FIRST COMMONWEALTH FINANCIAL CORP /PA/ - FORM 10-Q

Attached files

file	filename
EX-32.2 - CFO CERTIFICATION PURSUANT TO SECTION 906 OF SABRBANES-OXLEY ACT OF 2002 - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex322_2016930x10q.htm
EX-32.1 - CEO CERTIFICATION PURSUANT TO SECTION 906 OF SABRBANES-OXLEY ACT OF 2002 - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex321_2016930x10q.htm
EX-31.2 - CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex312_2016930x10q.htm
EX-31.1 - CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex311_2016930x10q.htm
EX-10.3 - RESTRICTED STOCK AGREEMENT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex103_restrictedstocka.htm
EX-10.2 - CHANGE OF CONTROL AGREEMENT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex102_changeofcontrola.htm
EX-10.1 - EMPLOYMENT AGREEMENT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex101_employmentagreem.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



Pennsylvania		25-1428528
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

601 Philadelphia Street, Indiana, PA		15701
(Address of principal executive offices)		(Zip Code)

724-349-7220

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Smaller reporting company ¨ Non-accelerated filer ¨

(Do not check if a smaller reporting company)

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 November 8, 2016, was 88,992,077.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

	Condensed Consolidated Statements of Financial Condition (Unaudited)	3
	Condensed Consolidated Statements of Income (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to the Unaudited Condensed Consolidated Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	64

ITEM 4.	Controls and Procedures	64

PART II.	Other Information

ITEM 1.	Legal Proceedings	65

ITEM 1A.	Risk Factors	65

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

ITEM 3.	Defaults Upon Senior Securities	65

ITEM 4.	Mine Safety Disclosures	65

ITEM 5.	Other Information	65

ITEM 6.	Exhibits	66

	Signatures	67

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)



	September 30, 2016			December 31, 2015
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	76,456		$	66,644
Interest-bearing bank deposits	5,097			2,808
Securities available for sale, at fair value	813,659			886,560
Securities held to maturity, at amortized cost (Fair value of $396,994 and $382,341 at September 30, 2016 and December 31, 2015, respectively)	389,513			384,324
Other investments	54,066			62,952
Loans held for sale	7,855			5,763
Loans:
Portfolio loans	4,860,652			4,683,750
Allowance for credit losses	(54,734		)	(50,812		)
Net loans	4,805,918			4,632,938
Premises and equipment, net	63,356			63,454
Other real estate owned	7,686			9,398
Goodwill	164,437			164,500
Amortizing intangibles, net	912			1,231
Bank owned life insurance	186,034			182,601
Other assets	91,494			103,717
Total assets	$	6,666,483		$	6,566,890
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,241,627		$	1,116,689
Interest-bearing	3,217,353			3,079,205
Total deposits	4,458,980			4,195,894
Short-term borrowings	1,330,327			1,510,825
Subordinated debentures	72,167			72,167
Other long-term debt	8,892			9,314
Total long-term debt	81,059			81,481
Other liabilities	44,330			59,144
Total liabilities	5,914,696			5,847,344
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; 105,563,455 shares issued at September 30, 2016 and December 31, 2015, and 88,992,077 and 88,961,268 shares outstanding at September 30, 2016 and December 31, 2015, respectively	105,563			105,563
Additional paid-in capital	366,291			365,981
Retained earnings	401,079			378,081
Accumulated other comprehensive income (loss), net	6,762			(2,386		)
Treasury stock (16,571,378 and 16,602,187 shares at September 30, 2016 and December 31, 2015, respectively)	(127,908		)	(127,693		)
Total shareholders’ equity	751,787			719,546
Total liabilities and shareholders’ equity	$	6,666,483		$	6,566,890

