,747,364 | ) | | $ | 234,906 |
| | $ | 261,842 |
| | $ | (1,250,616 | ) | | $ | 2,022,784 |
| | $ | 977,809 |
|
ISA/ISL | | 0.61 |
| | 3.01 |
| | 1.95 |
| | 0.74 |
| | 6.16 |
| | 17.09 |
|
Gap/Total assets | | 22.32 | % | | 3.00 | % | | 3.34 | % | | 15.98 | % | | 25.84 | % | | 12.49 | % |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | | | | | |
| | 0-90 Days | | 91-180 Days | | 181-365 Days | | Cumulative 0-365 Days | | Over 1 Year Through 5 Years | | Over 5 Years |
| | (dollars in thousands) | | | | | | | | | | |
Loans | | $ | 2,818,183 | | | $ | 313,651 | | | $ | 494,467 | | | $ | 3,626,301 | | | $ | 2,052,952 | | | $ | 475,962 | |
Investments | | 103,225 | | | 79,866 | | | 162,225 | | | 345,316 | | | 633,178 | | | 235,437 | |
Other interest-earning assets | | 19,510 | | | — | | | — | | | 19,510 | | | — | | | — | |
Total interest-sensitive assets (ISA) | | 2,940,918 | | | 393,517 | | | 656,692 | | | 3,991,127 | | | 2,686,130 | | | 711,399 | |
Certificates of deposit | | 121,302 | | | 161,488 | | | 303,245 | | | 586,035 | | | 246,512 | | | 2,822 | |
Other deposits | | 4,151,518 | | | — | | | — | | | 4,151,518 | | | — | | | — | |
Borrowings | | 274,213 | | | 193 | | | 385 | | | 274,791 | | | 103,082 | | | 53,064 | |
Total interest-sensitive liabilities (ISL) | | 4,547,033 | | | 161,681 | | | 303,630 | | | 5,012,344 | | | 349,594 | | | 55,886 | |
Gap | | $ | (1,606,115) | | | $ | 231,836 | | | $ | 353,062 | | | $ | (1,021,217) | | | $ | 2,336,536 | | | $ | 655,513 | |
ISA/ISL | | 0.65 | | | 2.43 | | | 2.16 | | | 0.80 | | | 7.68 | | | 12.73 | |
Gap/Total assets | | 19.33 | % | | 2.79 | % | | 4.25 | % | | 12.29 | % | | 28.12 | % | | 7.89 | % |
The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in interest rates over a 12 month time frame as compared with net interest income if rates remained unchanged and there are no changes in balance sheet categories.
|
| | | | | | | | | | | | | | | | |
| | Net interest income change (12 months) for basis point movements of: |
| | -200 | | -100 | | +100 | | +200 |
| | (dollars in thousands) |
March 31, 2019 ($) | | $ | (17,322 | ) | | $ | (7,282 | ) | | $ | 1,181 |
| | $ | 2,069 |
|
March 31, 2019 (%) | | (6.35 | )% | | (2.67 | )% | | 0.43 | % | | 0.76 | % |
| | | | | | | | |
December 31, 2018 ($) | | $ | (16,914 | ) | | $ | (6,442 | ) | | $ | 1,368 |
| | $ | 2,587 |
|
December 31, 2018 (%) | | (6.32 | )% | | (2.41 | )% | | 0.51 | % | | 0.97 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net interest income change (12 months) for basis point movements of: | | | | | | |
| | -200 | | -100 | | +100 | | +200 |
| | (dollars in thousands) | | | | | | |
March 31, 2020 ($) | | $ | (10,005) | | | $ | (6,696) | | | $ | 4,604 | | | $ | 8,444 | |
March 31, 2020 (%) | | (3.94) | % | | (2.64) | % | | 1.81 | % | | 3.33 | % |
| | | | | | | | |
December 31, 2019 ($) | | $ | (12,540) | | | $ | (5,880) | | | $ | 4,279 | | | $ | 8,032 | |
December 31, 2019 (%) | | (4.52) | % | | (2.12) | % | | 1.54 | % | | 2.90 | % |
The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates versus if rates remained unchanged and there are no changes in balance sheet categories.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net interest income change (12 months) for basis point movements of: | | | | | | |
| | -200 | | -100 | | +100 | | +200 |
| | (dollars in thousands) | | | | | | |
March 31, 2020 ($) | | $ | (40,677) | | | $ | (20,727) | | | $ | 11,393 | | | $ | 20,557 | |
March 31, 2020 (%) | | (14.65) | % | | (7.46) | % | | 4.10 | % | | 7.40 | % |
| | | | | | | | |
December 31, 2019 ($) | | $ | (41,661) | | | $ | (21,604) | | | $ | 12,259 | | | $ | 22,291 | |
December 31, 2019 (%) | | (15.02) | % | | (7.79) | % | | 4.42 | % | | 8.04 | % |
|
| | | | | | | | | | | | | | | | |
| | Net interest income change (12 months) for basis point movements of: |
| | -200 | | -100 | | +100 | | +200 |
| | (dollars in thousands) |
March 31, 2019 ($) | | $ | (37,273 | ) | | $ | (10,659 | ) | | $ | 2,304 |
