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

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EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex311_20170331x10q.htm
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex322_20170331x10q.htm
EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex321_20170331x10q.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex312_20170331x10q.htm
EX-10.2 - EXHIBIT 10.2 2017-2019 LTIP - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex102_2017x2019ltip.htm
EX-10.1 - EXHIBIT 10.1 2017 AIP - FIRST COMMONWEALTH FINANCIAL CORP /PA/	fcf-ex101_2017aip.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2017



¨	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 May 8, 2017, was 97,478,605.

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	39

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	54

ITEM 4.	Controls and Procedures	54

PART II.	Other Information

ITEM 1.	Legal Proceedings	55

ITEM 1A.	Risk Factors	55

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

ITEM 3.	Defaults Upon Senior Securities	55

ITEM 4.	Mine Safety Disclosures	55

ITEM 5.	Other Information	55

ITEM 6.	Exhibits	56

	Signatures	57

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)



	March 31, 2017			December 31, 2016
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	75,160		$	91,033
Interest-bearing bank deposits	47,944			24,644
Securities available for sale, at fair value	832,754			778,612
Securities held to maturity, at amortized cost (Fair value of $383,735 and $368,618 at March 31, 2017 and December 31, 2016, respectively)	386,954			372,513
Other investments	38,669			36,498
Loans held for sale	9,588			7,052
Loans:
Portfolio loans	4,907,961			4,879,347
Allowance for credit losses	(48,676		)	(50,185		)
Net loans	4,859,285			4,829,162
Premises and equipment, net	66,329			67,534
Other real estate owned	6,910			6,805
Goodwill	186,483			186,483
Amortizing intangibles, net	11,441			12,013
Bank owned life insurance	188,313			187,021
Other assets	99,147			84,648
Total assets	$	6,808,977		$	6,684,018
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,270,136		$	1,268,786
Interest-bearing	3,699,593			3,678,622
Total deposits	4,969,729			4,947,408
Short-term borrowings	961,601			867,943
Subordinated debentures	72,167			72,167
Other long-term debt	8,604			8,749
Total long-term debt	80,771			80,916
Other liabilities	35,881			37,822
Total liabilities	6,047,982			5,934,089
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 March 31, 2017 and December 31, 2016, and 89,113,083 and 89,007,077 shares outstanding at March 31, 2017 and December 31, 2016, respectively	105,563			105,563
Additional paid-in capital	367,607			366,426
Retained earnings	421,533			412,764
Accumulated other comprehensive loss, net	(6,083		)	(7,027		)
Treasury stock (16,450,372 and 16,556,378 shares at March 31, 2017 and December 31, 2016, respectively)	(127,625		)	(127,797		)
Total shareholders’ equity	760,995			749,929
Total liabilities and shareholders’ equity	$	6,808,977		$	6,684,018

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
		March 31,
		2017			2016
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans		$	48,300		$	45,034
Interest and dividends on investments:
Taxable interest		6,994			7,146
Interest exempt from federal income taxes		397			361
Dividends		476			806
Interest on bank deposits		12			6
Total interest income		56,179			53,353
Interest Expense
Interest on deposits		1,812			1,589
Interest on short-term borrowings		1,749			2,235
Interest on subordinated debentures		705			634
Interest on other long-term debt		83			88
Total interest expense		4,349			4,546
Net Interest Income		51,830			48,807
Provision for credit losses		3,229			6,526
Net Interest Income after Provision for Credit Losses		48,601			42,281
Noninterest Income
Net securities gains		652			—
Trust income		1,417			1,255
Service charges on deposit accounts		4,319			3,708
Insurance and retail brokerage commissions		2,082			1,959
Income from bank owned life insurance		1,292			1,296
Gain on sale of mortgage loans		977			683
Gain on sale of other loans and assets		307			195
Card-related interchange income		4,251			3,557
Derivatives mark to market		2			(1,014		)
Swap fee (expense) income		(73		)	460
Other income		1,706			1,616
Total noninterest income		16,932			13,715
Noninterest Expense
Salaries and employee benefits		23,466			21,677
Net occupancy expense		3,761			3,481
Furniture and equipment expense		3,088			2,867
Data processing expense		2,085			1,759
Advertising and promotion expense		806			526
Pennsylvania shares tax expense		816			758
Intangible amortization		572			137
Collection and repossession expense		497			569
Other professional fees and services		959			791
FDIC insurance		793			1,038
Loss on sale or write-down of assets		99			96
Litigation and operational losses		232			244
Merger and acquisition related		611			—
Other operating expenses		4,980			4,201
Total noninterest expense		42,765			38,144
Income Before Income Taxes		22,768			17,852
Income tax provision		6,880			5,379
Net Income		$	15,888		$	12,473
Average Shares Outstanding		88,929,892			88,840,088
Average Shares Outstanding Assuming Dilution		88,987,671			88,845,201
Per Share Data:
Basic Earnings per Share		$	0.18		$	0.14
Diluted Earnings per Share		$	0.18		$	0.14
Cash Dividends Declared per Common Share		$	0.08		$	0.07

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
		March 31,
		2017			2016
	(dollars in thousands)
Net Income		$	15,888		$	12,473
Other comprehensive income, before tax expense:
Unrealized holding gains on securities arising during the period		2,543			10,070
Less: reclassification adjustment for gains on securities included in net income		(652		)	—
Unrealized holding (losses) gains on derivatives arising during the period		(516		)	1,735
Less: reclassification adjustment for losses (gains) on derivatives included in net income		78			(15		)
Total other comprehensive income, before tax expense		1,453			11,790
Income tax expense related to items of other comprehensive income		(509		)	(4,126		)
Total other comprehensive income		944			7,664
Comprehensive Income		$	16,832		$	20,137

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, 2016	89,007,077		$	105,563	$	366,426	$	412,764		$	(7,027	)	$	(127,797	)	$	749,929
Net income							15,888									15,888
Other comprehensive income										944						944
Cash dividends declared ($0.08 per share)							(7,119		)							(7,119		)
Treasury stock acquired	(78,632	)											(1,102		)	(1,102		)
Treasury stock reissued	158,638				1,044		—						1,214			2,258
Restricted stock	26,000		—		137		—						60			197
Balance at March 31, 2017	89,113,083		$	105,563	$	367,607	$	421,533		$	(6,083	)	$	(127,625	)	$	760,995



	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							12,473									12,473
Other comprehensive income										7,664						7,664
Cash dividends declared ($0.07 per share)							(6,224		)							(6,224		)
Treasury stock acquired	(55,301	)											(488		)	(488		)
Restricted stock	53,348		—		109		—						234			343
Balance at March 31, 2016	88,959,315		$	105,563	$	366,090	$	384,330		$	5,278		$	(127,947	)	$	733,314

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 Three Months Ended
	March 31,
	2017			2016
Operating Activities	(dollars in thousands)
Net income	$	15,888		$	12,473
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	3,229			6,526
Deferred tax expense	2,506			1,200
Depreciation and amortization	2,113			1,740
Net (gains) losses on securities and other assets	(1,718		)	218
Net amortization of premiums and discounts on securities	867			1,102
Income from increase in cash surrender value of bank owned life insurance	(1,292		)	(1,296		)
Increase in interest receivable	(338		)	(911		)
Mortgage loans originated for sale	(27,580		)	(22,269		)
Proceeds from sale of mortgage loans	29,829			22,858
Increase (decrease) in interest payable	571			(26		)
Increase in income taxes payable	4,354			2,811
Other-net	(991		)	(4,834		)
Net cash provided by operating activities	27,438			19,592
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	10,826			6,924
Purchases	(25,140		)	(19,695		)
Transactions with securities available for sale:
Proceeds from maturities and redemptions	33,125			35,815
Purchases	(85,220		)	(29,930		)
Purchases of FHLB stock	(12,883		)	(10,281		)
Proceeds from the redemption of FHLB stock	10,712			12,636
Proceeds from sale of other assets	1,631			2,101
Restricted cash	(21,284		)	—
Net increase in loans	(37,514		)	(118,137		)
Purchases of other assets	(410		)	—
Purchases of premises and equipment	(1,531		)	(2,251		)
Net cash used in investing activities	(127,688		)	(122,818		)
Financing Activities
Net decrease in federal funds purchased	—			(4,000		)
Net increase in other short-term borrowings	93,658			11,917
Net increase in deposits	22,385			105,873
Repayments of other long-term debt	(145		)	(139		)
Dividends paid	(7,119		)	(6,224		)
Purchase of treasury stock	(1,102		)	(488		)
Net cash provided by financing activities	107,677			106,939
Net increase in cash and cash equivalents	7,427			3,713
Cash and cash equivalents at January 1	115,677			69,452
Cash and cash equivalents at March 31	$	123,104		$	73,165

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 three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year of 2017. These interim financial statements should be read in conjunction with First Commonwealth’s 2016 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 Three Months Ended March 31,
	2017									2016
	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	$	2,543		$	(890	)	$	1,653		$	10,070		$	(3,524	)	$	6,546
Reclassification adjustment for gains on securities included in net income	(652		)	228			(424		)	—			—			—
Total unrealized gains on securities	1,891			(662		)	1,229			10,070			(3,524		)	6,546
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period	(516		)	181			(335		)	1,735			(607		)	1,128
Reclassification adjustment for losses (gains) on derivatives included in net income	78			(28		)	50			(15		)	5			(10		)
Total unrealized (losses) gains on derivatives	(438		)	153			(285		)	1,720			(602		)	1,118
Total other comprehensive income	$	1,453		$	(509	)	$	944		$	11,790		$	(4,126	)	$	7,664

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 details the change in components of OCI for the three months ended March 31:



	2017											2016
	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	$	(7,455	)	$	225	$	203		$	(7,027	)	$	(2,956	)	$	10	$	560		$	(2,386	)
Other comprehensive income before reclassification adjustment	1,653			—		(335		)	1,318			6,546			—		1,128			7,674
Amounts reclassified from accumulated other comprehensive (loss) income	(424		)	—		50			(374		)	—			—		(10		)	(10		)
Net other comprehensive income during the period	1,229			—		(285		)	944			6,546			—		1,118			7,664
Balance at March 31	$	(6,226	)	$	225	$	(82	)	$	(6,083	)	$	3,590		$	10	$	1,678		$	5,278

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the period for interest, as well as detail on non-cash investing and financing activities for the three months ended March 31:



	2017			2016
	(dollars in thousands)
Cash paid during the period for:
Interest	$	3,832		$	4,674
Income taxes	1,039			1,000
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	958			1,355
Loans transferred from held to maturity to held for sale	3,613			—
Gross increase in market value adjustment to securities available for sale	1,892			10,070
Gross (decrease) increase in market value adjustment to securities derivatives	(438		)	1,720
Investments committed to purchase, not settled	498			600
Noncash treasury stock reissuance	2,258			—

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,
	2017		2016
Weighted average common shares issued	105,563,455		105,563,455
Average treasury stock shares	(16,527,204	)	(16,623,094	)
Average unearned nonvested shares	(106,359	)	(100,273	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	88,929,892		88,840,088
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	57,779		5,113
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	88,987,671		88,845,201

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 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.