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2016		2015			2016			2015
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	46,657	$	43,083		$	137,389		$	128,334
Interest and dividends on investments:
Taxable interest	6,763		6,470			20,937			20,022
Interest exempt from federal income taxes	380		261			1,112			646
Dividends	671		685			2,225			2,727
Interest on bank deposits	8		2			19			7
Total interest income	54,479		50,501			161,682			151,736
Interest Expense
Interest on deposits	2,125		1,757			5,642			5,787
Interest on short-term borrowings	1,987		1,279			6,322			3,353
Interest on subordinated debentures	663		588			1,941			1,736
Interest on other long-term debt	86		192			261			633
Total interest expense	4,861		3,816			14,166			11,509
Net Interest Income	49,618		46,685			147,516			140,227
Provision for credit losses	3,408		4,621			20,306			8,818
Net Interest Income after Provision for Credit Losses	46,210		42,064			127,210			131,409
Noninterest Income
Net securities gains	—		—			28			125
Trust income	1,523		1,614			4,098			4,511
Service charges on deposit accounts	3,975		4,081			11,528			11,271
Insurance and retail brokerage commissions	2,104		2,163			6,048			6,536
Income from bank owned life insurance	1,350		1,357			3,957			4,089
Gain on sale of mortgage loans	1,235		832			2,850			1,856
Gain on sale of other loans and assets	387		808			1,048			1,428
Card-related interchange income	3,698		3,637			11,039			10,784
Derivatives mark to market	470		(783		)	(1,075		)	(420		)
Swap fee income	725		84			1,985			727
Other income	1,527		1,712			4,761			5,136
Total noninterest income	16,994		15,505			46,267			46,043
Noninterest Expense
Salaries and employee benefits	20,647		22,446			62,212			66,339
Net occupancy expense	3,176		3,291			9,843			10,518
Furniture and equipment expense	2,847		2,670			8,596			7,980
Data processing expense	1,832		1,558			5,379			4,505
Advertising and promotion expense	750		789			1,940			1,946
Pennsylvania shares tax expense	914		1,713			2,764			3,617
Intangible amortization	67		157			318			469
Collection and repossession expense	760		801			1,803			2,229
Other professional fees and services	1,202		1,002			2,866			2,877
FDIC insurance	1,105		963			3,205			3,047
Loss on sale or write-down of assets	188		140			629			2,037
Litigation and operational losses	295		314			1,174			1,637
Merger and acquisition related	118		28			358			28
Other operating expenses	4,795		4,385			13,163			13,516
Total noninterest expense	38,696		40,257			114,250			120,745
Income Before Income Taxes	24,508		17,312			59,227			56,707
Income tax provision	7,312		4,898			17,551			16,625
Net Income	$	17,196	$	12,414		$	41,676		$	40,082
Average Shares Outstanding	88,854,448		88,807,294			88,842,143			89,527,560
Average Shares Outstanding Assuming Dilution	88,858,204		88,813,746			88,843,939			89,531,498
Per Share Data:
Basic Earnings per Share	$	0.19	$	0.14		$	0.47		$	0.45
Diluted Earnings per Share	$	0.19	$	0.14		$	0.47		$	0.45
Cash Dividends Declared per Common Share	$	0.07	$	0.07		$	0.21		$	0.21

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(dollars in thousands)
Net Income	$	17,196		$	12,414		$	41,676		$	40,082
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period	(751		)	6,344			13,121			12,510
Less: reclassification adjustment for gains on securities included in net income	—			—			(28		)	(125		)
Unrealized holding (losses) gains on derivatives arising during the period	(1,056		)	1,504			1,038			2,172
Less: reclassification adjustment for gains on derivatives included in net income	(16		)	—			(57		)	(6		)
Total other comprehensive (loss) income, before tax benefit (expense)	(1,823		)	7,848			14,074			14,551
Income tax benefit (expense) related to items of other comprehensive (loss) income	638			(2,747		)	(4,926		)	(5,091		)
Total other comprehensive (loss) income	(1,185		)	5,101			9,148			9,460
Comprehensive Income	$	16,011		$	17,515		$	50,824		$	49,542

