UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2016
Or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-11138
First Commonwealth Financial Corporation
(Exact name of registrant as specified in its charter)
 
Pennsylvania 25-1428528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
601 Philadelphia Street, Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
724-349-7220
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x    Accelerated filer  ¨    Smaller reporting company  ¨    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 6,November 8, 2016, was 88,944,99688,992,077.


Table of Contents



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

2

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,
2016
 December 31,
2015
 
(dollars in thousands,
except share data)
Assets   
Cash and due from banks$62,141
 $66,644
Interest-bearing bank deposits11,024
 2,808
Securities available for sale, at fair value890,198
 886,560
Securities held to maturity, at amortized cost (Fair value of $400,964 and $382,341 at March 31, 2016 and December 31, 2015, respectively)396,444
 384,324
Other investments60,597
 62,952
Loans held for sale5,849
 5,763
Loans:   
Portfolio loans4,798,755
 4,683,750
Allowance for credit losses(55,222) (50,812)
Net loans4,743,533
 4,632,938
Premises and equipment, net63,860
 63,454
Other real estate owned8,636
 9,398
Goodwill164,500
 164,500
Amortizing intangibles, net1,094
 1,231
Bank owned life insurance183,897
 182,601
Other assets107,381
 103,717
Total assets$6,699,154
 $6,566,890
Liabilities   
Deposits (all domestic):   
Noninterest-bearing$1,155,795
 $1,116,689
Interest-bearing3,145,860
 3,079,205
Total deposits4,301,655
 4,195,894
Short-term borrowings1,518,742
 1,510,825
Subordinated debentures72,167
 72,167
Other long-term debt9,175
 9,314
Total long-term debt81,342
 81,481
Other liabilities64,101
 59,144
Total liabilities5,965,840
 5,847,344
Shareholders’ Equity   
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
 
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at March 31, 2016 and December 31, 2015, and 88,959,315 and 88,961,268 shares outstanding at March 31, 2016 and December 31, 2015, respectively105,563
 105,563
Additional paid-in capital366,090
 365,981
Retained earnings384,330
 378,081
Accumulated other comprehensive income (loss), net5,278
 (2,386)
Treasury stock (16,604,140 and 16,602,187 shares at March 31, 2016 and December 31, 2015, respectively)(127,947) (127,693)
Total shareholders’ equity733,314
 719,546
Total liabilities and shareholders’ equity$6,699,154
 $6,566,890

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

Table of Contents



ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I.
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

2

Table of Contents




ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
 September 30,
2016
 December 31,
2015
 
(dollars in thousands,
except share data)
Assets   
Cash and due from banks$76,456
 $66,644
Interest-bearing bank deposits5,097
 2,808
Securities available for sale, at fair value813,659
 886,560
Securities held to maturity, at amortized cost (Fair value of $396,994 and $382,341 at September 30, 2016 and December 31, 2015, respectively)389,513
 384,324
Other investments54,066
 62,952
Loans held for sale7,855
 5,763
Loans:   
Portfolio loans4,860,652
 4,683,750
Allowance for credit losses(54,734) (50,812)
Net loans4,805,918
 4,632,938
Premises and equipment, net63,356
 63,454
Other real estate owned7,686
 9,398
Goodwill164,437
 164,500
Amortizing intangibles, net912
 1,231
Bank owned life insurance186,034
 182,601
Other assets91,494
 103,717
Total assets$6,666,483
 $6,566,890
Liabilities   
Deposits (all domestic):   
Noninterest-bearing$1,241,627
 $1,116,689
Interest-bearing3,217,353
 3,079,205
Total deposits4,458,980
 4,195,894
Short-term borrowings1,330,327
 1,510,825
Subordinated debentures72,167
 72,167
Other long-term debt8,892
 9,314
Total long-term debt81,059
 81,481
Other liabilities44,330
 59,144
Total liabilities5,914,696
 5,847,344
Shareholders’ Equity   
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
 
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at September 30, 2016 and December 31, 2015, and 88,992,077 and 88,961,268 shares outstanding at September 30, 2016 and December 31, 2015, respectively105,563
 105,563
Additional paid-in capital366,291
 365,981
Retained earnings401,079
 378,081
Accumulated other comprehensive income (loss), net6,762
 (2,386)
Treasury stock (16,571,378 and 16,602,187 shares at September 30, 2016 and December 31, 2015, respectively)(127,908) (127,693)
Total shareholders’ equity751,787
 719,546
Total liabilities and shareholders’ equity$6,666,483
 $6,566,890

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

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 EndedFor the Three Months Ended For the Nine Months Ended
March 31,September 30, September 30,
2016 20152016 2015 2016 2015
(dollars in thousands, except share data)(dollars in thousands, except share data)
Interest Income          
Interest and fees on loans$45,034
 $42,601
$46,657
 $43,083
 $137,389
 $128,334
Interest and dividends on investments:          
Taxable interest7,146
 6,817
6,763
 6,470
 20,937
 20,022
Interest exempt from federal income taxes361
 175
380
 261
 1,112
 646
Dividends806
 1,489
671
 685
 2,225
 2,727
Interest on bank deposits6
 3
8
 2
 19
 7
Total interest income53,353
 51,085
54,479
 50,501
 161,682
 151,736
Interest Expense          
Interest on deposits1,589
 2,150
2,125
 1,757
 5,642
 5,787
Interest on short-term borrowings2,235
 958
1,987
 1,279
 6,322
 3,353
Interest on subordinated debentures634
 569
663
 588
 1,941
 1,736
Interest on other long-term debt88
 236
86
 192
 261
 633
Total interest expense4,546
 3,913
4,861
 3,816
 14,166
 11,509
Net Interest Income48,807
 47,172
49,618
 46,685
 147,516
 140,227
Provision for credit losses6,526
 1,159
3,408
 4,621
 20,306
 8,818
Net Interest Income after Provision for Credit Losses42,281
 46,013
46,210
 42,064
 127,210
 131,409
Noninterest Income          
Net securities gains
 105