	2017					2016
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Restricted Stock	13,750	$	13.96	$	13.96	88,508	$	7.21	$	9.84
Restricted Stock Units	24,375	$	15.09	$	15.09	—	$	—	$	—

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, 2017		December 31, 2016
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,687,588	$	1,733,820
Financial standby letters of credit	16,894		18,108
Performance standby letters of credit	27,169		26,630
Commercial letters of credit	1,142		1,301

The notional amounts outstanding as of March 31, 2017 include amounts issued in 2017 of $0.7 million in financial standby letters of credit, $0.1 million in performance standby letters of credit and no commercial letters of credit. A liability of $0.1 million and $0.2 million has been recorded as of March 31, 2017 and December 31, 2016, 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 $3.9 million as of March 31, 2017 and $4.1 million as of December 31, 2016. This liability is reflected in "Other liabilities" in the Condensed Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal Proceedings

First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of March 31, 2017, 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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, 2017									December 31, 2016
	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	$	14,585	$	1,440	$	(7	)	$	16,018	$	15,143	$	1,481	$	(7	)	$	16,617
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	726,240		4,513		(9,799		)	720,954		683,601		4,557		(11,305		)	676,853
Mortgage-Backed Securities – Commercial	—		—		—			—		1		—		—			1
Other Government-Sponsored Enterprises	16,700		—		(58		)	16,642		16,700		—		(69		)	16,631
Obligations of States and Political Subdivisions	27,077		283		—			27,360		27,075		195		(41		)	27,229
Corporate Securities	15,896		476		(3		)	16,369		5,903		416		—			6,319
Pooled Trust Preferred Collateralized Debt Obligations	40,165		530		(6,954		)	33,741		39,989		427		(7,124		)	33,292
Total Debt Securities	840,663		7,242		(16,821		)	831,084		788,412		7,076		(18,546		)	776,942
Equities	1,670		—		—			1,670		1,670		—		—			1,670
Total Securities Available for Sale	$	842,333	$	7,242	$	(16,821	)	$	832,754	$	790,082	$	7,076	$	(18,546	)	$	778,612

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

The amortized cost and estimated fair value of debt securities available for sale at March 31, 2017, by contractual maturity, are shown below.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	3,300	$	3,294
Due after 1 but within 5 years	27,386		27,361
Due after 5 but within 10 years	27,077		27,360
Due after 10 years	42,075		36,097
	99,838		94,112
Mortgage-Backed Securities (a)	740,825		736,972
Total Debt Securities	$	840,663	$	831,084


(a)	Mortgage-Backed Securities include an amortized cost of $14.6 million and a fair value of $16.0 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $726.2 million and a fair value of $721.0 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:



	2017		2016
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities and impairment
Gross gains	652		—
Gross losses	—		—
Other-than-temporary impairment	—		—
	652		—
Net gains and impairment	$	652	$	—

Gross gains of $0.7 million recognized in 2017 were a result of the early redemption of one of our trust preferred securities. Securities available for sale with an estimated fair value of $438.4 million and $445.8 million were pledged as of March 31, 2017 and December 31, 2016, 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:



	March 31, 2017									December 31, 2016
	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	$	4,266	$	—	$	(19	)	$	4,247	$	4,297	$	—	$	(4	)	$	4,293
Mortgage-Backed Securities- Commercial	34,194		—		(700		)	33,494		34,444		—		(561		)	33,883
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	294,624		83		(2,224		)	292,483		280,430		5		(2,527		)	277,908
Mortgage-Backed Securities – Commercial	14,536		—		(51		)	14,485		14,675		—		(142		)	14,533
Obligations of States and Political Subdivisions	39,134		137		(443		)	38,828		38,667		55		(721		)	38,001
Debt Securities Issued by Foreign Governments	200		—		(2		)	198		—		—		—			—
Total Securities Held to Maturity	$	386,954	$	220	$	(3,439	)	$	383,735	$	372,513	$	60	$	(3,955	)	$	368,618

The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2017, 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	2,824		2,831
Due after 5 but within 10 years	32,379		32,173
Due after 10 years	4,131		4,022
	39,334		39,026
Mortgage-Backed Securities (a)	347,620		344,709
Total Debt Securities	$	386,954	$	383,735


(a)	Mortgage-Backed Securities include an amortized cost of $38.5 million and a fair value of $37.7 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $309.2 million and a fair value of $307.0 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 $217.8 million and $119.2 million were pledged as of March 31, 2017 and December 31, 2016, 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 three months ended March 31, 2017 and 2016, no other-than-temporary impairment charges were recognized.

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

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

The following table presents the gross unrealized losses and estimated fair values at March 31, 2017 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	$	6,014	$	(26	)	$	—	$	—		$	6,014	$	(26	)
Mortgage-Backed Securities – Commercial	33,494		(700		)	—		—			33,494		(700		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	689,399		(10,015		)	66,191		(2,008		)	755,590		(12,023		)
Mortgage-Backed Securities – Commercial	14,485		(51		)	—		—			14,485		(51		)
Other Government-Sponsored Enterprises	16,642		(58		)	—		—			16,642		(58		)
Obligations of States and Political Subdivisions	22,180		(443		)	—		—			22,180		(443		)
Debt securities issued by foreign governments	198		(2		)	—		—			198		(2		)
Corporate Securities	4,986		(3		)	—		—			4,986		(3		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,274		(6,954		)	29,274		(6,954		)
Total Securities	$	787,398	$	(11,298	)	$	95,465	$	(8,962	)	$	882,863	$	(20,260	)

At March 31, 2017, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 60% and 4%, respectively, of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 34% of the unrealized losses primarily due to the illiquid market for this investment type. At March 31, 2017, there are 116 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, 2016 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	$	4,898	$	(11	)	$	—	$	—		$	4,898	$	(11	)
Mortgage-Backed Securities - Commercial	33,883		(561		)	—		—			33,883		(561		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	670,708		(11,630		)	56,200		(2,202		)	726,908		(13,832		)
Mortgage-Backed Securities – Commercial	14,534		(142		)	—		—			14,534		(142		)
Other Government-Sponsored Enterprises	16,632		(69		)	—		—			16,632		(69		)
Obligation of States and Political Subdivisions	33,277		(762		)	—		—			33,277		(762		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			28,952		(7,124		)	28,952		(7,124		)
Total Securities	$	773,932	$	(13,175	)	$	85,152	$	(9,326	)	$	859,084	$	(22,501	)

As of March 31, 2017, our corporate securities had an amortized cost and an estimated fair value of $15.9 million and $16.4 million, respectively. As of December 31, 2016, our corporate securities had an amortized cost and estimated fair value of $5.9 million and $6.3 million, respectively. Corporate securities are comprised of debt for large regional banks. There were $3 thousand in unrealized losses on corporate securities as of March 31, 2017 and there were no securities in an unrealized loss position as of December 31, 2016. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

As of March 31, 2017, the book value of our pooled trust preferred collateralized debt obligations totaled $40.2 million with an estimated fair value of $33.7 million, which includes securities comprised of 257 banks and other financial institutions. All of our pooled securities are mezzanine tranches, two of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of March 31, 2017, after taking into account management’s best estimates of future interest deferrals and defaults, two of our securities had no excess subordination in the tranches we own and six of our securities had excess subordination which ranged from 2% to 85% of the current performing collateral.

The following table provides information related to our pooled trust preferred collateralized debt obligations as of March 31, 2017:



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	$	1,827	$	1,366	$	(461	)	B1/BB	6	18.05	%	61.36	%
Pre TSL VIII	Mezzanine	1,955		2,142		187			C/C	27	40.34		0.00
Pre TSL IX	Mezzanine	2,421		1,971		(450		)	B1/C	37	27.83		10.19
Pre TSL X	Mezzanine	1,769		2,024		255			Caa1/C	42	30.10		2.11
Pre TSL XII	Mezzanine	5,940		4,903		(1,037		)	B3/C	64	24.09		0.00
Pre TSL XIII	Mezzanine	13,010		11,009		(2,001		)	Ba3/CCC	53	10.01		55.04
Pre TSL XIV	Mezzanine	13,030		10,025		(3,005		)	Ba2/CCC	52	12.87		38.83
MMCap I	Mezzanine	213		301		88			Ca/C	8	58.11		85.00
Total		$	40,165	$	33,741	$	(6,424	)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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 months ended March 31, 2017 and 2016, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at March 31, 2017. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

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

•

Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions, which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 257 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

•

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they will become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of March 31, 2017, 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Our cash flow analysis as of March 31, 2017, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the three months ended March 31, 2017. Based upon the analysis performed by management, it is probable that two of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the previous table with 0.00% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of March 31, 2017 indicates it is probable that we will collect all contractual principal and interest payments. For five of those securities, PreTSL IX, PreTSL X, 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 March 31, 2017, 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 115% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.