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2015	88,961,268		$	105,563	$	365,981	$	378,081		$	(2,386	)	$	(127,693	)	$	719,546
Net income							41,676									41,676
Other comprehensive income										9,148						9,148
Cash dividends declared ($0.21 per share)							(18,678		)							(18,678		)
Treasury stock acquired	(98,687	)											(864		)	(864		)
Treasury stock reissued	23,148				39		—						177			216
Restricted stock	106,348		—		271		—						472			743
Balance at September 30, 2016	88,992,077		$	105,563	$	366,291	$	401,079		$	6,762		$	(127,908	)	$	751,787



	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, 2014	91,723,028		$	105,563	$	365,615	$	353,027		$	(4,499	)	$	(103,561	)	$	716,145
Net income							40,082									40,082
Other comprehensive income										9,460						9,460
Cash dividends declared ($0.21 per share)							(18,862		)							(18,862		)
Treasury stock acquired	(2,918,066	)											(25,383		)	(25,383		)
Treasury stock reissued	20,936				32		—						160			192
Restricted stock	135,370		—		303		—						831			1,134
Balance at September 30, 2015	88,961,268		$	105,563	$	365,950	$	374,247		$	4,961		$	(127,953	)	$	722,768

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	For the Nine Months Ended
	September 30,
	2016			2015
Operating Activities	(dollars in thousands)
Net income	$	41,676		$	40,082
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	20,306			8,818
Deferred tax expense	4,332			12,520
Depreciation and amortization	5,234			5,750
Net gains on securities and other assets	(2,288		)	(952		)
Net amortization of premiums and discounts on securities	3,486			2,012
Income from increase in cash surrender value of bank owned life insurance	(3,957		)	(4,089		)
Increase in interest receivable	(50		)	(167		)
Mortgage loans originated for sale	(94,611		)	(67,708		)
Proceeds from sale of mortgage loans	95,341			67,071
Decrease in interest payable	(324		)	(173		)
Decrease in income taxes payable	(3,055		)	(22		)
Other-net	(6,200		)	(10,757		)
Net cash provided by operating activities	59,890			52,385
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	35,470			3,828
Purchases	(42,837		)	(156,756		)
Transactions with securities available for sale:
Proceeds from sales	55,744			—
Proceeds from maturities and redemptions	122,828			286,924
Purchases	(94,777		)	(16,600		)
Purchases of FHLB stock	(31,218		)	(46,911		)
Proceeds from the redemption of FHLB stock	40,104			36,980
Proceeds from bank owned life insurance	203			378
Proceeds from sale of loans	3,511			2,898
Proceeds from sale of other assets	6,021			3,668
Net increase in loans	(200,269		)	(140,268		)
Purchases of other assets	(204		)	—
Purchases of premises and equipment	(5,511		)	(3,740		)
Net cash used in investing activities	(110,935		)	(29,599		)
Financing Activities
Net (decrease) increase in federal funds purchased	(1,000		)	11,000
Net (decrease) increase in other short-term borrowings	(179,498		)	212,918
Net increase (decrease) in deposits	263,392			(154,018		)
Repayments of other long-term debt	(422		)	(50,407		)
Dividends paid	(18,678		)	(18,862		)
Proceeds from reissuance of treasury stock	216			192
Purchase of treasury stock	(864		)	(25,383		)
Net cash provided by (used in) financing activities	63,146			(24,560		)
Net increase (decrease) in cash and cash equivalents	12,101			(1,774		)
Cash and cash equivalents at January 1	69,452			74,538
Cash and cash equivalents at September 30	$	81,553		$	72,764

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or the “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of First Commonwealth’s financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity as of and for the periods presented.

The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year of 2016. These interim financial statements should be read in conjunction with First Commonwealth’s 2015 Annual Report on Form 10-K.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Condensed Consolidated Statements of Income.