| | $ | 3,354 |
|
March 31, 2019 (%) | | (13.67 | )% | | (3.91 | )% | | 0.85 | % | | 1.23 | % |
| | | | | | | | |
December 31, 2018 ($) | | $ | (37,239 | ) | | $ | (14,277 | ) | | $ | 10,674 |
| | $ | 20,597 |
|
December 31, 2018 (%) | | (13.90 | )% | | (5.33 | )% | | 3.99 | % | | 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. In the three months endedMarch 31, 20192020 and 2018,2019, the cost of our interest-bearing liabilities averaged 1.07%0.85% and 0.56%1.07%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 4.55%4.27% and 4.11%4.55%, respectively.
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
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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 adequacyappropriateness 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.
On March 27, 2020, the CARES Act was signed into law, which provides banking organizations with optional, temporary relief from complying with Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (“CECL”). The Company had planned to adopt CECL as of January 1, 2020, however, due to the uncertain economic conditions caused by the COVID-19 pandemic and the resulting volatility of economic forecasts, the Company elected to defer its adoption of CECL and has, therefore, calculated reserves for loan losses under the incurred loss method at March 31, 2020.
First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual impaired loans with a balance greater than $0.1 million,$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 $4.6$2.0 million at March 31, 20192020 and is classified in "Other liabilities" on the unaudited 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
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
the borrower, who could not obtain comparable terms from alternative financing sources. In the first three months of 2019,2020, 12 loans totaling $1.5$0.3 million were identified as troubled debt restructurings.
The balance of troubled debt restructured loans decreased $5.5$0.5 million from December 31, 2018.2019. Changes during the first three months of 2019 are largely the result of the pay-off of a $6.0 million commercial, financial, agricultural and other relationship.2020 can be attributed to new restructurings in conjunction with bankruptcy offset by payments received on existing troubled debt restructured loans. Please refer to Note 8 “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.
In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. These modifications typically provide for the deferral of both principal and interest for 90 days. The CARES Act, along with a joint agency statement issued by banking regulators, provides that short-term modifications of up to 180 days made in response to COVID-19 do not need to be accounted for as a TDR. As of April 24, 2020, the Company has granted approximately 6,000 deferrals to its customers with aggregate principal balances of $1.1 billion.
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 on 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 fair value of any underlying collateral or the present value of projected future cash flows. Losses or a specifically assigned allowance for loan losses are recognized where appropriate.
Nonperforming loans, including loans held for sale, decreased $0.7increased $26.9 million to $31.3$59.1 million at March 31, 20192020 compared to $32.0$32.2 million at December 31, 2018.2019. During the three months ended March 31, 2019, $7.12020, $32.2 million of loans were moved to nonaccrual.nonaccrual including the transfer of four commercial real estate relationships totaling $27.0 million. Offsetting these additions was the payoffa $2.0 million paydown of an $6.0 million relationship, the charge-off of a $0.5 million commercial, financial, agricultural and other loan and the $0.3 million charge-off of a commercial real estate loan.relationship.