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



		For the Three Months Ended March 31,
		2017			2016
	(dollars in thousands)
Balance, beginning (a)		$	17,056		$	24,851
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)		(228		)	(261		)
Reduction for debt securities called during the period		—			—
Balance, ending		$	16,828		$	24,590


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


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

In the first three months of 2017 and 2016, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of March 31, 2017 and 2016, there were no equity securities in an unrealized loss position.

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of March 31, 2017 and

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2016, our FHLB stock totaled $38.7 million and $36.5 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three months ended March 31, 2017.

Note 8 Loans and Allowance for Credit Losses

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



	March 31, 2017						December 31, 2016
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,140,702	$	7,758	$	1,148,460	$	1,131,148	$	8,399	$	1,139,547
Real estate construction	239,983		139		240,122		217,840		1,781		219,621
Residential real estate	1,157,236		60,162		1,217,398		1,165,851		63,341		1,229,192
Commercial real estate	1,736,363		24,738		1,761,101		1,717,043		25,167		1,742,210
Loans to individuals	538,991		1,889		540,880		546,589		2,188		548,777
Total loans	$	4,813,275	$	94,686	$	4,907,961	$	4,778,471	$	100,876	$	4,879,347

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables represent our credit risk profile by creditworthiness:



	March 31, 2017
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,049,152	$	239,983	$	1,143,535	$	1,714,061	$	538,765	$	4,685,496
Non-Pass
OAEM	31,026		—		3,373		5,675		—		40,074
Substandard	53,104		—		10,328		16,627		226		80,285
Doubtful	7,420		—		—		—		—		7,420
Total Non-Pass	91,550		—		13,701		22,302		226		127,779
Total	$	1,140,702	$	239,983	$	1,157,236	$	1,736,363	$	538,991	$	4,813,275

Acquired loans
Pass	$	6,972	$	139	$	59,864	$	23,623	$	1,889	$	92,487
Non-Pass
OAEM	477		—		—		—		—		477
Substandard	309		—		298		1,115		—		1,722
Doubtful	—		—		—		—		—		—
Total Non-Pass	786		—		298		1,115		—		2,199
Total	$	7,758	$	139	$	60,162	$	24,738	$	1,889	$	94,686



	December 31, 2016
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Originated loans
Pass	$	1,038,844	$	217,565	$	1,152,511	$	1,691,220	$	546,316	$	4,646,456
Non-Pass
OAEM	27,387		275		5,923		7,596		—		41,181
Substandard	64,917		—		7,417		18,227		273		90,834
Doubtful	—		—		—		—		—		—
Total Non-Pass	92,304		275		13,340		25,823		273		132,015
Total	$	1,131,148	$	217,840	$	1,165,851	$	1,717,043	$	546,589	$	4,778,471

Acquired loans
Pass	$	7,591	$	1,781	$	62,919	$	24,043	$	2,185	$	98,519
Non-Pass
OAEM	486		—		—		—		—		486
Substandard	322		—		422		1,124		3		1,871
Doubtful	—		—		—		—		—		—
Total Non-Pass	808		—		422		1,124		3		2,357
Total	$	8,399	$	1,781	$	63,341	$	25,167	$	2,188	$	100,876

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Portfolio Risks

The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital, regulatory agency relationships, investment community reputation and shareholder returns. First Commonwealth devotes a substantial amount of resources managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting activities. 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, 2017. 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, 2017 and December 31, 2016. 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, 2017
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	2,973	$	603	$	139	$	21,710	$	25,425	$	1,115,277	$	1,140,702
Real estate construction	—		—		—		—		—		239,983		239,983
Residential real estate	2,979		1,187		617		5,984		10,767		1,146,469		1,157,236
Commercial real estate	665		—		87		3,899		4,651		1,731,712		1,736,363
Loans to individuals	1,073		485		739		226		2,523		536,468		538,991
Total	$	7,690	$	2,275	$	1,582	$	31,819	$	43,366	$	4,769,909	$	4,813,275

Acquired loans
Commercial, financial, agricultural and other	$	—	$	—	$	477	$	—	$	477	$	7,281	$	7,758
Real estate construction	—		—		—		—		—		139		139
Residential real estate	73		103		51		298		525		59,637		60,162
Commercial real estate	—		—		—		162		162		24,576		24,738
Loans to individuals	6		2		1		—		9		1,880		1,889
Total	$	79	$	105	$	529	$	460	$	1,173	$	93,513	$	94,686

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2016
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	2,380	$	171	$	75	$	17,928	$	20,554	$	1,110,594	$	1,131,148
Real estate construction	183		—		—		—		183		217,657		217,840
Residential real estate	4,133		1,089		995		5,792		12,009		1,153,842		1,165,851
Commercial real estate	265		327		57		3,443		4,092		1,712,951		1,717,043
Loans to individuals	1,640		776		970		273		3,659		542,930		546,589
Total	$	8,601	$	2,363	$	2,097	$	27,436	$	40,497	$	4,737,974	$	4,778,471

Acquired loans
Commercial, financial, agricultural and other	$	486	$	—	$	—	$	—	$	486	$	7,913	$	8,399
Real estate construction	—		—		—		—		—		1,781		1,781
Residential real estate	148		39		34		422		643		62,698		63,341
Commercial real estate	—		—		—		162		162		25,005		25,167
Loans to individuals	1		7		—		3		11		2,177		2,188
Total	$	635	$	46	$	34	$	587	$	1,302	$	99,574	$	100,876

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.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At March 31, 2017, nonaccrual loans held for sale totaled $3.6 million and included loans to one commercial manufacturing borrower. There were no nonaccrual loans held for sale as of December 31, 2016. In addition, no gains or losses were recognized in income related to these loans for the periods ended March 31, 2017 and 2016.

Significant nonaccrual loans as of March 31, 2017, include the following:


•	A $7.4 million relationship of commercial industrial loans to a steel and aluminum servicing company. These loans were originated in 2011 and were placed in nonaccrual status during the first quarter of 2016. The collateral valuation completed in the third quarter of 2016 incorporated certain estimates obtained in the first quarter of 2016.


•	A $3.6 million relationship of a commercial industrial loan to a company specializing in commercial business services. This loan was originated 2014 and was placed in nonaccrual status during the first quarter of 2017. A collateral valuation was completed during the first quarter of 2017.

•

A $3.2 million relationship of commercial industrial loans to a local energy company involved in the drilling and production of natural gas wells. These loans were originated from 2008 to 2011 and were placed in nonaccrual status during the third quarter of 2013. Two of these loans were modified resulting in TDR classification: one loan totaling $1.0 million was modified in 2012, and the other loan totaling $2.2 million was modified in 2014. A valuation of the collateral was updated during the first quarter of 2017.


•	A $3.0 million relationship of commercial industrial loans to a gear manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. A valuation of the collateral was completed during the first quarter of 2017.

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, 2017 and December 31, 2016. 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, 2017						December 31, 2016
	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	$	12,780	$	20,043			$	9,549	$	15,369
Real estate construction	—		—				—		—
Residential real estate	11,227		13,237				10,873		13,004
Commercial real estate	6,028		7,037				5,765		6,905
Loans to individuals	365		429				382		507
Subtotal	30,400		40,746				26,569		35,785
With an allowance recorded:
Commercial, financial, agricultural and other	13,929		20,124		$	2,466	13,423		19,226		$	2,530
Real estate construction	—		—		—		—		—		—
Residential real estate	366		418		146		424		475		164
Commercial real estate	1,101		1,101		376		810		810		434
Loans to individuals	—		—		—		—		—		—
Subtotal	15,396		21,643		2,988		14,657		20,511		3,128
Total	$	45,796	$	62,389	$	2,988	$	41,226	$	56,296	$	3,128

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	March 31, 2017						December 31, 2016
	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	$	—	$	—			$	—	$	—
Real estate construction	—		—				—		—
Residential real estate	246		321				406		480
Commercial real estate	162		162				162		162
Loans to individuals	—		—				3		3
Subtotal	408		483				571		645
With an allowance recorded:
Commercial, financial, agricultural and other	—		—		$	—	—		—		$	—
Real estate construction	—		—		—		—		—		—
Residential real estate	65		65		29		16		16		16
Commercial real estate	—		—		—		—		—		—
Loans to individuals	—		—		—		—		—		—
Subtotal	65		65		29		16		16		16
Total	$	473	$	548	$	29	$	587	$	661	$	16



	For the Three Months Ended March 31,
	2017								2016
	Originated Loans				Acquired Loans				Originated Loans
	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	$	12,034	$	38	$	—	$	—	$	17,298	$	152
Real estate construction	—		—		—		—		17		44
Residential real estate	11,422		74		241		—		10,724		47
Commercial real estate	5,949		54		162		—		7,658		38
Loans to individuals	338		2		—		—		480		1
Subtotal	29,743		168		403		—		36,177		282
With an allowance recorded:
Commercial, financial, agricultural and other	12,787		26		—		—		17,027		28
Real estate construction	—		—		—		—		—		—
Residential real estate	334		1		65		—		497		—
Commercial real estate	1,111		7		—		—		529		5
Loans to individuals	—		—		—		—		—		—
Subtotal	14,232		34		65		—		18,053		33
Total	$	43,975	$	202	$	468	$	—	$	54,230	$	315

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unfunded commitments related to nonperforming loans were $0.2 million at March 31, 2017 and $1.8 million at December 31, 2016. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $0.1 million and $12 thousand was established for these off balance sheet exposures at March 31, 2017 and December 31, 2016, respectively.