 
 28
 125
Trust income1,255
 1,421
1,523
 1,614
 4,098
 4,511
Service charges on deposit accounts3,708
 3,318
3,975
 4,081
 11,528
 11,271
Insurance and retail brokerage commissions1,959
 2,195
2,104
 2,163
 6,048
 6,536
Income from bank owned life insurance1,296
 1,354
1,350
 1,357
 3,957
 4,089
Gain on sale of mortgage loans683
 439
1,235
 832
 2,850
 1,856
Gain on sale of other loans and assets195
 224
387
 808
 1,048
 1,428
Card-related interchange income3,557
 3,418
3,698
 3,637
 11,039
 10,784
Derivatives mark to market expense(1,014) (230)
Derivatives mark to market470
 (783) (1,075) (420)
Swap fee income725
 84
 1,985
 727
Other income2,076
 1,947
1,527
 1,712
 4,761
 5,136
Total noninterest income13,715
 14,191
16,994
 15,505
 46,267
 46,043
Noninterest Expense          
Salaries and employee benefits21,677
 21,892
20,647
 22,446
 62,212
 66,339
Net occupancy expense3,481
 3,911
3,176
 3,291
 9,843
 10,518
Furniture and equipment expense2,867
 2,680
2,847
 2,670
 8,596
 7,980
Data processing expense1,759
 1,438
1,832
 1,558
 5,379
 4,505
Advertising and promotion expense750
 789
 1,940
 1,946
Pennsylvania shares tax expense758
 794
914
 1,713
 2,764
 3,617
Intangible amortization137
 156
67
 157
 318
 469
Collection and repossession expense569
 511
760
 801
 1,803
 2,229
Other professional fees and services791
 930
1,202
 1,002
 2,866
 2,877
FDIC insurance1,038
 1,059
1,105
 963
 3,205
 3,047
Loss on sale or write-down of assets96
 262
188
 140
 629
 2,037
Litigation and operational losses244
 1,000
295
 314
 1,174
 1,637
Merger and acquisition related118
 28
 358
 28
Other operating expenses4,727
 5,221
4,795
 4,385
 13,163
 13,516
Total noninterest expense38,144
 39,854
38,696
 40,257
 114,250
 120,745
Income Before Income Taxes17,852
 20,350
24,508
 17,312
 59,227
 56,707
Income tax provision5,379
 6,129
7,312
 4,898
 17,551
 16,625
Net Income$12,473
 $14,221
$17,196
 $12,414
 $41,676
 $40,082
Average Shares Outstanding88,840,088
 90,875,724
88,854,448
 88,807,294
 88,842,143
 89,527,560
Average Shares Outstanding Assuming Dilution88,845,201
 90,889,035
88,858,204
 88,813,746
 88,843,939
 89,531,498
Per Share Data:          
Basic Earnings per Share$0.14
 $0.16
$0.19
 $0.14
 $0.47
 $0.45
Diluted Earnings per Share$0.14
 $0.16
$0.19
 $0.14
 $0.47
 $0.45
Cash Dividends Declared per Common Share$0.07
 $0.07
$0.07
 $0.07
 $0.21
 $0.21

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

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,
 2016 2015
 (dollars in thousands)
Net Income$12,473
 $14,221
Other comprehensive income, before tax expense:   
Unrealized holding gains on securities arising during the period10,070
 9,980
Less: reclassification adjustment for gains on securities included in net income
 (105)
Unrealized holding gains on derivatives arising during the period1,735
 1,195
Less: reclassification adjustment for (gains) losses on derivatives included in net income(15) 5
Total other comprehensive income, before tax expense11,790
 11,075
Income tax expense related to items of other comprehensive income(4,126) (3,874)
Total other comprehensive income7,664
 7,201
Comprehensive Income$20,137
 $21,422
 For the Three Months Ended For the Nine Months Ended
 September 30, September 30,
 2016 2015 2016 2015
 (dollars in thousands)
Net Income$17,196
 $12,414
 $41,676
 $40,082
Other comprehensive (loss) income, before tax benefit (expense):       
Unrealized holding (losses) gains on securities arising during the period(751) 6,344
 13,121
 12,510
Less: reclassification adjustment for gains on securities included in net income
 
 (28) (125)
Unrealized holding (losses) gains on derivatives arising during the period(1,056) 1,504
 1,038
 2,172
Less: reclassification adjustment for gains on derivatives included in net income(16) 
 (57) (6)
Total other comprehensive (loss) income, before tax benefit (expense)(1,823) 7,848
 14,074
 14,551
Income tax benefit (expense) related to items of other comprehensive (loss) income638
 (2,747) (4,926) (5,091)
Total other comprehensive (loss) income(1,185) 5,101
 9,148
 9,460
Comprehensive Income$16,011
 $17,515
 $50,824
 $49,542