	For the Nine Months Ended September 30,
	2016									2015
	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	$	13,121		$	(4,593	)	$	8,528		$	12,510		$	(4,377	)	$	8,133
Reclassification adjustment for gains on securities included in net income	(28		)	10			(18		)	(125		)	44			(81		)
Total unrealized gains on securities	13,093			(4,583		)	8,510			12,385			(4,333		)	8,052
Unrealized gains on derivatives:
Unrealized holding gains on derivatives arising during the period	1,038			(363		)	675			2,172			(760		)	1,412
Reclassification adjustment for gains on derivatives included in net income	(57		)	20			(37		)	(6		)	2			(4		)
Total unrealized gains on derivatives	981			(343		)	638			2,166			(758		)	1,408
Total other comprehensive income	$	14,074		$	(4,926	)	$	9,148		$	14,551		$	(5,091	)	$	9,460

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three Months Ended September 30,
	2016								2015
	Pretax Amount			Tax (Expense) Benefit		Net of Tax Amount			Pretax Amount		Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on securities arising during the period	$	(751	)	$	262	$	(489	)	$	6,344	$	(2,221	)	$	4,123
Reclassification adjustment for losses on securities included in net income	—			—		—			—		—			—
Total unrealized (losses) gains on securities	(751		)	262		(489		)	6,344		(2,221		)	4,123
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period	(1,056		)	370		(686		)	1,504		(526		)	978
Reclassification adjustment for gains on derivatives included in net income	(16		)	6		(10		)	—		—			—
Total unrealized (losses) gains on derivatives	(1,072		)	376		(696		)	1,504		(526		)	978
Total other comprehensive (loss) income	$	(1,823	)	$	638	$	(1,185	)	$	7,848	$	(2,747	)	$	5,101

The following table details the change in components of OCI for the nine months ended September 30:



	2016											2015
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income
	(dollars in thousands)
Balance at December 31	$	(2,956	)	$	10	$	560		$	(2,386	)	$	(4,875	)	$	76	$	300		$	(4,499	)
Other comprehensive income before reclassification adjustment	8,528			—		675			9,203			8,133			—		1,412			9,545
Amounts reclassified from accumulated other comprehensive (loss) income	(18		)	—		(37		)	(55		)	(81		)	—		(4		)	(85		)
Net other comprehensive income during the period	8,510			—		638			9,148			8,052			—		1,408			9,460
Balance at September 30	$	5,554		$	10	$	1,198		$	6,762		$	3,177		$	76	$	1,708		$	4,961

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the period for interest, as well as detail on non-cash investing and financing activities for the nine months ended September 30:



	2016		2015
	(dollars in thousands)
Cash paid during the period for:
Interest	$	14,768	$	11,682
Income taxes	15,750		4,000
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	3,973		7,413
Loans transferred from held to maturity to held for sale	3,573		3,071
Gross increase in market value adjustment to securities available for sale	13,094		12,381
Gross increase in market value adjustment to derivatives	981		2,167
Investments committed to purchase, not settled	276		1,350
Proceeds from death benefit on bank-owned life insurance not received	320		—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED 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 September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Weighted average common shares issued	105,563,455		105,563,455		105,563,455		105,563,455
Average treasury stock shares	(16,609,505	)	(16,602,502	)	(16,617,616	)	(15,858,433	)
Average unearned nonvested shares	(99,502	)	(153,659	)	(103,696	)	(177,462	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	88,854,448		88,807,294		88,842,143		89,527,560
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	3,756		6,452		1,796		3,938
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	88,858,204		88,813,746		88,843,939		89,531,498

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 nine months ended September 30 because to do so would have been antidilutive.



	2016					2015
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Restricted Stock	72,432	$	8.38	$	10.09	121,091	$	5.26	$	9.84

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:



	September 30, 2016		December 31, 2015
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,598,318	$	1,643,187
Financial standby letters of credit	17,760		17,843
Performance standby letters of credit	28,110		26,497
Commercial letters of credit	1,528		1,672

The notional amounts outstanding as of September 30, 2016 include amounts issued in 2016 of $23 thousand in financial standby letters of credit, $2.9 million in performance standby letters of credit and $0.2 million commercial letters of credit. A liability of $0.2 million has been recorded as of both September 30, 2016 and December 31, 2015 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $4.0 million as of September 30, 2016 and $4.4 million as of December 31, 2015. This liability is reflected in "Other liabilities" in the Condensed Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal Proceedings

First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, 2016, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $7 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.