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:



	March 31, 2017		December 31, 2016
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	13,990	$	13,790
Nonaccrual status	10,482		11,569
Total	$	24,472	$	25,359
Commitments
Letters of credit	$	60	$	—
Unused lines of credit	160		358
Total	$	220	$	358

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, 2017
		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	$	—	$	42	$	—	$	42	$	38	$	—
Residential real estate	7	129		101		306		536		504		—
Commercial real estate	2	179		—		16		195		193		—
Loans to individuals	3	—		14		30		44		43		—
Total	13	$	308	$	157	$	352	$	817	$	778	$	—

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 March 31, 2016
		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	$	—	$	3,769	$	—	$	3,769	$	3,749	$	—
Residential real estate	8	—		114		874		988		910		—
Commercial real estate	3	65		—		133		198		169		—
Loans to individuals	3	—		18		5		23		16		—
Total	16	$	65	$	3,901	$	1,012	$	4,978	$	4,844	$	—

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, 2017 and 2016, $0.2 million and $3.9 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 2017 and 2016 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 restructured loans that were considered to be in default during the three months ended March 31:



	2017			2016
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	—	$	—	2	$	70
Total	—	$	—	2	$	70

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables provide detail related to the allowance for credit losses:



	For the Three Months Ended March 31, 2017
	Commercial, financial, agricultural and other				Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	35,974			$	577		$	2,492		$	6,619		$	4,504		$	50,166
Charge-offs	(3,825		)		—			(465		)	(31		)	(1,198		)	(5,519		)
Recoveries	368				54			122			117			128			789
Provision (credit)	2,184				(17		)	265			(123		)	900			3,209
Ending balance	34,701				614			2,414			6,582			4,334			48,645
Acquired loans:
Beginning balance	—				—			19			—			—			19
Charge-offs	—				—			(8		)	—			(7		)	(15		)
Recoveries	—			—	—			6			—			1			7
Provision (credit)	—				—			14			—			6			20
Ending balance	—				—			31			—			—			31
Total ending balance	$	34,701			$	614		$	2,445		$	6,582		$	4,334		$	48,676
Ending balance: individually evaluated for impairment	$	2,466			$	—		$	175		$	376		$	—		$	3,017
Ending balance: collectively evaluated for impairment	32,235				614			2,270			6,206			4,334			45,659
Loans:
Ending balance	1,148,460				240,122			1,217,398			1,761,101			540,880			4,907,961
Ending balance: individually evaluated for impairment	26,260				—			6,287			5,819			—			38,366
Ending balance: collectively evaluated for impairment	1,122,200				240,122			1,211,111			1,755,282			540,880			4,869,595

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 March 31, 2016
	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:
Beginning balance	$	31,035		$	887		$	2,606		$	11,924		$	4,360		$	50,812
Charge-offs	(1,392		)	—			(382		)	(265		)	(1,469		)	(3,508		)
Recoveries	134			223			118			756			161			1,392
Provision (credit)	11,944			(209		)	286			(6,932		)	1,437			6,526
Ending balance	$	41,721		$	901		$	2,628		$	5,483		$	4,489		$	55,222
Ending balance: individually evaluated for impairment	$	12,900		$	—		$	75		$	420		$	—		$	13,395
Ending balance: collectively evaluated for impairment	28,821			901			2,553			5,063			4,489			41,827
Loans:
Ending balance	1,190,384			256,856			1,212,962			1,552,904			585,649			4,798,755
Ending balance: individually evaluated for impairment	42,016			—			6,246			5,934			—			54,196
Ending balance: collectively evaluated for impairment	1,148,368			256,856			1,206,716			1,546,970			585,649			4,744,559

Note 9 Income Taxes

At March 31, 2017 and December 31, 2016, 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. Federal and state returns for tax years 2013 and forward remain open for examination as of March 31, 2017.

During the first quarter of 2017, First Commonwealth adopted ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718)." Adoption of this ASU resulted in a $117 thousand tax benefit.

Note 10 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 Condensed Consolidated Statements of Financial Condition or in the “Other assets” category of the Condensed Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.

FASB ASC Topic 825, “Financial Instruments”, permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•

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 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 Condensed Consolidated Statements of Financial Condition are 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 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. Also included in loans held for sale are nonaccrual loans related to one commercial relationship. The fair value of these loans is based on a letter of intent with the potential buyer.

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' (loan customers') credit risk since origination of the interest rate swap as well as interest rate caps and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 11, “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 2017, 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•

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.

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the United States. There has been little or no active trading in these securities since 2009; therefore, it is more appropriate to determine estimated fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 7, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

Management validates the fair value of the pooled trust preferred collateralized debt obligations by monitoring the performance of the underlying collateral, discussing the discount rate, cash flow assumptions and general market trends with a specialized third party and confirming changes in the underlying collateral to the trustee reports. Management’s monitoring of the underlying collateral includes deferrals of interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings or actions and general news related to the underlying collateral. Management also evaluates fair value changes compared to expectations based on changes in the interest rates used in determining the discount rate and general financial markets.

The estimated fair value of the non-marketable equity investments included in Level 3 is based on par 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).

In accordance with ASU 2011-4, the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.



	Fair Value (dollars in thousands)			Valuation Technique	Unobservable Inputs	Range / (weighted average)
Pooled Trust Preferred Securities	$	33,741		Discounted Cash Flow	Probability of default	0% - 100% (10.19%)
					Prepayment rates	0% - 72.53% (4.15%)
					Discount rates	5.25% - 12.00% (a)
Equities	1,670			Par Value	N/A	N/A
Impaired Loans	2,237		(b)	Reserve study	Discount rate	10.00%
					Gas per MCF	$2.07 - $2.79 (c)
					Oil per BBL/d	$56.05 - $57.65 (c)
	10,845		(b)	Discounted Cash Flow	Discount Rate	1.90% - 7.00%
Limited Partnership Investments	1,340			Par Value	N/A	N/A


(a)	Incorporates spread over risk free rate related primarily to credit quality and illiquidity of securities.


(b)	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.


(c)	Unobservable inputs are defined as follows: MCF - million cubic feet; BBL/d - barrels per day.

The significant unobservable inputs used in the fair value measurement of pooled trust preferred securities are the probability of default, discount rates and prepayment rates. Significant increases in the probability of default or discount rate used would result in a decrease in the estimated fair value of these securities, while decreases in these variables would result in higher fair value measurements. In general, a change in the assumption of probability of default is accompanied by a directionally similar

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

change in the discount rate. In most cases, increases in the prepayment rate assumptions would result in a higher estimated fair value for these securities while decreases would provide for a lower value. The direction of this change is somewhat dependent on the structure of the investment and the amount of the investment tranches senior to our position.

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.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:



	March 31, 2017
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	16,018	$	—	$	16,018
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		720,954		—		720,954
Mortgage-Backed Securities - Commercial	—		—		—		—
Other Government-Sponsored Enterprises	—		16,642		—		16,642
Obligations of States and Political Subdivisions	—		27,360		—		27,360
Corporate Securities	—		16,369		—		16,369
Pooled Trust Preferred Collateralized Debt Obligations	—		—		33,741		33,741
Total Debt Securities	—		797,343		33,741		831,084
Equities	—		—		1,670		1,670
Total Securities Available for Sale	—		797,343		35,411		832,754
Other Investments	—		38,669		—		38,669
Loans Held for Sale	—		9,588		—		9,588
Other Assets(a)	—		4,576		1,340		5,916
Total Assets	$	—	$	850,176	$	36,751	$	886,927
Other Liabilities(a)	$	—	$	5,039	$	—	$	5,039
Total Liabilities	$	—	$	5,039	$	—	$	5,039


(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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	16,617	$	—	$	16,617
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		676,853		—		676,853
Mortgage-Backed Securities - Commercial	—		1		—		1
Other Government-Sponsored Enterprises	—		16,631		—		16,631
Obligations of States and Political Subdivisions	—		27,229		—		27,229
Corporate Securities	—		6,319		—		6,319
Pooled Trust Preferred Collateralized Debt Obligations	—		—		33,292		33,292
Total Debt Securities	—		743,650		33,292		776,942
Equities	—		—		1,670		1,670
Total Securities Available for Sale	—		743,650		34,962		778,612
Other Investments	—		36,498		—		36,498
Loans Held for Sale	—		7,052		—		7,052
Other Assets(a)	—		6,089		930		7,019
Total Assets	$	—	$	793,289	$	35,892	$	829,181
Other Liabilities(a)	$	—	$	5,972	$	—	$	5,972
Total Liabilities	$	—	$	5,972	$	—	$	5,972


(a)	Hedging and non-hedging interest rate derivatives and limited partnership investments

For the three months ended March 31, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:



	2017
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	33,292		$	1,670	$	930	$	35,892
Total gains or losses
Included in earnings	—			—		—		—
Included in other comprehensive income	497			—		—		497
Purchases, issuances, sales and settlements
Purchases	—			—		410		410
Issuances	—			—		—		—
Sales	—			—		—		—
Settlements	(48		)	—		—		(48		)
Transfers from Level 3	—			—		—		—
Transfers into Level 3	—			—		—		—
Balance, end of period	$	33,741		$	1,670	$	1,340	$	36,751

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	2016
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Total
	(dollars in thousands)
Balance, beginning of period	$	35,658		$	2,170	$	37,828
Total gains or losses
Included in earnings	—			—		—
Included in other comprehensive income	(2,385		)	—		(2,385		)
Purchases, issuances, sales and settlements
Purchases	—			36		36
Issuances	—			—		—
Sales	—			—		—
Settlements	—			—		—
Transfers into Level 3	—			—		—
Balance, end of period	$	33,273		$	2,206	$	35,479

During the three months ended March 31, 2017 and 2016, there were no transfers between fair value Levels 1, 2 or 3. There were no 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, 2017 and 2016. For the three months ended March 31, 2016, there were no Level 3 Other Assets measured at fair value on a recurring basis.