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

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
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)(dollars in thousands, except share and per share data)
Balance at December 31, 201588,961,268
 $105,563
 $365,981
 $378,081
 $(2,386) $(127,693) $719,546
88,961,268
 $105,563
 $365,981
 $378,081
 $(2,386) $(127,693) $719,546
Net income      12,473
     12,473
      41,676
     41,676
Other comprehensive income        7,664
   7,664
        9,148
   9,148
Cash dividends declared ($0.07 per share)      (6,224)     (6,224)
Cash dividends declared ($0.21 per share)      (18,678)     (18,678)
Treasury stock acquired(55,301)         (488) (488)(98,687)         (864) (864)
Treasury stock reissued23,148
   39
 
   177
 216
Restricted stock53,348
 
 109
 
   234
 343
106,348
 
 271
 
   472
 743
Balance at March 31, 201688,959,315
 $105,563
 $366,090
 $384,330
 $5,278
 $(127,947) $733,314
Balance at September 30, 201688,992,077
 $105,563
 $366,291
 $401,079
 $6,762
 $(127,908) $751,787
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
net
 
Treasury
Stock
 
Total
Shareholders’
Equity
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)(dollars in thousands, except share and per share data)
Balance at December 31, 201491,723,028
 $105,563
 $365,615
 $353,027
 $(4,499) $(103,561) $716,145
91,723,028
 $105,563
 $365,615
 $353,027
 $(4,499) $(103,561) $716,145
Net income      14,221
     14,221
      40,082
     40,082
Other comprehensive income        7,201
   7,201
        9,460
   9,460
Cash dividends declared ($0.07 per share)      (6,407)     (6,407)
Cash dividends declared ($0.21 per share)      (18,862)     (18,862)
Treasury stock acquired(2,201,391)         (18,874) (18,874)(2,918,066)         (25,383) (25,383)
Treasury stock reissued20,936
   32
 
   160
 192
Restricted stock134,370
 
 259
 
   315
 574
135,370
 
 303
 
   831
 1,134
Balance at March 31, 201589,656,007
 $105,563
 $365,874
 $360,841
 $2,702
 $(122,120) $712,860
Balance at September 30, 201588,961,268
 $105,563
 $365,950
 $374,247
 $4,961
 $(127,953) $722,768


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

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 EndedFor the Nine Months Ended
March 31,September 30,
2016 20152016 2015
Operating Activities(dollars in thousands)(dollars in thousands)
Net income$12,473
 $14,221
$41,676
 $40,082
Adjustment to reconcile net income to net cash provided by operating activities:      
Provision for credit losses6,526
 1,159
20,306
 8,818
Deferred tax expense1,200
 4,219
4,332
 12,520
Depreciation and amortization1,740
 1,899
5,234
 5,750
Net losses (gains) on securities and other assets218
 (267)
Net gains on securities and other assets(2,288) (952)
Net amortization of premiums and discounts on securities1,102
 441
3,486
 2,012
Income from increase in cash surrender value of bank owned life insurance(1,296) (1,354)(3,957) (4,089)
Increase in interest receivable(911) (127)(50) (167)
Mortgage loans originated for sale(22,269) (15,382)(94,611) (67,708)
Proceeds from sale of mortgage loans22,858
 15,472
95,341
 67,071
Decrease in interest payable(26) (92)(324) (173)
Increase in income taxes payable2,811
 290
Decrease in income taxes payable(3,055) (22)
Other-net(4,834) (4,748)(6,200) (10,757)
Net cash provided by operating activities19,592
 15,731
59,890
 52,385
Investing Activities      
Transactions with securities held to maturity:      
Proceeds from maturities and redemptions6,924
 
35,470
 3,828
Purchases(19,695) (29,616)(42,837) (156,756)
Transactions with securities available for sale:      
Proceeds from sales55,744
 
Proceeds from maturities and redemptions35,815
 50,568
122,828
 286,924
Purchases(29,930) (500)(94,777) (16,600)
Purchases of FHLB stock(10,281) (13,801)(31,218) (46,911)
Proceeds from the redemption of FHLB stock12,636
 11,270
40,104
 36,980
Proceeds from bank owned life insurance
 291
203
 378
Proceeds from sale of loans3,511
 2,898
Proceeds from sale of other assets2,101
 1,008
6,021
 3,668
Net (increase) decrease in loans(118,137) 9,540
Net increase in loans(200,269) (140,268)
Purchases of other assets(204) 
Purchases of premises and equipment(2,251) (1,665)(5,511) (3,740)
Net cash (used in) provided by investing activities(122,818) 27,095
Net cash used in investing activities(110,935) (29,599)
Financing Activities      
Net (decrease) increase in federal funds purchased(4,000) 6,000
(1,000) 11,000
Net increase in other short-term borrowings11,917
 13,644
Net (decrease) increase in other short-term borrowings(179,498) 212,918
Net increase (decrease) in deposits105,873
 (21,761)263,392
 (154,018)
Repayments of other long-term debt(139) (25,134)(422) (50,407)
Dividends paid(6,224) (6,407)(18,678) (18,862)
Proceeds from reissuance of treasury stock216
 192
Purchase of treasury stock(488) (18,421)(864) (25,383)
Net cash provided by (used in) financing activities106,939
 (52,079)63,146
 (24,560)
Net increase (decrease) in cash and cash equivalents3,713
 (9,253)12,101
 (1,774)
Cash and cash equivalents at January 169,452
 74,538
69,452
 74,538
Cash and cash equivalents at March 31$73,165
 $65,285
Cash and cash equivalents at September 30$81,553
 $72,764

