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 nine months ended September 30, 2018 and 2017, no other-than-temporary impairment charges were recognized.

First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by 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 September 30, 2018 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	7,267	$	(288	)	$	—	$	—		$	7,267	$	(288	)
Mortgage-Backed Securities – Commercial	144,211		(1,538		)	76,183		(3,879		)	220,394		(5,417		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	399,505		(10,329		)	489,431		(26,218		)	888,936		(36,547		)
Mortgage-Backed Securities – Commercial	12,986		(427		)	—		—			12,986		(427		)
Other Government-Sponsored Enterprises	—		—			100		—			100		—
Obligations of States and Political Subdivisions	44,422		(635		)	5,781		(389		)	50,203		(1,024		)
Debt securities issued by foreign governments	395		(5		)	—		—			395		(5		)
Corporate Securities	18,702		(279		)	—		—			18,702		(279		)
Total Securities	$	627,488	$	(13,501	)	$	571,495	$	(30,486	)	$	1,198,983	$	(43,987	)

At September 30, 2018, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 84% and 13%, respectively, of total unrealized losses due to changes in market interest rates. At September 30, 2018, there are 183 debt securities in an unrealized loss position.

The following table presents the gross unrealized losses and estimated fair values at December 31, 2017 by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	5,584	$	(21	)	$	—	$	—		$	5,584	$	(21	)
Mortgage-Backed Securities - Commercial	48,322		(962		)	32,683		(894		)	81,005		(1,856		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	351,222		(2,295		)	400,984		(9,746		)	752,206		(12,041		)
Mortgage-Backed Securities – Commercial	13,985		(71		)	—		—			13,985		(71		)
Other Government-Sponsored Enterprises	997		(1		)	99		—			1,096		(1		)
Obligation of States and Political Subdivisions	7,144		(32		)	3,653		(129		)	10,797		(161		)
Corporate Securities	3,993		(4		)	—		—			3,993		(4		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			19,120		(4,379		)	19,120		(4,379		)
Total Securities	$	431,247	$	(3,386	)	$	456,539	$	(15,148	)	$	887,786	$	(18,534	)

As of September 30, 2018, our corporate securities had an amortized cost and an estimated fair value of $20.9 million and $21.1 million, respectively. As of December 31, 2017, our corporate securities had an amortized cost and estimated fair value of $15.9 million and $16.5 million, respectively. Corporate securities are comprised of debt for large regional banks. There were four corporate securities in an unrealized loss position as of September 30, 2018 and one corporate security in an unrealized loss position as of December 31, 2017. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

During the first six months of 2018, all of our pooled trust preferred collateralized debt obligations were liquidated either through a successful auction call or sale. At December 31, 2017, the pooled trust preferred securities had an amortized cost and estimated fair value of $27.5 million and $23.6 million, respectively. 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 September 30,					For the Nine Months Ended September 30,
	2018		2017			2018			2017
	(dollars in thousands)
Balance, beginning (a)	$	—	$	16,610		$	12,208		$	17,056
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—		—			—			—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—		—			—			—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	—		(219		)	(223		)	(665		)
Reduction for debt securities sold during the period	—		—			(9,164		)	—
Reduction for debt securities called during the period	—		—			(2,821		)	—
Balance, ending	$	—	$	16,391		$	—		$	16,391


(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.

During the nine-months ended September 30, 2018, there were no gains or losses recognized through earnings on equity securities. During the nine-months ended September 30, 2017, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of September 30, 2018 and 2017, there were no equity securities in an unrealized loss position.

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of September 30, 2018 and December 31, 2017, our FHLB stock totaled $25.0 million and $29.8 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three and nine months ended September 30, 2018.