The tables below present the balances of assets measured at fair value on a nonrecurring basis at:



	March 31, 2017
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	22,010	$	21,242	$	43,252
Other real estate owned	—		7,427		—		7,427
Total Assets	$	—	$	29,437	$	21,242	$	50,679



	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	18,679	$	19,990	$	38,669
Other real estate owned	—		7,566		—		7,566
Total Assets	$	—	$	26,245	$	19,990	$	46,235

The following gain (losses) were realized on the assets measured on a nonrecurring basis:



		For the Three Months Ended March 31,
		2017			2016
	(dollars in thousands)
Impaired loans		$	(1,460	)	$	(7,702	)
Other real estate owned		(31		)	(13		)
Total losses		$	(1,491	)	$	(7,715	)

Impaired loans over $100 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 thousand and over. For real estate secured loans with balances under $250

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.

The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned determined using an internal valuation is classified as Level 3. Other real estate owned has a current carrying value of $6.9 million as of March 31, 2017 and consists primarily of commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated 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 12, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2017.

FASB ASC 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.

Securities: Fair values for 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, 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, which is not an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”

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 $0.1 million and $0.2 million at March 31, 2017 and December 31, 2016, 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 types of borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements or an announced redemption price.

The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:



	March 31, 2017
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	75,160	$	75,160	$	75,160	$	—	$	—
Interest-bearing deposits	47,944		47,944		47,944		—		—
Securities available for sale	832,754		832,754		—		797,343		35,411
Securities held to maturity	386,954		383,735		—		383,735		—
Other investments	38,669		38,669		—		38,669		—
Loans held for sale	9,588		9,588		—		9,588		—
Loans	4,907,961		4,890,426		—		22,010		4,868,416
Financial liabilities
Deposits	4,969,729		4,971,049		—		4,971,049		—
Short-term borrowings	961,601		961,449		—		961,449		—
Subordinated debt	72,167		63,964		—		—		63,964
Long-term debt	8,604		9,038		—		9,038		—



	December 31, 2016
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	91,033	$	91,033	$	91,033	$	—	$	—
Interest-bearing deposits	24,644		24,644		24,644		—		—
Securities available for sale	778,612		778,612		—		743,650		34,962
Securities held to maturity	372,513		368,618		—		368,618		—
Other investments	36,498		36,498		—		36,498		—
Loans held for sale	7,052		7,052		—		7,052		—
Loans	4,879,347		4,878,254		—		18,679		4,859,575
Financial liabilities
Deposits	4,947,408		4,949,714		—		4,949,714		—
Short-term borrowings	867,943		867,667		—		867,667		—
Subordinated debt	72,167		65,656		—		—		65,656
Long-term debt	8,749		9,169		—		9,169		—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11 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 25 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 eight 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 that are not designated as hedging instruments. These derivatives 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 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

The Company has entered into four interest rate swap contracts that were designated as cash flow hedges. The interest rate swaps have a total notional amount of $200.0 million, $85.0 million with an original maturity of three years and $115.0 million with and original maturity of four years. 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 on commercial loans benchmarked to the 1-month LIBOR rate. Therefore, the interest rate swaps convert the interest payments on the first $200.0 million of 1-month LIBOR based commercial loans into fixed rate payments.

The periodic net settlement of interest rate swaps is recorded as an adjustment to "Interest and fees on loans" in the Condensed Consolidated Statements of Income. For the three months ended March 31, 2017, there was a $0.2 million impact on interest income as a result of these interest rate swaps, respectively. Changes in the fair value of the effective portion of cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in "Interest and fees on loans," the same line item in the Condensed Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at March 31, 2017 and December 31, 2016, 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. 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" in the Condensed Consolidated Statements of Income. The impact to noninterest expense for the three months ended March 31, 2017 totaled $0.1 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, 2017 the underlying funded mortgage

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

loan commitments had a carrying value of $5.8 million and a fair value of $6.0 million, while the underlying unfunded mortgage loan commitments had a notional amount of $15.3 million.

In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Condensed Consolidated Statements of Income. The impact on other noninterest expense for the three months ended March 31, 2017 totaled $2 thousand. At March 31, 2017 and December 31, 2016, the underlying loans had a carrying value of $6.8 million and $4.7 million, respectively, and a fair value of $6.8 million and $4.7 million, respectively.

The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:



	March 31, 2017			December 31, 2016
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(316	)	$	(317	)
Notional amount:
Interest rate derivatives	342,898			345,102
Interest rate caps	—			14,762
Risk participation agreements	166,748			174,213
Sold credit protection on risk participation agreements	(40,021		)	(40,281		)
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	73			(443		)
Notional amount	200,000			200,000
Interest rate forwards:
Fair value adjustment	(112		)	—
Notional amount	17,000			—
Foreign exchange forwards:
Fair value adjustment	38			(8		)
Notional amount	6,847			4,749

The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in "Other income" on the Condensed Consolidated Statements of Income:



		For the Three Months Ended March 31,
		2017		2016
	(dollars in thousands)
Non-hedging interest rate derivatives
Increase (decrease) in other income		$	2	$	(1,014	)
Hedging interest rate derivatives
Increase in interest and fees on loans		249		430
Increase in other expense		78		15
Hedging interest rate forwards
Increase in other expense		112		—
Hedging foreign exchange forwards
Increase in other expense		2		3

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12 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 2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step goodwill impairment test is not required.

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of both March 31, 2017 and December 31, 2016 was $186.5 million. No impairment charges on goodwill or other intangible assets were incurred in 2017 or 2016.

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 of March 31, 2017, goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

Note 13 New Accounting Pronouncements

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606)”. In May 2014, the

FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", with an original effective date for

annual reporting periods beginning after December 15, 2016. The core principle of ASU 2014-09 is that an entity should

recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration

to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 deferred the effective date of

ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017. We expect that ASU No. 2014-09 will require us to change how we recognize certain recurring revenue streams within trust and investment management fees and insurance commissions and fees; however, we do not expect these changes to have a significant impact on our financial statements. We continue to evaluate the impact of ASU No. 2014-9 on other components of non-interest income and expect additional financial statement disclosures and associated internal controls to be implemented along with the adoption of this ASU.

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. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. 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. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Entities have the option to use certain relief; full retrospective application is prohibited. We are currently evaluating the potential impact of ASU 2016-02 on our financial statements.

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 guidance requires the use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Company as of January 1, 2020. Management is currently evaluating the impact of the amended guidance on First Commonwealth’s financial condition or results of operations.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which provides guidance on eight specific cash flow issues: 1. debt prepayment or extinguishment costs; 2. settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates; 3. contingent consideration payments made after a business combination; 4. proceeds from the settlement of insurance claims; 5. proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6. distributions received from equity method investees; 7. beneficial interests in securitizations transactions; and 8. separately identifiable cash flows and application of the predominance principle. This ASU provides additional guidance for these eight issues, reducing current and potential diversity in practice. This standard is effective for the Company as of January 1, 2018. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805), Clarifying the Definition of a Business" which provides a screen to determine when a set of assets and activities (a "set") is not a business. The screen requires, that when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen thereby reduces the number of transactions that need to be further evaluated. If the screen is not met, this ASU 1. requires that to be considered a business, a set must include, at a minimum, an input and substantive process that significantly contributes to the ability to create output and 2. removes the evaluation of whether a market participant could replace the missing elements. The amendment provides a framework to assist entities in evaluating whether both an input and substantive process is present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. This ASU also narrows the definition of the term output so that the term is consistent with how outputs are described in Topic 606. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2017. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

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 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 March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This standard is effective for 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.

Note 14 Subsequent Events

On April 3, 2017, the Company completed its acquisition of DCB Financial Corporation ("DCB") and its banking subsidiary, The Delaware County Bank and Trust Company. DCB has approximately $550 million in assets and operates nine full-service banking offices which will operate under the First Commonwealth name. On March 31, 2017, the Company funded $21.3 million of the purchase price for this acquisition into an escrow account pending the closing on April 3, 2017. As of March 31, 2017, these funds were classified as restricted cash and are included in the "Other assets" line in the Condensed Consolidated Statements of Financial Condition.

Table of Contents

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 ended March 31, 2017 and 2016, and should be read in conjunction with the Condensed 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, and could be affected by many factors, including, but not limited to: (1) local, regional, national and international economic conditions and the impact they may have 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.

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 this non-GAAP financial measure provides information useful to investors in understanding our underlying operational performance and our business and performance trends as it facilitates comparison with the performance of others in the financial services industry. Although we believe that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure 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 Condensed Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 41 for the three months ended March 31, 2017 and 2016, 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 Condensed Consolidated Financial Statements and related notes.



		For the Three Months Ended March 31,
		2017			2016
	(dollars in thousands, except per share data)
Net Income		$	15,888		$	12,473
Per Share Data:
Basic Earnings per Share		$	0.18		$	0.14
Diluted Earnings per Share		0.18			0.14
Cash Dividends Declared per Common Share		0.08			0.07
Average Balance:
Total assets		$	6,708,817		$	6,617,594
Total equity		757,077			730,354
End of Period Balance:
Net loans ⁽¹⁾		$	4,868,873		$	4,749,382
Total assets		6,808,977			6,699,154
Total deposits		4,969,729			4,301,655
Total equity		760,995			733,314
Key Ratios:
Return on average assets		0.96		%	0.76		%
Return on average equity		8.51		%	6.87		%
Dividends payout ratio		44.44		%	50.00		%
Average equity to average assets ratio		11.28		%	11.04		%
Net interest margin		3.50		%	3.29		%
Net loans to deposits ratio		97.97		%	110.41		%

⁽¹⁾Includes loans held for sale.

Results of Operations

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Net Income

For the three months ended March 31, 2017, First Commonwealth had net income of $15.9 million, or $0.18 diluted earnings per share, compared to net income of $12.5 million, or $0.14 diluted earnings per share, in the three months ended March 31, 2016. The increase in net income was primarily the result of an increase in net interest income and noninterest income coupled with a decrease in the provision for credit losses, offset by an increase in noninterest expense.