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


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 threenine months ended March 31,September 30, 2016 are not necessarily indicative of the results that may be expected for the full year of 2016. These interim financial statements should be read in conjunction with First Commonwealth’s 2015 Annual Report on Form 10-K.
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.
Note 2 Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Condensed Consolidated Statements of Income.
For the Three Months Ended March 31,For the Nine Months Ended September 30,
2016 20152016 2015
Pretax Amount Tax (Expense) Benefit Net of Tax Amount Pretax Amount Tax (Expense) Benefit Net of Tax AmountPretax Amount Tax (Expense) Benefit Net of Tax Amount Pretax Amount Tax (Expense) Benefit Net of Tax Amount
(dollars in thousands)(dollars in thousands)
Unrealized gains on securities:                      
Unrealized holding gains on securities arising during the period$10,070
 $(3,524) $6,546
 $9,980
 $(3,491) $6,489
$13,121
 $(4,593) $8,528
 $12,510
 $(4,377) $8,133
Reclassification adjustment for gains on securities included in net income
 
 
 (105) 37
 (68)(28) 10
 (18) (125) 44
 (81)
Total unrealized gains on securities10,070
 (3,524) 6,546
 9,875
 (3,454) 6,421
13,093
 (4,583) 8,510
 12,385
 (4,333) 8,052
Unrealized gains on derivatives:                      
Unrealized holding gains on derivatives arising during the period1,735
 (607) 1,128
 1,195
 (418) 777
1,038
 (363) 675
 2,172
 (760) 1,412
Reclassification adjustment for (gains) losses on derivatives included in net income(15) 5
 (10) 5
 (2) 3
Reclassification adjustment for gains on derivatives included in net income(57) 20
 (37) (6) 2
 (4)
Total unrealized gains on derivatives1,720
 (602) 1,118
 1,200
 (420) 780
981
 (343) 638
 2,166
 (758) 1,408
Total other comprehensive income$11,790
 $(4,126) $7,664
 $11,075
 $(3,874) $7,201
$14,074
 $(4,926) $9,148
 $14,551
 $(5,091) $9,460


8

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


 For the Three Months Ended September 30,
 2016 2015
 Pretax Amount Tax (Expense) Benefit Net of Tax Amount Pretax Amount Tax (Expense) Benefit Net of Tax Amount
 (dollars in thousands)
Unrealized (losses) gains on securities:           
Unrealized holding (losses) gains on securities arising during the period$(751) $262
 $(489) $6,344
 $(2,221) $4,123
Reclassification adjustment for losses on securities included in net income
 
 
 
 
 
Total unrealized (losses) gains on securities(751) 262
 (489) 6,344
 (2,221) 4,123
Unrealized (losses) gains on derivatives:           
Unrealized holding (losses) gains on derivatives arising during the period(1,056) 370
 (686) 1,504
 (526) 978
Reclassification adjustment for gains on derivatives included in net income(16) 6
 (10) 
 
 
Total unrealized (losses) gains on derivatives(1,072) 376
 (696) 1,504
 (526) 978
Total other comprehensive (loss) income$(1,823) $638
 $(1,185) $7,848
 $(2,747) $5,101
The following table details the change in components of OCI for the threenine months ended March 31September 30:
2016 20152016 2015
Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive IncomeSecurities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income
(dollars in thousands)(dollars in thousands)
Balance at December 31$(2,956)$10
$560
$(2,386) $(4,875)$76
$300
$(4,499)$(2,956)$10
$560
$(2,386) $(4,875)$76
$300
$(4,499)
Other comprehensive income before reclassification adjustment6,546

1,128
7,674
 6,489

777
7,266
8,528

675
9,203
 8,133

1,412
9,545
Amounts reclassified from accumulated other comprehensive (loss) income

(10)(10) (68)
3
(65)(18)
(37)(55) (81)
(4)(85)
Net other comprehensive income during the period6,546

1,118
7,664
 6,421

780
7,201
8,510

638
9,148
 8,052

1,408
9,460
Balance at March 31$3,590
$10
$1,678
$5,278
 $1,546
$76
$1,080
$2,702
Balance at September 30$5,554
$10
$1,198
$6,762
 $3,177
$76
$1,708
$4,961

Note 3 Supplemental Cash Flow Disclosures
The following table presents information related to cash paid during the period for interest, as well as detail on non-cash investing and financing activities for the threenine months ended March 31:September 30:
2016 20152016 2015
(dollars in thousands)(dollars in thousands)
Cash paid during the period for:      
Interest$4,674
 $4,004
$14,768
 $11,682
Income taxes1,000
 1,500
15,750
 4,000
Non-cash investing and financing activities:      
Loans transferred to other real estate owned and repossessed assets1,355
 797
3,973
 7,413
Loans transferred from held to maturity to held for sale
 3,011
3,573
 3,071
Gross increase in market value adjustment to securities available for sale10,070
 9,869
13,094
 12,381
Gross increase in market value adjustment to derivatives1,720
 1,200
981
 2,167
Investments committed to purchase, not settled600
 637
276
 1,350
Unsettled treasury stock repurchases
 453
Proceeds from death benefit on bank-owned life insurance not received320
 

9

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



Note 4 Earnings per Share
The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computations:
 For the Three Months Ended March 31,
 2016 2015
Weighted average common shares issued105,563,455
 105,563,455
Average treasury stock shares(16,623,094) (14,503,976)
Average unearned nonvested shares(100,273) (183,755)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share88,840,088
 90,875,724
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share5,113
 13,311
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share88,845,201
 90,889,035