First Commonwealth Financial Corporation and First Commonwealth Bank were named defendants in an action commenced August 27, 2015 by eight named plaintiffs that is pending in the Court of Common Pleas of Jefferson County, Pennsylvania. The plaintiffs allege that the Bank repossessed motor vehicles, sold the vehicles and sought to collect deficiency balances in a manner that did not comply with the notice requirements of the Pennsylvania Uniform Commercial Code (UCC), charged inappropriate costs and fees, including storage costs for dates that a repossessed vehicle was not in storage, and wrongly filed forms with the Department of Motor Vehicles asserting that the Bank had complied with applicable laws relating to the repossession of the vehicles. The plaintiffs seek to pursue the action as a class action on behalf of the named plaintiffs and other similarly situated plaintiffs who had their automobiles repossessed and seek to recover damages under the UCC and the Pennsylvania Fair Credit Extension Uniformity Act. First Commonwealth and the Bank contest the plaintiffs’ allegations and intend to oppose class certification. The Bank has also asserted counterclaims for breach of contract, set-off and recoupment against the plaintiffs, individually, and as representatives of the putative class. The Bank and counsel for the plaintiffs reached an agreement-in-principle to settle the litigation during the second quarter of 2016. The parties are negotiating the terms of a definitive settlement agreement which would be subject to court approval and other customary conditions. The estimated cost of the settlement to the Bank was recorded as a liability in the second quarter of 2016. As set forth in the preceding paragraph, all current litigation matters, including this action, are believed to be within the range of reasonably possible losses set forth in the preceding paragraph.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED 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:



	September 30, 2016									December 31, 2015
	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	$	16,059	$	1,917	$	—		$	17,976	$	20,034	$	2,071	$	(13	)	$	22,092
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	692,092		13,090		(556		)	704,626		778,476		7,983		(8,882		)	777,577
Mortgage-Backed Securities – Commercial	1		—		—			1		28		—		—			28
Other Government-Sponsored Enterprises	19,300		7		—			19,307		19,201		2		(85		)	19,118
Obligations of States and Political Subdivisions	27,073		878		—			27,951		27,066		532		—			27,598
Corporate Securities	5,901		618		—			6,519		1,897		422		—			2,319
Pooled Trust Preferred Collateralized Debt Obligations	43,020		677		(8,088		)	35,609		42,239		916		(7,497		)	35,658
Total Debt Securities	803,446		17,187		(8,644		)	811,989		888,941		11,926		(16,477		)	884,390
Equities	1,670		—		—			1,670		2,170		—		—			2,170
Total Securities Available for Sale	$	805,116	$	17,187	$	(8,644	)	$	813,659	$	891,111	$	11,926	$	(16,477	)	$	886,560

Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and obligations of U.S. Government-sponsored enterprises. These obligations have contractual maturities ranging from less than one year to approximately 30 years with lower anticipated lives to maturity due to prepayments. All mortgage backed securities contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds; therefore, First Commonwealth uses computer simulation models to test the average life and yield volatility of all mortgage backed securities under various interest rate scenarios to monitor the potential impact on earnings and interest rate risk positions.

Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties. Other fixed income securities within the portfolio also contain prepayment risk.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at September 30, 2016, by contractual maturity, are shown below.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	5,600	$	5,602
Due after 1 but within 5 years	17,697		17,756
Due after 5 but within 10 years	27,073		27,951
Due after 10 years	44,924		38,077
	95,294		89,386
Mortgage-Backed Securities (a)	708,152		722,603
Total Debt Securities	$	803,446	$	811,989


(a)	Mortgage Backed Securities include an amortized cost of $16.1 million and a fair value of $18.0 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $692.1 million and a fair value of $704.6 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the nine months ended September 30:



	2016			2015
	(dollars in thousands)
Proceeds from sales	$	55,744		$	—
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	304		$	—
Gross losses	(276		)	—
	28			—
Maturities and impairment
Gross gains	—			125
Gross losses	—			—
Other-than-temporary impairment	—			—
	—			125
Net gains and impairment	$	28		$	125

Securities available for sale with an estimated fair value of $498.5 million and $416.1 million were pledged as of September 30, 2016 and December 31, 2015, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity

Below is an analysis of the amortized cost and fair values of debt securities held to maturity at:



	September 30, 2016									December 31, 2015
	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	$	4,615	$	154	$	—		$	4,769	$	4,775	$	—	$	(7	)	$	4,768
Mortgage-Backed Securities- Commercial	35,625		225		—			35,850		16,843		—		(247		)	16,596
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	297,681		5,865		—			303,546		315,609		30		(1,824		)	313,815
Mortgage-Backed Securities – Commercial	14,809		378		—			15,187		15,187		—		(178		)	15,009
Obligations of States and Political Subdivisions	36,783		884		(25		)	37,642		31,910		301		(58		)	32,153
Total Securities Held to Maturity	$	389,513	$	7,506	$	(25	)	$	396,994	$	384,324	$	331	$	(2,314	)	$	382,341

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2016, 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	$	—	$	—
Due after 1 but within 5 years	1,223		1,249
Due after 5 but within 10 years	29,368		30,125
Due after 10 years	6,192		6,268
	36,783		37,642
Mortgage-Backed Securities (a)	352,730		359,352
Total Debt Securities	$	389,513	$	396,994


(a)	Mortgage Backed Securities include an amortized cost of $40.2 million and a fair value of $40.6 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $312.5 million and a fair value of $318.7 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 $281.9 million and $45.7 million were pledged as of September 30, 2016 and December 31, 2015, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the nine months ended September 30, 2016 and 2015, no other-than-temporary impairment charges were recognized.

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

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note 10, “Fair Values of Assets and Liabilities,” for additional information.

The following table presents the gross unrealized losses and estimated fair values at September 30, 2016 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-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	59,691	$	(137	)	$	60,909	$	(419	)	$	120,600	$	(556	)
Obligations of States and Political Subdivisions	1,781		(25		)	—		—			1,781		(25		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,896		(8,088		)	29,896		(8,088		)
Total Securities	$	61,472	$	(162	)	$	90,805	$	(8,507	)	$	152,277	$	(8,669	)

At September 30, 2016, fixed income securities issued by U.S. Government-sponsored enterprises comprised 6% of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 93% of the unrealized losses primarily due to the illiquid market for this investment type. At September 30, 2016, there are 22 debt securities in an unrealized loss position.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at December 31, 2015 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	$	6,798	$	(20	)	$	—	$	—		$	6,798	$	(20	)
Mortgage-Backed Securities - Commercial	16,596		(247		)	—		—			16,596		(247		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	436,011		(3,293		)	263,119		(7,413		)	699,130		(10,706		)
Mortgage-Backed Securities – Commercial	15,009		(178		)	—		—			15,009		(178		)
Other Government-Sponsored Enterprises	12,316		(85		)	—		—			12,316		(85		)
Obligation of States and Political Subdivisions	7,208		(58		)	—		—			7,208		(58		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,957		(7,497		)	29,957		(7,497		)
Total Securities	$	493,938	$	(3,881	)	$	293,076	$	(14,910	)	$	787,014	$	(18,791	)

As of September 30, 2016, our corporate securities had an amortized cost and an estimated fair value of $5.9 million and $6.5 million, respectively. As of December 31, 2015, our corporate securities had an amortized cost and estimated fair value of $1.9 million and $2.3 million, respectively. Corporate securities are comprised of debt for large regional banks. There were no corporate securities in an unrealized loss position as of September 30, 2016 and December 31, 2015. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