For the three months ended March 31, 2017, the Company’s return on average equity was 8.51% and its return on average assets was 0.96%, compared to 6.87% and 0.76%, respectively, for the three months ended March 31, 2016.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $52.8 million in the first three months of 2017, compared to $49.7 million for the same period in 2016. This increase was due to both growth in average interest earning assets of $52.3 million and a 19 basis point increase in the yield on interest earning assets. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income), at 75% and 78% for the three months ended March 31, 2017 and 2016, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.50% and 3.29% for the three months ended March 31, 2017 and March 31, 2016, respectively. The 21 basis point increase in the net interest margin is attributable to an increase in the overall yield on interest earning assets, primarily loans.

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 3.78% for the three months ended March 31, 2017, an increase of 19 basis points compared to the 3.59% yield for the same period in 2016. This increase is largely due to the loan portfolio yield, which improved by 17 basis points when compared to the three months ended March 31, 2016. This change was largely affected by an increase in rates on variable rate loans. In addition, the yield on the investment portfolio increased 14 basis points in comparison to the prior year. This increase can be attributed to investment security runoff being replaced with higher yielding investments. Investment portfolio purchases during the three months ended March 31, 2017 have been primarily in mortgage-related assets with approximate durations of 48-60 months and municipal and corporate securities with durations of approximately five years. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities if interest rates rise.

The cost of interest-bearing liabilities decreased to 0.38% for the three months ended March 31, 2017, from 0.39% for the same period in 2016, primarily due to a decrease in the volume of short-term borrowings. The decrease in the level of short-term borrowings is directly related to lower costing deposits obtained from the acquisition of thirteen FirstMerit branches in December 2016.

For the three months ended March 31, 2017, changes in interest rates positively impacted net interest income by $1.4 million when compared with the same period in 2016. The higher yield on interest-earning assets positively impacted net interest income by $2.0 million, while the increase in the cost of interest-bearing liabilities had a negative impact of $0.6 million. We have been able to partially mitigate the impact of low interest rates and the effect on net interest income through improving the mix of deposits and borrowed funds, growing the loan portfolio and increasing our investment yields by re-investing cash flow from runoff of lower-yielding investments.

Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $1.7 million in the three months ended March 31, 2017, as compared to the same period in 2016. Higher levels of interest-earning assets resulted in an increase of $0.9 million in interest income, while changes in the volume of interest-bearing liabilities decreased interest expense by $0.8 million, primarily as the result of decreases in short-term borrowings. Average earning assets for the three months ended March 31, 2017 increased $52.3 million, or 1%, compared to the same period in 2016. Average loans for the three months ended March 31, 2017 increased $171.5 million, or 4%, compared to the same period in 2016.

Net interest income also benefited from a $100.8 million increase in average net free funds at March 31, 2017 as compared to March 31, 2016. 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 $134.2 million, or 12.2%, in noninterest-bearing demand deposit average balances. Additionally, higher cost time deposits continue to mature and reprice into lower cost deposits or other funding alternatives. Average time deposits for the three months ended March 31, 2017 decreased by $22.2 million compared to the comparable period in 2016.

The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended March 31:



	2017		2016
	(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	56,179	$	53,353
Adjustment to fully taxable equivalent basis	988		942
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	57,167		54,295
Interest expense	4,349		4,546
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	52,818	$	49,749

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:



	2017							2016
	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	$	6,511		$	12	0.75	%	$	4,339		$	6	0.56	%
Tax-free investment securities	65,982			611		3.76		59,987			556		3.73
Taxable investment securities	1,139,532			7,470		2.66		1,266,907			7,952		2.52
Loans, net of unearned income (b)(c)	4,916,759			49,074		4.05		4,745,252			45,781		3.88
Total interest-earning assets	6,128,784			57,167		3.78		6,076,485			54,295		3.59
Noninterest-earning assets:
Cash	82,404							65,120
Allowance for credit losses	(52,550		)					(52,714		)
Other assets	550,179							528,703
Total noninterest-earning assets	580,033							541,109
Total Assets	$	6,708,817						$	6,617,594
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	891,190		$	126	0.06	%	$	701,778		$	85	0.05	%
Savings deposits (d)	2,209,018			815		0.15		1,852,118			590		0.13
Time deposits	572,750			871		0.62		594,929			914		0.62
Short-term borrowings	930,998			1,749		0.76		1,503,013			2,235		0.60
Long-term debt	80,840			788		3.95		81,409			722		3.57
Total interest-bearing liabilities	4,684,796			4,349		0.38		4,733,247			4,546		0.39
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,230,939							1,096,692
Other liabilities	36,005							57,301
Shareholders’ equity	757,077							730,354
Total Noninterest-Bearing Funding Sources	2,024,021							1,884,347
Total Liabilities and Shareholders’ Equity	$	6,708,817						$	6,617,594
Net Interest Income and Net Yield on Interest-Earning Assets				$	52,818	3.50	%				$	49,749	3.29	%


(a)	Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.


(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.

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 ended March 31, 2017 compared with March 31, 2016:



	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	$	6		$	3		$	3
Tax-free investment securities	55			56			(1		)
Taxable investment securities	(482		)	(798		)	316
Loans	3,293			1,655			1,638
Total interest income (b)	2,872			916			1,956
Interest-bearing liabilities:
Interest-bearing demand deposits	41			24			17
Savings deposits	225			115			110
Time deposits	(43		)	(34		)	(9		)
Short-term borrowings	(486		)	(853		)	367
Long-term debt	66			(5		)	71
Total interest expense	(197		)	(753		)	556
Net interest income	$	3,069		$	1,669		$	1,400


(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 35% 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 ended March 31:



	2017					2016
	Dollars			Percentage		Dollars			Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	2,184		68	%	$	11,944		183	%
Real estate construction	(17		)	(1	)	(209		)	(3	)
Residential real estate	279			9		286			4
Commercial real estate	(123		)	(4	)	(6,932		)	(106	)
Loans to individuals	906			28		1,437			22
Total	$	3,229		100	%	$	6,526		100	%

The provision for credit losses for the three months ended March 31, 2017 decreased in comparison to the three months ended March 31, 2016 by $3.3 million. The level of provision expense in the first three months of 2017 is primarily due to commercial, financial, agricultural and other loans as the result of $3.4 million in charge-offs recognized on two commercial loan relationships. Of this total, $1.9 million was recognized on a commercial loan that was transferred to held for sale and subsequently sold in April 2017.

The majority of the 2016 provision expense is attributable to loans to commercial, financial and agricultural loans resulting from an increase in historical loss factors, an increase in qualitative factors related to certain recovery rates and specific reserves established for one commercial loan relationship. Provision expense for commercial real estate loans was impacted by decreases in historical loss factors. The provision for loans to individuals is primarily due to charge-offs in the indirect automobile portfolio as well as changes in qualitative factors related to the automobile industry.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The allowance for credit losses was $48.7 million, or 0.99%, of total loans outstanding at March 31, 2017, compared to $50.2 million, or 1.03%, at December 31, 2016 and $55.2 million, or 1.15%, at March 31, 2016. The change compared to December 31, 2016, can be attributed to the aforementioned charge-offs on two commercial loan relationships. Nonperforming loans as a percentage of total loans increased to 1.01% at March 31, 2017 from 0.86% at December 31, 2016 and 1.29% as of March 31, 2016. The allowance to nonperforming loan ratio was 105.20%, 120.02% and 89.33% as of March 31, 2017, December 31, 2016 and March 31, 2016, respectively.

Below is an analysis of the consolidated allowance for credit losses for the three months ended March 31, 2017 and 2016 and the year-ended December 31, 2016:



	March 31, 2017		March 31, 2016		December 31, 2016
	(dollars in thousands)
Balance, beginning of period	$	50,185	$	50,812	$	50,812
Loans charged off:
Commercial, financial, agricultural and other	3,825		1,392		19,603
Real estate construction	—		—		—
Residential real estate	473		382		1,189
Commercial real estate	31		265		570
Loans to individuals	1,205		1,469		4,943
Total loans charged off	5,534		3,508		26,305
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	368		134		4,164
Real estate construction	54		223		562
Residential real estate	128		118		481
Commercial real estate	117		756		1,522
Loans to individuals	129		161		469
Total recoveries	796		1,392		7,198
Net credit losses	4,738		2,116		19,107
Provision charged to expense	3,229		6,526		18,480
Balance, end of period	$	48,676	$	55,222	$	50,185

Noninterest Income

The following table presents the components of noninterest income for the three months ended March 31:



	2017			2016			$ Change			% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	1,417		$	1,255		$	162		13	%
Service charges on deposit accounts	4,319			3,708			611			16
Insurance and retail brokerage commissions	2,082			1,959			123			6
Income from bank owned life insurance	1,292			1,296			(4		)	—
Card-related interchange income	4,251			3,557			694			20
Swap fee (expense) income	(73		)	460			(533		)	(116	)
Other income	1,706			1,616			90			6
Subtotal	14,994			13,851			1,143			8
Net securities gains	652			—			652			N/A
Gain on sale of mortgage loans	977			683			294			43
Gain on sale of other loans and assets	307			195			112			57
Derivatives mark to market	2			(1,014		)	1,016			(100	)
Total noninterest income	$	16,932		$	13,715		$	3,217		23	%

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market, increased $1.1 million for the first three months of 2017 compared to 2016. Service charges on deposit accounts increased $0.6 million and card-related interchange income increased $0.7 million, of which $0.3 million and $0.5 million, respectively, can be attributed to the acquisition of the FirstMerit branches December 2016. Insurance and retail brokerage commissions and trust income also increased $0.1 million and $0.2 million, respectively, due to higher annuity and mutual fund sales. Offsetting these increases was a decrease in swap fee income compared to 2016 of $0.5 million due to a decrease in the number of interest rate swaps entered into for our commercial loan customers during the first three months of 2017 compared to the same period in the prior year.