9

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


 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2016 2015 2016 2015
Weighted average common shares issued105,563,455
 105,563,455
 105,563,455
 105,563,455
Average treasury stock shares(16,609,505) (16,602,502) (16,617,616) (15,858,433)
Average unearned nonvested shares(99,502) (153,659) (103,696) (177,462)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share88,854,448
 88,807,294
 88,842,143
 89,527,560
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share3,756
 6,452
 1,796
 3,938
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share88,858,204
 88,813,746
 88,843,939
 89,531,498
The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the threenine months ended March 31September 30 because to do so would have been antidilutive.
 2016 2015
   Price Range   Price Range
 Shares From To Shares From To
Restricted Stock88,508
 7.21
 9.84
 118,390
 7.35
 9.26
 2016 2015
   Price Range   Price Range
 Shares From To Shares From To
Restricted Stock72,432
 $8.38
 $10.09
 121,091
 $5.26
 $9.84

Note 5 Commitments and Contingent Liabilities
Commitments and Letters of Credit
Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.
The following table identifies the notional amount of those instruments at:
March 31, 2016 December 31, 2015September 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:      
Commitments to extend credit$1,643,908
 $1,643,187
$1,598,318
 $1,643,187
Financial standby letters of credit17,805
 17,843
17,760
 17,843
Performance standby letters of credit27,352
 26,497
28,110
 26,497
Commercial letters of credit1,718
 1,672
1,528
 1,672
 
The notional amounts outstanding as of March 31,September 30, 2016 include amounts issued in 2016 of $13$23 thousand in financial standby letters of credit, $1.32.9 million in performance standby letters of credit and $0.2 million commercial letters of credit. A liability of $0.10.2 million and $0.2 million has been recorded as of both March 31,September 30, 2016 and December 31, 2015, 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.

10

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


Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk related to these commitments resulted in the recording of a liability of $4.14.0 million as of March 31,September 30, 2016 and $4.4 million as of December 31, 2015. This liability is reflected in "Other liabilities" in the Condensed Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.
Legal Proceedings
First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of March 31,September 30, 2016, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $7 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it

10

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


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 for such mattersset forth in the aggregate set forth above.preceding paragraph. 


11

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


Note 6 Investment Securities
Securities Available for Sale
Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:
March 31, 2016 December 31, 2015September 30, 2016 December 31, 2015
Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
(dollars in thousands)(dollars in thousands)
Obligations of U.S. Government Agencies:                              
Mortgage-Backed Securities – Residential$19,380
 $2,320
 $
 $21,700
 $20,034
 $2,071
 $(13) $22,092
$16,059
 $1,917
 $
 $17,976
 $20,034
 $2,071
 $(13) $22,092
Obligations of U.S. Government-Sponsored Enterprises:      
       
      
       
Mortgage-Backed Securities – Residential768,405
 12,917
 (1,697) 779,625
 778,476
 7,983
 (8,882) 777,577
692,092
 13,090
 (556) 704,626
 778,476
 7,983
 (8,882) 777,577
Mortgage-Backed Securities – Commercial23
 
 
 23
 28
 
 
 28
1
 
 
 1
 28
 
 
 28
Other Government-Sponsored Enterprises19,201
 7
 (5) 19,203
 19,201
 2
 (85) 19,118
19,300
 7
 
 19,307
 19,201
 2
 (85) 19,118
Obligations of States and Political Subdivisions27,068
 764
 
 27,832
 27,066
 532
 
 27,598
27,073
 878
 
 27,951
 27,066
 532
 
 27,598
Corporate Securities5,896
 440
 
 6,336
 1,897
 422
 
 2,319
5,901
 618
 
 6,519
 1,897
 422
 
 2,319
Pooled Trust Preferred Collateralized Debt Obligations42,500
 476
 (9,703) 33,273
 42,239
 916
 (7,497) 35,658
43,020
 677
 (8,088) 35,609
 42,239
 916
 (7,497) 35,658
Total Debt Securities882,473
 16,924
 (11,405) 887,992
 888,941
 11,926
 (16,477) 884,390
803,446
 17,187
 (8,644) 811,989
 888,941
 11,926
 (16,477) 884,390
Equities2,206
 
 
 2,206
 2,170
 
 
 2,170
1,670
 
 
 1,670
 2,170
 
 
 2,170
Total Securities Available for Sale$884,679
 $16,924
 $(11,405) $890,198
 $891,111
 $11,926
 $(16,477) $886,560
$805,116
 $17,187
 $(8,644) $813,659
 $891,111
 $11,926
 $(16,477) $886,560

Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and obligations of U.S. Government-sponsored enterprises. These obligations have contractual maturities ranging from less than one year to approximately 30 years with lower anticipated lives to maturity due to prepayments. All mortgage backed securities contain a

11

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


certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds; therefore, First Commonwealth uses computer simulation models to test the average life and yield volatility of all mortgage backed securities under various interest rate scenarios to monitor the potential impact on earnings and interest rate risk positions.