The allowance for credit losses as a percentage of nonperforming loans was 158.74%133.71% as of March 31, 2019,2020, compared to 149.14%160.28% at December 31, 2018,2019, and 93.84%158.74% at March 31, 2018.2019. The amount of specific reserves included in the allowance for
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific reserves of $2.0$9.8 million and general reserves of $47.6$69.3 million as of March 31, 2019.2020. Specific reserves increased $0.4$7.4 million from December 31, 2018,2019, and decreased $9.4$7.8 million from March 31, 2018.2019. The increase from December 31, 2018both periods is primarily due to the addition of the two nonaccrual relationships. The decrease from March 31, 2018 is primarily due to the payoff of two commercial relationships totaling $14.3 million and the sale of a $3.7 million dollar commercial relationship. These three relationships had total specific reserves of $9.0 million.$4.0 million added on the $27.0 million in new commercial real estate nonaccrual loans. In addition, specific reserves increased $1.0 million on a commercial real estate relationship and $0.7 million on a commercial, financial, agricultural and other relationship, both as a result of updated appraisals. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at March 31, 2019.2020.
Criticized loans totaled $120.5$117.5 million at March 31, 20192020 and represented 2.1%1.9% of the loan portfolio. The level of criticized loans decreasedincreased as of March 31, 20192020 when compared to December 31, 2018,2019, by $6.7$16.9 million, or 5.3%16.8%. Classified loans totaled $39.4$90.2 million at March 31, 20192020 compared to $40.2$52.0 million at December 31, 2018, a decrease2019, an increase of $0.8$38.2 million, or 2.0%73.4%. This decreaseThe increase in criticized loans is primarily the result of the aforementioned changes in nonperforming loans. Delinquency on accruing loans for the same period increased$2.2decreased $1.3 million,, or 21.0%10.0%, the majority of which are commercial, financial, agricultural and other loans and commercialresidential real estate loans.
The allowance for credit losses was $49.7$79.1 million at March 31, 2019,2020, or 0.85%1.25% of total loans outstanding, compared to 0.83% reported at December 31, 2018,2019, and 1.00%0.85% at March 31, 2018.2019. General reserves, or the portion of the allowance related to loans that were not specifically evaluated for impairment, as a percentage of non-impaired loans were 0.82%1.11% at March 31, 20192020 compared to 0.80% at December 31, 20182019 and 0.79%0.82% at March 31, 2018.2019. General reserves as a percentage of non-impaired originated loans were 1.19% at March 31, 2020 compared to 0.87% at December 31, 2019 and 0.89% at March 31, 2019 compared to 0.88% at December 31, 2018 and 0.86%2019. The increase in the general reserve for both periods is reflective of higher qualitative reserves maintained at March 31, 2018.
2010 as a result of the COVID-19 pandemic. These reserves were increased in order to provide for risks related to the uncertain economic environment, the large volume of consumer forbearance granted as of March 31, 2020 as a result of COVID-19 as well as consideration of the probable losses incurred in certain loan categories, such as hospitality and senior living.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures:
| | | | March 31, | | | | December 31, 2018 | | | | | March 31, | | | | | December 31, 2019 | | |
| | 2019 | | | | 2018 | | | | | | 2020 | | | | 2019 | | | | | December 31, 2019 |
| | (dollars in thousands) | | | | | (dollars in thousands) | | | |
Nonperforming Loans: | | | | Nonperforming Loans: | | | | |
Loans on nonaccrual basis | | $ | 16,286 |
| | | | $ | 28,317 |
| |
| | $ | 11,509 |
| | | Loans on nonaccrual basis | | $ | 46,109 | | | | | $ | 16,286 | | | | | $ | 18,638 | | | |
Loans held for sale on a nonaccrual basis | | — |
| | | | — |
| | | | — |
| | | Loans held for sale on a nonaccrual basis | | — | | | | | — | | | | | — | | | |