As of September 30, 2016, the book value of our pooled trust preferred collateralized debt obligations totaled $43.0 million with an estimated fair value of $35.6 million, which includes securities comprised of 268 banks and other financial institutions. All of our pooled securities are mezzanine tranches, three of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of September 30, 2016, after taking into account management’s best estimates of future interest deferrals and defaults, three of our securities had no excess subordination in the tranches we own and six of our securities had excess subordination which ranged from 2% to 82% of the current performing collateral.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides information related to our pooled trust preferred collateralized debt obligations as of September 30, 2016:



Deal	Class	Book Value		Estimated Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks	Deferrals and Defaults as a % of Current Collateral		Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL IV	Mezzanine	$	1,830	$	1,331	$	(499	)	B1/BB	6	18.05	%	60.61	%
Pre TSL VII	Mezzanine	3,119		3,513		394			Ca/-	14	47.77		0.00
Pre TSL VIII	Mezzanine	2,063		2,025		(38		)	C/C	28	44.37		0.00
Pre TSL IX	Mezzanine	2,403		1,893		(510		)	B1/C	37	27.83		12.79
Pre TSL X	Mezzanine	1,707		1,887		180			Caa1/C	42	31.58		2.17
Pre TSL XII	Mezzanine	5,839		4,584		(1,255		)	B3/C	64	24.50		0.00
Pre TSL XIII	Mezzanine	12,888		10,504		(2,384		)	Ba3/C	54	11.75		48.41
Pre TSL XIV	Mezzanine	12,960		9,559		(3,401		)	B1/CC	54	13.45		37.92
MMCap I	Mezzanine	211		313		102			Ca/C	8	58.11		81.65
Total		$	43,020	$	35,609	$	(7,411	)

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

In October 2016, the Company received notice that the Senior note holders of Pre TSL VII elected to liquidate all assets of the trust. The sale of the assets and early redemption of the security is anticipated to be completed in the fourth quarter of 2016. Estimated proceeds are expected to be in line with our book value.

All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies and therefore are not considered covered funds under the Volcker Rule.

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three and nine months ended September 30, 2016 and 2015, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at September 30, 2016. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

Results of a discounted cash flow test are significantly affected by other variables, such as the estimate of future cash flows, credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following provides additional information for each of these variables:

•

Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions, which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 268 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

•

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they will become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of September 30, 2016, default probabilities for performing collateral ranged from 0.33% to 75%.

Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying piece of collateral. Using the results of the credit evaluation, the next step of the process is to look at pricing of senior debt or credit default swaps for the issuer (or where such information is unavailable, for companies having similar credit profiles as the issuer). The pricing of these market indicators provides the information necessary to determine appropriate default probabilities for each bank.

In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults that results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security. The results of the stress test allow management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.

Our cash flow analysis as of September 30, 2016, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the nine months ended September 30, 2016. Based upon the analysis performed by management, it is probable that three of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the table on page 17 with 0.00% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of September 30, 2016 indicates it is probable that we will collect all contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of September 30, 2016, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities' current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from 19% to 123% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
	(dollars in thousands)
Balance, beginning (a)	$	24,310		$	25,366		$	24,851		$	26,246
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)	(270		)	(255		)	(811		)	(917		)
Reduction for debt securities called during the period	—			—			—			(218		)
Balance, ending	$	24,040		$	25,111		$	24,040		$	25,111


(a)	The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.


(b)	Represents the increase in cash flows recognized in interest income during the period.

In the first nine months of 2016 and 2015, 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, 2016 and 2015, 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, 2016 and December 31, 2015, our FHLB stock totaled $54.1 million and $63.0 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, 2016.

Note 8 Loans and Allowance for Credit Losses

The following table provides outstanding balances related to each of our loan types:



	September 30, 2016		December 31, 2015
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,207,447	$	1,150,906
Real estate construction	229,375		220,736

FIRST COMMONWEALTH FINANCIAL CORP /PA/ - FORM 10-Q - November 9, 2016

Attached files