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

12

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


The amortized cost and estimated fair value of debt securities available for sale at March 31,September 30, 2016, by contractual maturity, are shown below.
Amortized
Cost
 Estimated
Fair Value
Amortized
Cost
 Estimated
Fair Value
(dollars in thousands)(dollars in thousands)
Due within 1 year$2,601
 $2,601
$5,600
 $5,602
Due after 1 but within 5 years20,596
 20,640
17,697
 17,756
Due after 5 but within 10 years27,068
 27,832
27,073
 27,951
Due after 10 years44,400
 35,571
44,924
 38,077
94,665
 86,644
95,294
 89,386
Mortgage-Backed Securities (a)787,808
 801,348
708,152
 722,603
Total Debt Securities$882,473
 $887,992
$803,446
 $811,989
 
(a)
Mortgage Backed Securities include an amortized cost of $19.416.1 million and a fair value of $21.718.0 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $768.4692.1 million and a fair value of $779.6704.6 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
 
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the threenine months ended March 31:September 30:
2016 20152016 2015
(dollars in thousands)(dollars in thousands)
Proceeds from sales$
 $
$55,744
 $
Gross gains (losses) realized:      
Sales Transactions:      
Gross gains$
 $
$304
 $
Gross losses
 
(276) 

 
28
 
Maturities and impairment      
Gross gains
 105

 125
Gross losses
 

 
Other-than-temporary impairment
 

 

 105

 125
Net gains and impairment$
 $105
$28
 $125

Securities available for sale with an estimated fair value of $478.2498.5 million and $416.1 million were pledged as of March 31,September 30, 2016 and December 31, 2015, respectively, to secure public deposits and for other purposes required or permitted by law.

1213

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, 2016 December 31, 2015September 30, 2016 December 31, 2015
Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
(dollars in thousands)(dollars in thousands)
Obligations of U.S. Government Agencies:                              
Mortgage-Backed Securities – Residential$4,743
 $99
 $
 $4,842
 $4,775
 $
 $(7) $4,768
$4,615
 $154
 $
 $4,769
 $4,775
 $
 $(7) $4,768
Mortgage-Backed Securities- Commercial16,767
 
 (3) 16,764
 16,843
 
 (247) 16,596
35,625
 225
 
 35,850
 16,843
 
 (247) 16,596
Obligations of U.S. Government-Sponsored Enterprises:                              
Mortgage-Backed Securities – Residential325,974
 3,526
 
 329,500
 315,609
 30
 (1,824) 313,815
297,681
 5,865
 
 303,546
 315,609
 30
 (1,824) 313,815
Mortgage-Backed Securities – Commercial15,067
 273
 
 15,340
 15,187
 
 (178) 15,009
14,809
 378
 
 15,187
 15,187
 
 (178) 15,009
Obligations of States and Political Subdivisions33,893
 627
 (2) 34,518
 31,910
 301
 (58) 32,153
36,783
 884
 (25) 37,642
 31,910
 301
 (58) 32,153
Total Securities Held to Maturity$396,444
 $4,525
 $(5) $400,964
 $384,324
 $331
 $(2,314) $382,341
$389,513
 $7,506
 $(25) $396,994
 $384,324
 $331
 $(2,314) $382,341
The amortized cost and estimated fair value of debt securities held to maturity at March 31,September 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
Amortized
Cost
 Estimated
Fair Value
Amortized
Cost
 Estimated
Fair Value
(dollars in thousands)(dollars in thousands)
Due within 1 year$
 $
$
 $
Due after 1 but within 5 years107
 108
1,223
 1,249
Due after 5 but within 10 years27,839
 28,412
29,368
 30,125
Due after 10 years5,947
 5,998
6,192
 6,268
33,893
 34,518
36,783
 37,642
Mortgage-Backed Securities (a)362,551
 366,446
352,730
 359,352
Total Debt Securities$396,444
 $400,964
$389,513
 $396,994
(a)Mortgage Backed Securities include an amortized cost of $21.5$40.2 million and a fair value of $21.6$40.6 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $341.0$312.5 million and a fair value of $344.8$318.7 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
Securities held to maturity with an amortized cost of $58.3$281.9 million and $45.7 million were pledged as of March 31,September 30, 2016 and December 31, 2015, respectively, to secure public deposits and for other purposes required or permitted by law.


1314

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 threenine months ended March 31,September 30, 2016 and 2015, no other-than-temporary impairment charges were recognized.
First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, and 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,September 30, 2016 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:
 
Less Than 12 Months 12 Months or More TotalLess 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
Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
(dollars in thousands)(dollars in thousands)
Obligations of U.S. Government Agencies:           
Mortgage-Backed Securities – Commercial$16,764
 $(3) $
 $
 $16,764
 $(3)
Obligations of U.S. Government-Sponsored Enterprises:                      
Mortgage-Backed Securities – Residential26,650
 (14) 212,200
 (1,683) 238,850
 (1,697)$59,691
 $(137) $60,909
 $(419) $120,600
 $(556)
Other Government-Sponsored Enterprises5,596
 (5) 
 
 5,596
 (5)
Obligations of States and Political Subdivisions543
 (2) 
 
 543
 (2)1,781
 (25) 
 
 1,781
 (25)
Pooled Trust Preferred Collateralized Debt Obligations
 
 27,923
 (9,703) 27,923
 (9,703)
 
 29,896
 (8,088) 29,896
 (8,088)
Total Securities$49,553
 $(24) $240,123
 $(11,386) $289,676
 $(11,410)$61,472
 $(162) $90,805
 $(8,507) $152,277
 $(8,669)

At March 31,September 30, 2016, fixed income securities issued by U.S. Government-sponsored enterprises comprised 15%6% of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 85%93% of the unrealized losses primarily due to the illiquid market for this investment type. At March 31,September 30, 2016, there are 3022 debt securities in an unrealized loss position.