Troubled debt restructured loans on nonaccrual basis | | 5,874 |
| | | | 10,233 |
| | | | 11,761 |
| | | Troubled debt restructured loans on nonaccrual basis | | 5,522 | | | | | 5,874 | | | | | 6,037 | | | |
Troubled debt restructured loans on accrual basis | | 9,120 |
| | | | 18,707 |
| | | | 8,757 |
| | | Troubled debt restructured loans on accrual basis | | 7,509 | | | | | 9,120 | | | | | 7,542 | | | |
Total nonperforming loans | | $ | 31,280 |
| | | | $ | 57,257 |
| | | | $ | 32,027 |
| | | Total nonperforming loans | | $ | 59,140 | | | | | $ | 31,280 | | | | | $ | 32,217 | | | |
Loans past due 30 to 90 days and still accruing | | $ | 11,002 |
| | $ | 10,714 |
| | $ | 8,760 |
| | Loans past due 30 to 90 days and still accruing | | $ | 10,683 | | | $ | 11,002 | | | $ | 11,378 | | |
Loans past due in excess of 90 days and still accruing | | $ | 1,509 |
| | | | $ | 1,955 |
| | | | $ | 1,582 |
| | | Loans past due in excess of 90 days and still accruing | | $ | 1,427 | | | | | $ | 1,509 | | | | | $ | 2,073 | | | |
Other real estate owned | | $ | 3,993 |
| | | | $ | 2,997 |
| | | | $ | 3,935 |
| | | Other real estate owned | | $ | 2,697 | | | | | $ | 3,993 | | | | | $ | 2,228 | | | |
Loans held for sale at end of period | | $ | 9,627 |
| | $ | 9,759 |
| | $ | 11,881 |
| | Loans held for sale at end of period | | $ | 25,783 | | | $ | 9,627 | | | $ | 15,989 | | |
Portfolio loans outstanding at end of period | | $ | 5,871,070 |
| | | | $ | 5,381,305 |
| |
| | $ | 5,774,139 |
| | | Portfolio loans outstanding at end of period | | $ | 6,313,944 | | | | | $ | 5,871,070 | | | | | $ | 6,189,148 | | | |
Average loans outstanding | | $ | 5,811,587 |
| | (a) | | $ | 5,413,677 |
| | (a) | | $ | 5,582,651 |
| | (b) | Average loans outstanding | | $ | 6,255,825 | | | (a) | | $ | 5,811,587 | | | (a) | | $ | 5,987,398 | | | (b) |
Nonperforming loans as a percentage of total loans | | 0.53 | % | | 1.06 | % | | 0.55 | % | | Nonperforming loans as a percentage of total loans | | 0.93 | % | | 0.53 | % | | 0.52 | % | |
Provision for credit losses | | $ | 4,095 |
| | (a) | | $ | 6,903 |
| | (a) | | $ | 12,531 |
| | (b) | Provision for credit losses | | $ | 30,967 | | | (a) | | $ | 4,095 | | | (a) | | $ | 14,533 | | | (b) |
Allowance for credit losses | | $ | 49,653 |
| | | | $ | 53,732 |
| | | | $ | 47,764 |
| | | Allowance for credit losses | | $ | 79,075 | | | | | $ | 49,653 | | | | | $ | 51,637 | | | |
Net charge-offs | | $ | 2,206 |
| | (a) | | $ | 1,469 |
| | (a) | | $ | 13,065 |
| | (b) | Net charge-offs | | $ | 3,529 | | | (a) | | $ | 2,206 | | | (a) | | $ | 10,660 | | | (b) |
Net charge-offs as a percentage of average loans outstanding (annualized) | | 0.15 | % | | 0.11 | % | | 0.23 | % | | Net charge-offs as a percentage of average loans outstanding (annualized) | | 0.23 | % | | 0.15 | % | | 0.18 | % | |
Provision for credit losses as a percentage of net charge-offs | | 185.63 | % | | (a) | | 469.91 | % | | (a) | | 95.91 | % | | (b) | Provision for credit losses as a percentage of net charge-offs | | 877.50 | % | | (a) | | 185.63 | % | | (a) | | 136.33 | % | | (b) |
Allowance for credit losses as a percentage of end-of-period loans outstanding (c) | | 0.85 | % | | 1.00 | % | | 0.83 | % | | Allowance for credit losses as a percentage of end-of-period loans outstanding (c) | | 1.25 | % | | 0.85 | % | | 0.83 | % | |
Allowance for credit losses as a percentage of end-of-period originated loans outstanding | | 0.92 | % | | 1.08 | % | | 0.91 | % | | |
Allowance for credit losses on originated loans and leases as a percentage of end-of-period originated loans outstanding | | Allowance for credit losses on originated loans and leases as a percentage of end-of-period originated loans outstanding | | 1.32 | % | | 0.92 | % | | 0.90 | % | |
Allowance for credit losses as a percentage of nonperforming loans (d) | | 158.74 | % | | 93.84 | % | | 149.14 | % | | Allowance for credit losses as a percentage of nonperforming loans (d) | | 133.71 | % | | 158.74 | % | | 160.28 | % | |
| |
(a) | For the three-month period ended.