Total noninterest income for the three months ended March 31, 2017 increased $3.2 million in comparison to the three months ended March 31, 2016. The most significant change includes a $1.0 million increase related to the mark to market adjustment on interest rate swaps entered into for our commercial loan customers. This adjustment does not reflect a realized gain on the swaps, but rather relates to a change in fair value due to increases in corporate bond spreads and decreases in swap rates. In addition, net securities gains increased $0.7 million due to the early redemption of one of our pooled trust preferred securities.

Noninterest Expense

The following table presents the components of noninterest expense for the three months ended March 31:



	2017		2016		$ Change			% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	23,466	$	21,677	$	1,789		8	%
Net occupancy expense	3,761		3,481		280			8
Furniture and equipment expense	3,088		2,867		221			8
Data processing expense	2,085		1,759		326			19
Advertising and promotion expense	806		526		280			53
Pennsylvania shares tax expense	816		758		58			8
Intangible amortization	572		137		435			318
Collection and repossession expense	497		569		(72		)	(13	)
Other professional fees and services	959		791		168			21
FDIC insurance	793		1,038		(245		)	(24	)
Other operating expenses	4,980		4,201		779			19
Subtotal	41,823		37,804		4,019			11
Loss on sale or write-down of assets	99		96		3			3
Merger and acquisition related	611		—		611			N/A
Litigation and operational losses	232		244		(12		)	5	%
Total noninterest expense	$	42,765	$	38,144	$	4,621		12	%

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $4.0 million, or 11%, for the three months ended March 31, 2017 compared to the same period in 2016. Contributing to the 2017 increase is a $1.8 million increase in salaries and employee benefits primarily due to an increase in employees resulting from the acquisition of 13 branches from FirstMerit Bank, NA in the fourth quarter of 2016. The increase in net occupancy expense of $0.3 million, furniture and equipment expense of $0.2 million and intangible amortization of $0.4 million is also the result of the acquisition. The $0.8 million increase in other operating expense is primarily due to an increase of $0.2 million in unfunded commitment reserves expense in 2017 as compared to 2016 and an increase of $0.4 million in audit and accounting expense.

Total noninterest expense increased by $4.6 million, or 12%, for the three months ended March 31, 2017 compared to the same period in 2016. Contributing to this increase is $0.6 million in merger and acquisition expense related to the April 2017 acquisition of DCB Financial Corporation.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Income Tax

The provision for income taxes increased $1.5 million for the three months ended March 31, 2017, compared to the corresponding period in 2016. The higher provision for income taxes was the result of a $4.9 million increase in the level of income before taxes.

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 ended March 31, 2017 and 2016.

We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The level of tax benefits that reduced our tax rate below the 35% statutory rate produced an annual effective tax rate of 30.2% and 30.1% for the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017, our deferred tax assets totaled $30.3 million. Based on our evaluation as of March 31, 2017, 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 needed. 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 2017, liquidity used by the net decrease in short-term borrowings totaled $93.7 million, while the sales, maturity and redemption of investment securities provided $44.0 million. This liquidity provided funds needed to 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, 2017, our maximum borrowing capacity under this program was $1.0 billion and as of that date there was $0.6 million outstanding with an average weighted rate of 0.84% and an average original term of 305 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, 2017, the borrowing capacity under this program totaled $769.7 million and there were no amounts outstanding.

As of March 31, 2017, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.5 billion and as of that date amounts used against this capacity included $0.9 billion in outstanding borrowings and $10.2 million in outstanding letters of credit.

We also have available unused federal funds lines with five correspondent banks. These lines have an aggregate commitment of $195.0 million with no outstanding balance as of March 31, 2017.

First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As of March 31, 2017, 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 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. The following table shows a breakdown of the components of First Commonwealth’s deposits:



	March 31, 2017		December 31, 2016
	(dollars in thousands)
Noninterest-bearing demand deposits	$	1,270,136	$	1,268,786
Interest-bearing demand deposits	114,526		114,043
Savings deposits	3,030,156		2,972,747
Time deposits	554,911		591,832
Total	$	4,969,729	$	4,947,408

During the first three months of 2017, total deposits increased $22.3 million due to a $57.9 million increase in interest-bearing demand and savings deposits and a $1.4 million increase in noninterest-bearing demand deposits. These increases were offset by a $36.9 million decrease in time deposits. The decrease in time deposits is the result of a decline in core certificates.

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 0.74 and 0.75 at March 31, 2017 and December 31, 2016, 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, 2017 and December 31, 2016:



	March 31, 2017
	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	$	2,579,871		$	178,796		$	308,650		$	3,067,317		$	1,409,863		$	408,097
Investments	88,905			47,027			90,334			226,266			572,020			445,991
Other interest-earning assets	47,944			—			—			47,944			—			—
Total interest-sensitive assets (ISA)	2,716,720			225,823			398,984			3,341,527			1,981,883			854,088
Certificates of deposit	109,614			74,942			165,163			349,719			201,425			3,767
Other deposits	3,144,682			—			—			3,144,682			—			—
Borrowings	1,033,914			147			299			1,034,360			2,608			5,404
Total interest-sensitive liabilities (ISL)	4,288,210			75,089			165,462			4,528,761			204,033			9,171
Gap	$	(1,571,490	)	$	150,734		$	233,522		$	(1,187,234	)	$	1,777,850		$	844,917
ISA/ISL	0.63			3.01			2.41			0.74			9.71			93.13
Gap/Total assets	23.08		%	2.21		%	3.43		%	17.44		%	26.11		%	12.41		%

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



	December 31, 2016
	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	$	2,510,367		$	184,386		$	315,397		$	3,010,150		$	1,446,035		$	402,282
Investments	85,756			44,417			89,838			220,011			546,056			406,743
Other interest-earning assets	24,644			—			—			24,644			—			—
Total interest-sensitive assets (ISA)	2,620,767			228,803			405,235			3,254,805			1,992,091			809,025
Certificates of deposit	110,584			92,765			115,949			319,298			268,680			3,854
Other deposits	3,086,791			—			—			3,086,791			—			—
Borrowings	940,254			146			296			940,696			2,584			5,579
Total interest-sensitive liabilities (ISL)	4,137,629			92,911			116,245			4,346,785			271,264			9,433
Gap	$	(1,516,862	)	$	135,892		$	288,990		$	(1,091,980	)	$	1,720,827		$	799,592
ISA/ISL	0.63			2.46			3.49			0.75			7.34			85.77
Gap/Total assets	22.69		%	2.03		%	4.32		%	16.34		%	25.75		%	11.96		%

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)
	-200			-100			+100			+200
	(dollars in thousands)
March 31, 2017 ($)	$	(12,839	)	$	(5,638	)	$	5,344		$	10,136
March 31, 2017 (%)	(6.01		)%	(2.64		)%	2.50		%	4.74		%

December 31, 2016 ($)	$	(11,180	)	$	(5,495	)	$	4,643		$	9,027
December 31, 2016 (%)	(5.41		)%	(2.66		)%	2.25		%	4.37		%

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)
	-200			-100			+100			+200
	(dollars in thousands)
March 31, 2017 ($)	$	(22,066	)	$	(11,211	)	$	8,842		$	16,586
March 31, 2017 (%)	(10.32		)%	(5.25		)%	4.14		%	7.76		%

December 31, 2016 ($)	$	(17,526	)	$	(9,132	)	$	8,379		$	16,286
December 31, 2016 (%)	(8.48		)%	(4.42		)%	4.06		%	7.88		%

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 low 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 ended March 31, 2017 and 2016, the cost of our interest-bearing liabilities averaged 0.38% and 0.39%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.78% and 3.59%, respectively.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

During the first quarter of 2015, the Company entered into cash flow interest rate swaps, in which we extended the duration of $100.0 million of the $1.3 billion LIBOR based loans in our loan portfolio at that time into fixed interest rates for a period of three or four years. These swaps added approximately two basis points of protection to the net interest margin as a hedge against a prolonged low-rate environment. A similar cash flow interest rate swap, with a notional amount of $100.0 million, was entered into in 2014. Please refer to Note 11, "Derivatives," for additional information on interest rate swaps.

Asset/liability models require that certain assumptions be made, such as prepayment rates on earning assets and the impact of pricing on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our experience, business plans and published industry experience. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will approximate actual results.

Credit Risk

First Commonwealth maintains an allowance for credit losses at a level deemed sufficient for losses inherent in the loan portfolio at the date of each statement of financial condition. Management reviews the adequacy of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated losses.

First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual impaired loans with a balance greater than $0.1 million, 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 $3.9 million at March 31, 2017 and is classified in "Other liabilities" on the Condensed Consolidated Statements of Financial Condition.

First Commonwealth defines exposure to the Oil and Gas Industry as any borrower who is involved in exploration and production, and any company in the industry supply chain that generates 40% or more of their sales revenue from exploration and production companies.

As of March 31, 2017, the Company had a total of $116.6 million in commitments to the Oil and Gas Industry, with $54.3 million in outstanding loan balances against those commitments. Of this total, commitments of $29.3 million with outstanding balances of $3.7 million are for exploration and production, while $87.3 million in commitments, with outstanding balances of $50.7 million, are related to ancillary businesses.

One customer accounts for 34.2% of the loans related to exploration and production, and is a pass-rated credit. This credit facility is primarily used to support letters of credit and has little or no usage. One commercial relationship with a commitment of $15.0 million and no outstanding balance is categorized as a non-pass accruing credit. One commercial relationship in this category, with an oustanding balance of $2.2 million, has been on non-performing status since before the oil price decline in the third quarter of 2014.