1415

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


The following table presents the gross unrealized losses and estimated fair values at December 31, 2015 by investment category and time frame for which securities have been in a continuous unrealized loss position:
 Less Than 12 Months 12 Months or More Total
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 (dollars in thousands)
Obligations of U.S. Government Agencies:           
Mortgage-Backed Securities – Residential$6,798
 $(20) $
 $
 $6,798
 $(20)
Mortgage-Backed Securities - Commercial16,596
 (247) 
 
 16,596
 (247)
Obligations of U.S. Government-Sponsored Enterprises:           
Mortgage-Backed Securities – Residential436,011
 (3,293) 263,119
 (7,413) 699,130
 (10,706)
Mortgage-Backed Securities – Commercial15,009
 (178) 
 
 15,009
 (178)
Other Government-Sponsored Enterprises12,316
 (85) 
 
 12,316
 (85)
Obligation of States and Political Subdivisions7,208
 (58) 
 
 7,208
 (58)
Pooled Trust Preferred Collateralized Debt Obligations
 
 29,957
 (7,497) 29,957
 (7,497)
Total Securities$493,938
 $(3,881) $293,076
 $(14,910) $787,014
 $(18,791)
As of March 31,September 30, 2016, our corporate securities had an amortized cost and an estimated fair value of $5.9 million and $6.36.5 million, respectively. As of December 31, 2015, our corporate securities had an amortized cost and estimated fair value of $1.9 million and $2.3 million, respectively. Corporate securities are comprised of debt for large regional banks. There were no corporate securities in an unrealized loss position as of March 31,September 30, 2016 and December 31, 2015. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.
As of March 31,September 30, 2016, the book value of our pooled trust preferred collateralized debt obligations totaled $42.543.0 million with an estimated fair value of $33.335.6 million, which includes securities comprised of 274268 banks and other financial institutions. All of our pooled securities are mezzanine tranches, three of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of March 31,September 30, 2016, after taking into account management’s best estimates of future interest deferrals and defaults, fourthree of our securities had no excess subordination in the tranches we own and fivesix of our securities had excess subordination which ranged from 10%2% to 83%82% of the current performing collateral.
 
The following table provides information related to our pooled trust preferred collateralized debt obligations as of March 31, 2016:
DealClass 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 IVMezzanine $1,830
 $1,291
 $(539) B1/BB 6
 18.05% 59.28%
Pre TSL VIIMezzanine 3,020
 3,272
 252
 Ca/- 14
 49.68
 
Pre TSL VIIIMezzanine 2,020
 1,705
 (315) C/C 28
 53.00
 
Pre TSL IXMezzanine 2,385
 1,778
 (607) B1/C 38
 29.80
 9.82
Pre TSL XMezzanine 1,644
 1,779
 135
 Caa1/C 43
 30.66
 
Pre TSL XIIMezzanine 5,735
 4,324
 (1,411) B3/C 66
 22.03
 
Pre TSL XIIIMezzanine 12,767
 9,856
 (2,911) Ba3/C 56
 12.11
 42.17
Pre TSL XIVMezzanine 12,889
 8,969
 (3,920) B1/CC 56
 19.72
 49.72
MMCap IMezzanine 210
 299
 89
 Ca/C 8
 58.11
 83.30
Total  $42,500
 $33,273
 $(9,227)        

1516

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


The following table provides information related to our pooled trust preferred collateralized debt obligations as of September 30, 2016:
DealClass 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 IVMezzanine $1,830
 $1,331
 $(499) B1/BB 6
 18.05% 60.61%
Pre TSL VIIMezzanine 3,119
 3,513
 394
 Ca/- 14
 47.77
 0.00
Pre TSL VIIIMezzanine 2,063
 2,025
 (38) C/C 28
 44.37
 0.00
Pre TSL IXMezzanine 2,403
 1,893
 (510) B1/C 37
 27.83
 12.79
Pre TSL XMezzanine 1,707
 1,887
 180
 Caa1/C 42
 31.58
 2.17
Pre TSL XIIMezzanine 5,839
 4,584
 (1,255) B3/C 64
 24.50
 0.00
Pre TSL XIIIMezzanine 12,888
 10,504
 (2,384) Ba3/C 54
 11.75
 48.41
Pre TSL XIVMezzanine 12,960
 9,559
 (3,401) B1/CC 54
 13.45
 37.92
MMCap IMezzanine 211
 313
 102
 Ca/C 8
 58.11
 81.65
Total  $43,020
 $35,609
 $(7,411)        
Lack of liquidity in the market for trust preferred collateralized debt obligations, below investment grade credit ratings and market uncertainties related to the financial industry are factors contributing to the impairment on these securities.
In October 2016, the Company received notice that the Senior note holders of Pre TSL VII elected to liquidate all assets of the trust. The sale of the assets and early redemption of the security is anticipated to be completed in the fourth quarter of 2016. Estimated proceeds are expected to be in line with our book value.
All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies and therefore are not considered covered funds under the Volcker Rule.
On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three and nine months ended March 31,September 30, 2016 and 2015, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.
Additional information related to the discounted cash flow analysis follows:
Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at March 31,September 30, 2016. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.
 
Results of a discounted cash flow test are significantly affected by other variables, such as the estimate of future cash flows, credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following provides additional information for each of these variables:
Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions, which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon

17

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


is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.
Credit Analysis – A quarterly credit evaluation is performed for each of the 274268 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,September 30, 2016, default probabilities for performing collateral ranged from 0.33% to 75%.
Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying piece of collateral. Using the results of the credit evaluation, the next step of the process is to look at pricing of senior debt or credit default swaps for the issuer (or where such information is unavailable, for companies having similar credit profiles as the issuer). The pricing of these market indicators provides the information necessary to determine appropriate default probabilities for each bank.