|
| |
(b) | For the twelve-month period ended. |
| |
(c) | Does not include loans held for sale. |
| |
(d) | Does not include nonperforming loans held for sale. |
(a)For the three-month period ended.
(b)For the twelve-month period ended.
(c)Does not include loans held for sale.
(d)Does not include nonperforming loans held for sale.
The following tables show the outstanding balances of our loan portfolio and the breakdown of net charge-offs and nonperforming loans, excluding loans held for sale, by loan type as of and for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | December 31, 2019 | | |
| | Amount | | % | | Amount | | % |
| | (dollars in thousands) | | | | | | |
Commercial, financial, agricultural and other | | $ | 1,272,240 | | | 20 | % | | $ | 1,241,853 | | | 20 | % |
Real estate construction | | 413,458 | | | 7 | | | 449,039 | | | 7 | |
Residential real estate | | 1,691,140 | | | 27 | | | 1,681,362 | | | 27 | |
Commercial real estate | | 2,190,098 | | | 34 | | | 2,117,519 | | | 34 | |
Loans to individuals | | 747,008 | | | 12 | | | 699,375 | | | 12 | |
Total loans and leases net of unearned income | | $ | 6,313,944 | | | 100 | % | | $ | 6,189,148 | | | 100 | % |
|
| | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | Amount | | % | | Amount | | % |
| | (dollars in thousands) |
Commercial, financial, agricultural and other | | $ | 1,180,320 |
| | 20 | % | | $ | 1,138,473 |
| | 20 | % |
Real estate construction | | 389,387 |
| | 7 |
| | 358,978 |
| | 6 |
|
Residential real estate | | 1,565,349 |
| | 27 |
| | 1,562,405 |
| | 27 |
|
Commercial real estate | | 2,138,376 |
| | 36 |
| | 2,123,544 |
| | 37 |
|
Loans to individuals | | 597,638 |
| | 10 |
| | 590,739 |
| | 10 |
|
Total loans and leases net of unearned income | | $ | 5,871,070 |
| | 100 | % | | $ | 5,774,139 |
| | 100 | % |
During the three months endedMarch 31, 2019,2020, loans increased $96.9$124.8 million,, or 1.7%2.0%, compared to balances outstanding at December 31, 2018.2019. All loan categories, except real estate construction, reflect growth for the three months ended March 31, 20192020, with commercial financial, agricultural and other as well as real estate, constructionloans to individuals and commercial, financial, agricultural providing a majority of the growth. Commercial, financial, agricultural and other loans increased $41.8$30.4 million, or 3.7%2.4%, largely due to growth in direct lending in Pennsylvania and Ohio. Real estate
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
construction loans increased $30.4 million, or 8.5%, with $19.0 million resulting from growth in commercial construction projects primarilylending in Pennsylvania and Ohio and $11.4Ohio. Real estate construction loans decreased $35.6 million, or 7.9%, primarily due to the completion of construction projects converting to commercial real estate loans. Residential real estate grew $9.8 million, or 0.6%, primarily due to originations of closed-end 1-4 family mortgage loans. Commercial real estate loans increased $72.6 million, or 3.4%, primarily due to construction real estate loans that converted to permanent loans. Loans to individuals increased $47.6 million, or 6.8%, as a result of growth in the indirect portfolio of $52.8 million offset by a decrease in other consumer construction.loans of $5.2 million.