The ancillary businesses sector consists of well services, transportation, and providing equipment and materials to support the oil and gas industry. Two customers, which account for 35.5% of the ancillary business exposure, are bulk transporters of refined product and are not expected to be negatively impacted from lower oil prices. There are two pass-rated credits, with total commitments of $23.6 million, in the ancillary business sector that will see some impact from reduced drilling activity due to lower oil and gas prices. Three commercial relationships with $4.1 million in outstanding loans for ancillary businesses are on non-performing status.

Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower, who could not obtain comparable terms from alternative financing sources. In the first three months of 2017, 13 loans totaling $0.8 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans decreased $0.9 million from December 31, 2016 due primarily to normal loan paydowns. Please refer to Note 8, “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.

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

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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, increased $8.1 million to $49.9 million at March 31, 2017 compared to $41.8 million at December 31, 2016. This increase is primarily due to the addition of a $5.5 million commercial loan relationship, of which $1.9 million was charged-off, to a manufacturer of custom store fixtures which is classified as held for sale, a $3.6 million commercial loan to a company specializing in commercial business services and a $3.3 million commercial loan relationship, of which $1.5 million was charged-off, to a manufacturer of fluid containment tanks. Also included in nonperforming loans is a $7.4 million loan to an aluminum servicing company which was classified as doubtful at March 31, 2017. A charge-off was recognized on this loan in the fourth quarter of 2016 and a restructuring is expected to be completed in the second quarter of 2017. At this time, the restructuring is not expected to result in any additional charge-offs on this loan.

The allowance for credit losses as a percentage of nonperforming loans was 105.20% as of March 31, 2017 compared to 120.02% at December 31, 2016 and 89.33% at March 31, 2016. The amount of specific reserves included in the allowance for 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 $3.0 million and general reserves of $45.7 million as of March 31, 2017. Specific reserves decreased $0.1 million from December 31, 2016, and $10.4 million from March 31, 2016. The specific reserves in the first three months of 2016 is primarily due to specific reserves related to one new impaired loan. 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, 2017.

Criticized loans totaled $130.0 million at March 31, 2017 and represented 2.6% of the loan portfolio. The level of criticized loans decreased as of March 31, 2017 when compared to December 31, 2016, by $4.4 million, or 3.3%. Classified loans totaled $89.4 million at March 31, 2017 compared to $93.2 million at December 31, 2016, a decrease of $3.8 million, or 4.0%. Delinquency on accruing loans for the same period decreased $1.5 million, or 11.0%, the majority of which are commercial, financial, agricultural and other loans and residential real estate loans.

The allowance for credit losses was $48.7 million at March 31, 2017 or 0.99% of total loans outstanding, compared to 1.03% reported at December 31, 2016 and 1.15% at March 31, 2016. 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 0.94% at March 31, 2017 compared to 0.97% at December 31, 2016 and 0.88% at March 31, 2016.

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, 2016
	2017				2016				December 31, 2016
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	21,797			$	33,470			$	16,454
Loans held for sale on a nonaccrual basis	3,613				—				—
Troubled debt restructured loans on nonaccrual basis	10,482				13,366				11,569
Troubled debt restructured loans on accrual basis	13,990				14,979				13,790
Total nonperforming loans	$	49,882			$	61,815			$	41,813
Loans past due 30 to 90 days and still accruing	$	9,965			$	8,866			$	10,964
Loans past due in excess of 90 days and still accruing	$	1,582			$	1,330			$	2,097
Other real estate owned	$	6,910			$	8,636			$	6,805
Loans held for sale at end of period	$	9,588			$	5,849			$	7,052
Portfolio loans outstanding at end of period	$	4,907,961			$	4,798,755			$	4,879,347
Average loans outstanding	$	4,916,759		(a)	$	4,745,252		(a)	$	4,818,759		(b)
Nonperforming loans as a percentage of total loans	1.01		%		1.29		%		0.86		%
Provision for credit losses	$	3,229		(a)	$	6,526		(a)	$	18,480		(b)
Allowance for credit losses	$	48,676			$	55,222			$	50,185
Net charge-offs	$	4,738		(a)	$	2,116		(a)	$	19,107		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.39		%		0.18		%		0.40		%
Provision for credit losses as a percentage of net charge-offs	68.15		%	(a)	308.41		%	(a)	96.72		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	0.99		%		1.15		%		1.03		%
Allowance for credit losses as a percentage of end-of-period originated loans outstanding	1.01		%		1.15		%		1.05		%
Allowance for credit losses as a percentage of nonperforming loans (d)	105.20		%		89.33		%		120.02		%


(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, 2017				December 31, 2016
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,148,460	23	%	$	1,139,547	23	%
Real estate construction	240,122		5		219,621		5
Residential real estate	1,217,398		25		1,229,192		25
Commercial real estate	1,761,101		36		1,742,210		36
Loans to individuals	540,880		11		548,777		11
Total loans and leases net of unearned income	$	4,907,961	100	%	$	4,879,347	100	%

During the three months ended March 31, 2017, loans increased $28.6 million, or 1%, compared to balances outstanding at December 31, 2016. During the three months ended March 31, 2017, growth in commercial, financial, agricultural and other portfolio and commercial real estate loans can largely be attributed to growth in middle market lending in Pennsylvania and Ohio. The increase in construction loans is primarily the result of several multifamily and hospitality projects in the Columbus, Cleveland and Pittsburgh markets. Declines in the loans to individuals category is primarily due to a decline in indirect auto

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

loans. The decrease in residential real estate loans is the result of runoff in our home equity and mortgage portfolios, as many of the loans originated by our mortgage banking area are sold in the secondary market.

Net charge-offs for the three months ended March 31, 2017 totaled $4.7 million, compared to $2.1 million for the three months ended March 31, 2016. The most significant charge-offs during the three months ended March 31, 2017 include a $1.9 million partial charge-off on a loan to a custom display manufacturer and a $1.5 million partial charge-off related to a containment tank manufacturer. During the three months ended March 31, 2016, the most significant charge-offs include a $1.1 million partial charge-off of two commercial industrial loans related to a local energy company.



	For the Three Months Ended March 31, 2017							As of March 31, 2017
	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	$	3,457		72.96	%	0.29	%	$	30,322	60.79	%	0.62	%
Real estate construction	(54		)	(1.14	)	(0.01	)	—		—		—
Residential real estate	345			7.28		0.03		11,904		23.86		0.24
Commercial real estate	(86		)	(1.81	)	(0.01	)	7,291		14.62		0.14
Loans to individuals	1,076			22.71		0.09		365		0.73		0.01
Total loans, net of unearned income	$	4,738		100.00	%	0.39	%	$	49,882	100.00	%	1.01	%

As the above table illustrates, 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, 2017. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At March 31, 2017, shareholders’ equity was $761.0 million, an increase of $11.1 million from December 31, 2016. The increase was primarily the result of a $15.9 million in net income, an increase of $0.9 million in the fair value of available for sale investments and $2.5 million in treasury stock sales. These increases were partially offset by $7.1 million of dividends paid to shareholders and $1.1 million of common stock repurchases. Cash dividends declared per common share were $0.08 and $0.07 for the three months ended March 31, 2017 and 2016, 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.

First Commonwealth maintains capital to absorb unexpected losses. In order to provide assurance that our capital levels are adequate for our risk exposure, we test our capital position under several stress scenarios on an annual basis. This analysis is subject to Board of Director review and approval. Our most recent capital stress test was completed in September 2016.

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 include higher minimum capital requirements, as the minimum Tier I capital ratio increased from 4.0% to 6.0% and a new common equity Tier I capital ratio was established with a minimum level of 4.5%. Additionally, the new rules improve the quality of capital by providing stricter eligibility criteria for regulatory capital instruments and provide for a phase-in, beginning January 1, 2016, of a capital conservation buffer of 2.5% of risk-weighted assets. This buffer provides a requirement to hold common equity Tier 1 capital above the minimum risk-based capital requirements, resulting in an effective common equity Tier I risk-weighted asset minimum ratio of 7% on a fully phased-in basis.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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.

As of March 31, 2017, 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 - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	694,012	12.25	%	$	524,007	9.250	%	$	594,818	10.50	%	$	566,494	10.00	%
First Commonwealth Bank	622,025		11.06		520,070		9.250		590,350		10.50		562,238		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	641,441	11.32	%	$	410,708	7.250	%	$	481,520	8.50	%	$	453,195	8.00	%
First Commonwealth Bank	569,454		10.13		407,622		7.250		477,902		8.50		449,790		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	641,441	9.85	%	$	260,527	4.000	%	$	260,527	4.00	%	$	325,659	5.00	%
First Commonwealth Bank	569,454		8.79		259,048		4.000		259,048		4.00		323,809		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	571,441	10.09	%	$	325,734	5.750	%	$	396,546	7.00	%	$	368,221	6.50	%
First Commonwealth Bank	569,454		10.13		323,287		5.750		393,567		7.00		365,455		6.50

On April 25, 2017, First Commonwealth Financial Corporation declared a quarterly dividend of $0.08 per share payable on May 19, 2017 to shareholders of record as of May 5, 2017. 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.

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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.

In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the current fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. No such changes were identified in connection with this evaluation.

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


ITEM 1.	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, 2016.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable


ITEM 5.	OTHER INFORMATION

None

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS



Exhibit Number	Description	Incorporated by Reference to

10.1	2017 Annual Incentive Plan	Filed herewith

10.2	2017-2019 Long-Term Incentive Plan	Filed herewith

31.1	Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.2	Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

101	The following materials from First Commonwealth Financial Corporation’s Quarterly Report on Form 10-Q, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.	Filed herewith

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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)



DATED: May 9, 2017		/s/ T. Michael Price
		T. Michael Price President and Chief Executive Officer

DATED: May 9, 2017		/s/ James R. Reske
		James R. Reske Executive Vice President, Chief Financial Officer and Treasurer

Attached files

FIRST COMMONWEALTH FINANCIAL CORP /PA/ Reports

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