As indicated in the table below, commercial, financial, agricultural and other, residential real estate and commercial real estate loans represented a significant portion of the nonperforming loans as of March 31, 2019.2020. See discussions related to the provision for credit losses and loans for more information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2020 | | | | | | As of March 31, 2020 | | | | |
| | Net Charge- offs | | % of Total Net Charge-offs | | Net Charge- offs as a % of Average Loans (annualized) | | Nonperforming Loans | | % of Total Nonperforming Loans | | Nonperforming Loans as a % of Total Loans |
| | (dollars in thousands) | | | | | | | | | | |
Commercial, financial, agricultural and other | | $ | 405 | | | 11.48 | % | | 0.03 | % | | $ | 8,501 | | | 14.36 | % | | 0.13 | % |
Real estate construction | | — | | | — | | | — | | | — | | | — | | | — | |
Residential real estate | | 502 | | | 14.22 | | | 0.03 | | | 12,164 | | | 20.57 | | | 0.19 | |
Commercial real estate | | 222 | | | 6.29 | | | 0.01 | | | 37,990 | | | 64.24 | | | 0.60 | |
Loans to individuals | | 2,400 | | | 68.01 | | | 0.16 | | | 485 | | | 0.82 | | | 0.01 | |
Total loans, net of unearned income | | $ | 3,529 | | | 100.00 | % | | 0.23 | % | | $ | 59,140 | | | 100.00 | % | | 0.93 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, 2019 | | As of March 31, 2019 |
| | Net Charge- offs | | % of Total Net Charge-offs | | Net Charge- offs as a % of Average Loans (annualized) | | Nonperforming Loans | | % of Total Nonperforming Loans | | Nonperforming Loans as a % of Total Loans |
| | (dollars in thousands) |
Commercial, financial, agricultural and other | | $ | 922 |
| | 41.79 | % | | 0.06 | % | | $ | 6,016 |
| | 19.23 | % | | 0.10 | % |
Real estate construction | | (42 | ) | | (1.90 | ) | | — |
| | — |
| | — |
| | — |
|
Residential real estate | | 76 |
| | 3.44 |
| | — |
| | 13,195 |
| | 42.18 |
| | 0.22 |
|
Commercial real estate | | 258 |
| | 11.70 |
| | 0.02 |
| | 11,716 |
| | 37.46 |
| | 0.20 |
|
Loans to individuals | | 992 |
| | 44.97 |
| | 0.07 |
| | 353 |
| | 1.13 |
| | 0.01 |
|
Total loans, net of unearned income | | $ | 2,206 |
| | 100.00 | % | | 0.15 | % | | $ | 31,280 |
| | 100.00 | % | | 0.53 | % |
Net charge-offs for the three months ended March 31, 20192020 totaled $2.2$3.5 million, compared to $1.5$2.2 million for the three months ended March 31, 2018.2019. The most significant charge-offs during the three months ended March 31, 20192020 included a $0.5 million charge-off and a $0.3 million charge-off for two commercial customers and $1.0$2.4 million in net charge-offs related to loans to individuals, primarily indirect auto loans and personal credit lines. See discussions related to the provision for credit losses and loans for more information.
Capital Resources
At March 31, 2019,2020, shareholders’ equity was $998.0 million,$1.1 billion, an increase of $22.6$2.3 million from December 31, 2018.2019. The increase was primarily the result $24.6of $4.7 million in net income, $2.7$1.8 million in treasury stock sales and an increase of $7.2$11.8 million in the fair value of available for sale investments. These increases were partially offset by $9.9$10.8 million of dividends paid to shareholders and $2.1$5.2 million of common stock repurchases. Cash dividends declared per common share were $0.10$0.11 and $0.08$0.10 for the three months ended March 31, 20192020 and 2018,2019, respectively.
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 that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth and 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 the new regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. The most significant changes includeincluded 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 improveimproved 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, which was fully phased-in as of January 1, 2019, 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%7.0% 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 existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment, which reduces the volatility of regulatory capital levels.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
During the second quarter of 2018, First Commonwealth Bank, the Company's banking subsidiary, issued $100 million in subordinated debt, which under the regulatory rules qualifies as Tier II capital. This subordinated debt issuance increased the total risk-based capital ratio by 160 basis points.
As of March 31, 2019,2020, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which they are subject and was considered well-capitalized under the regulatory rules, all on a fully phased-in basis. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital, Tier I leverage ratio and Common equity tier I risk-based capital as set forth in the table below:
| | | Actual | | Minimum Capital Required | | Required to be Considered Well Capitalized | | Actual | | | Minimum Capital Required | | | Required to be Considered Well Capitalized | |
| Capital Amount | | Ratio | | Capital Amount | | Ratio | | Capital Amount | | Ratio | | Capital Amount | | Ratio | | | Capital Amount | | Ratio | | Capital Amount | | Ratio |
| (dollars in thousands) | | (dollars in thousands) | |
Total Capital to Risk Weighted Assets | | | | | | | | | | | | Total Capital to Risk Weighted Assets | | | |
First Commonwealth Financial Corporation | $ | 936,382 |
| | 14.60 | % | | $ | 673,575 |
| | 10.50 | % | | $ | 641,500 |
| | 10.00 | % | First Commonwealth Financial Corporation | $ | 971,738 | | | 14.18 | % | | | $ | 719,609 | | | 10.50 | % | | $ | 685,342 | | | 10.00 | % |
First Commonwealth Bank | 900,536 |
| | 14.07 |
| | 672,277 |
| | 10.50 |
| | 640,264 |
| | 10.00 |
| First Commonwealth Bank | 937,443 | | | 13.71 | | | | 718,146 | | | 10.50 | | | 683,948 | | | 10.00 | |
Tier I Capital to Risk Weighted Assets | | | | | | | | | | | | Tier I Capital to Risk Weighted Assets | | | |
First Commonwealth Financial Corporation | $ | 783,929 |
| | 12.22 | % | | $ | 545,275 |
| | 8.50 | % | | $ | 513,200 |
| | 8.00 | % | First Commonwealth Financial Corporation | $ | 792,334 | | | 11.56 | % | | | $ | 582,541 | | | 8.50 | % | | $ | 548,274 | | | 8.00 | % |
First Commonwealth Bank | 748,083 |
| | 11.68 |
| | 544,224 |
| | 8.50 |
| | 512,211 |
| | 8.00 |
| First Commonwealth Bank | 758,039 | | | 11.08 | | | | 581,356 | | | 8.50 | | | 547,159 | | | 8.00 | |
Tier I Capital to Average Assets | | | | | | | | | | | | Tier I Capital to Average Assets | | | |
First Commonwealth Financial Corporation | $ | 783,929 |
| | 10.31 | % | | $ | 304,162 |
| | 4.00 | % | | $ | 380,202 |
| | 5.00 | % | First Commonwealth Financial Corporation | $ | 792,334 | | | 9.90 | % | | | $ | 320,206 | | | 4.00 | % | | $ | 400,258 | | | 5.00 | % |
First Commonwealth Bank | 748,083 |
| | 9.85 |
| | 303,652 |
| | 4.00 |
| | 379,565 |
| | 5.00 |
| First Commonwealth Bank | 758,039 | | | 9.49 | | | | 319,576 | | | 4.00 | | | 399,470 | | | 5.00 | |
Common Equity Tier I to Risk Weighted Assets | | | | | | | | | | | | Common Equity Tier I to Risk Weighted Assets | | | |
First Commonwealth Financial Corporation | $ | 713,929 |
| | 11.13 | % | | $ | 449,050 |
| | 7.00 | % | | $ | 416,975 |
| | 6.50 | % | First Commonwealth Financial Corporation | $ | 722,334 | | | 10.54 | % | | | $ | 479,739 | | | 7.00 | % | | $ | 445,472 | | | 6.50 | % |
First Commonwealth Bank | 748,083 |
| | 11.68 |
| | 448,185 |
| | 7.00 |
| | 416,171 |
| | 6.50 |
| First Commonwealth Bank | 758,039 | | | 11.08 | | | | 478,764 | | | 7.00 | | | 444,566 | | | 6.50 | |
On April 23, 2019,28, 2020, First Commonwealth Financial Corporation declared a quarterly dividend of $0.10$0.11 per share payable on May 17, 201922, 2020 to shareholders of record as of May 3, 2019.8, 2020. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.
On March 4, 2019, a share repurchase program was authorized by the Board of Directors for up to an additional $25.0 million in shares of the Company's common stock. As of March 31, 2019, 74,0332020, 761,558 common shares were repurchased at an average price of $12.48$12.30 per share. First Commonwealth may suspendIn March 2020, as a result of the COVID-19 pandemic, the Company temporarily suspended the share repurchase program.
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, however, on March 27, 2020, the CARES Act was signed into law, providing banking organizations with optional, temporary relief from implementing CECL until the earlier of the date on which the national emergency related to COVID-19 ends or discontinueDecember 31, 2020. As provided by the program at any time.CARES Act, the Company has elected to delay its adoption of CECL as a result of the uncertainty and volatility around economic forecasts.
During our implementation process, we 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 was 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.
ITEM 3. QuantitativeFinancial Condition and Qualitative Disclosures About Market RiskResults of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Parallel runs were completed beginning with the third quarter of 2019 incorporating operational procedures and internal controls. Based on the composition, characteristics and quality of our loan portfolio as well as prevailing economic conditions and forecasts as of the January 1, 2020 adoption date, we expect that 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 will not record any allowance for credit losses on its debt securities as a result of adopting ASU 2016-13.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Information appearing in Item 2 of this report under the caption “Market Risk” is incorporated by reference in response to this item.
ITEM 4. 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.
PART II – OTHER INFORMATION
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
| |
ITEM 1.ITEM 1. LEGAL PROCEEDINGS | LEGAL PROCEEDINGS |
The information required by this item is set forth in Part I, Item 1, Note 5, "Commitments and Contingent Liabilities," which is incorporated herein by reference in response to this item.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019, except for the following risk factor.
The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily closed certain of our branches and offices. In response to the pandemic, we have also suspended residential property foreclosure sales and involuntary automobile repossessions, and are offering fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, small business and consumer lending customers, and future governmental actions may require these and other types of customer-related responses. In addition, we have temporarily suspended share repurchases and could take other capital actions in response to the COVID-19 pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
PART II – OTHER INFORMATION
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 4, 2019, a share repurchase program was authorized for up to $25.0 million in shares of the Company's common stock. The following table details the amount of shares repurchased under this program during the first quarter of 2019:2020:
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Month Ending: | Total Number of Shares Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs* |
January 31, 2020 | 8,550 | | | $ | 13.57 | | | — | | | 1,470,127 | |
February 29, 2020 | 159,775 | | | 13.33 | | | — | | | 1,503,902 | |
March 31, 2020 | 199,287 | | | 10.62 | | | — | | | 1,710,022 | |
Total | 367,612 | | | $ | 11.87 | | | — | | | |
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* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $13.52 at January 31, 2020, $11.80 at February 29, 2020 and $9.14 at March 31, 2020. | | | | | | | | |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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Month Ending: | Total Number of Shares Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs* |
January 31, 2019 | — |
| | $ | — |
| | — |
| | — |
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February 28, 2019 | — |
| | — |
| | — |
| | — |
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March 31, 2019 | 74,033 |
| | 12.48 |
| | 74,033 |
| | 1,910,789 |
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Total | 74,033 |
| | $ | 12.48 |
| | 74,033 |
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* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $12.60 at March 31, 2019. |
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
PART II – OTHER INFORMATION
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS
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Exhibit Number | | Description | | Incorporated by Reference to |
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| | | | Filed herewith |
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| | | | Filed herewith |
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Exhibit
| | Description | | Incorporated by Reference to |
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| | | | Filed herewith |
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| | | | Filed herewith |
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| | | | Filed herewith |
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| | | | Filed herewith |
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| | | | Filed herewith |
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| | | | Filed herewith |
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| The following materials from First Commonwealth Financial Corporation’s Quarterly Report on Form 10-Q, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.
Note that XBRL tags are embedded within the document.
| | Filed herewith |
SIGNATURES
Pursuant to the requirements 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
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DATED: May 6, 20198, 2020 | | /s/ T. Michael Price |
| | T. Michael Price President and Chief Executive Officer |
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DATED: May 6, 20198, 2020 | | /s/ James R. Reske |
| | James R. Reske Executive Vice President, Chief Financial Officer and Treasurer
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