16

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,September 30, 2016, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the threenine months ended March 31,September 30, 2016. Based upon the analysis performed by management, it is probable that fourthree of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the table on page 1517 with 0%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,September 30, 2016 indicates it is probable that we will collect all contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.
During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of March 31,September 30, 2016, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities' current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from 20%19% to 129%123% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.

18

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


The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:
For the Three Months Ended March 31,For the Three Months Ended September 30, For the Nine Months Ended September 30,
2016 20152016 2015 2016 2015
(dollars in thousands)(dollars in thousands)
Balance, beginning (a)$24,851
 $26,246
$24,310
 $25,366
 $24,851
 $26,246
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized
 

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

 
 
 
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)(261) (321)(270) (255) (811) (917)
Reduction for debt securities called during the period
 (218)
 
 
 (218)
Balance, ending$24,590
 $25,707
$24,040
 $25,111
 $24,040
 $25,111
 
(a)The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.
(b)Represents the increase in cash flows recognized in interest income during the period.
In the first threenine months of 2016 and 2015, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of March 31,September 30, 2016 and 2015, there were no equity securities in an unrealized loss position.
Other Investments
As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of March 31,September 30, 2016 and

17

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


December 31, 2015, our FHLB stock totaled $60.654.1 million and $63.0 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three and nine months ended March 31,September 30, 2016.
Note 8 Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types:
 
March 31, 2016 December 31, 2015September 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Commercial, financial, agricultural and other$1,190,384
 $1,150,906
$1,207,447
 $1,150,906
Real estate construction256,856
 220,736
229,375
 220,736
Residential real estate1,212,962
 1,224,465
1,185,759
 1,224,465
Commercial real estate1,552,904
 1,479,000
1,683,015
 1,479,000
Loans to individuals585,649
 608,643
555,056
 608,643
Total loans$4,798,755
 $4,683,750
$4,860,652
 $4,683,750

19

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


Credit Quality Information
As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:
Pass  Acceptable levels of risk exist in the relationship. Includes all loans not classified as OAEM, substandard or doubtful.
Other Assets Especially Mentioned (OAEM)  Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Company’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.
Substandard  Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.
Doubtful  Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.
The following tables represent our credit risk profile by creditworthiness:
 September 30, 2016
 Commercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals Total
 (dollars in thousands)
Pass$1,105,422
 $229,092
 $1,172,174
 $1,661,908
 $554,792
 $4,723,388
Non-Pass           
OAEM26,758
 283
 5,962
 7,002
 
 40,005
Substandard75,267
 
 7,623
 14,105
 264
 97,259
Doubtful
 
 
 
 
 
Total Non-Pass102,025
 283
 13,585
 21,107
 264
 137,264
Total$1,207,447
 $229,375
 $1,185,759
 $1,683,015
 $555,056
 $4,860,652

1820

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, 2016
 Commercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals Total
 (dollars in thousands)
Pass$1,085,770
 $256,423
 $1,198,103
 $1,530,565
 $585,269
 $4,656,130
Non-Pass           
OAEM18,522
 433
 5,178
 7,676
 
 31,809
Substandard86,092
 
 9,681
 14,663
 380
 110,816
Doubtful
 
 
 
 
 
Total Non-Pass104,614
 433
 14,859
 22,339
 380
 142,625
Total$1,190,384
 $256,856
 $1,212,962
 $1,552,904
 $585,649
 $4,798,755
 December 31, 2015
 Commercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals Total
 (dollars in thousands)
Pass$1,074,858
 $220,267
 $1,209,606
 $1,436,714
 $608,342
 $4,549,787
Non-Pass           
OAEM11,825
 442
 5,244
 30,012
 
 47,523
Substandard64,223
 27
 9,615
 12,274
 301
 86,440
Doubtful
 
 
 
 
 
Total Non-Pass76,048
 469
 14,859
 42,286
 301
 133,963
Total$1,150,906
 $220,736
 $1,224,465
 $1,479,000
 $608,643
 $4,683,750
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,September 30, 2016. 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.

19

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


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,September 30, 2016 and December 31, 2015. 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, 2016September 30, 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 Total30 - 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)(dollars in thousands)
Commercial, financial, agricultural and other$277
 $92
 $130
 $34,851
 $35,350
 $1,155,034
 $1,190,384
$780
 $37
 $826
 $30,868
 $32,511
 $1,174,936
 $1,207,447
Real estate construction
 
 86
 
 86
 256,770
 256,856

 
 
 
 
 229,375
 229,375
Residential real estate3,639
 1,308
 205
 6,642
 11,794
 1,201,168
 1,212,962
3,736
 878
 527
 6,031
 11,172
 1,174,587
 1,185,759
Commercial real estate1,270
 
 
 4,963
 6,233
 1,546,671
 1,552,904
785
 73
 195
 3,377
 4,430
 1,678,585
 1,683,015
Loans to individuals1,732
 548
 909
 380
 3,569
 582,080
 585,649
2,038
 615
 795
 264
 3,712
 551,344
 555,056
Total$6,918
 $1,948
 $1,330
 $46,836
 $57,032
 $4,741,723
 $4,798,755
$7,339
 $1,603
 $2,343
 $40,540
 $51,825
 $4,808,827
 $4,860,652
 

21

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


 December 31, 2015
 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)
Commercial, financial, agricultural and other$364
 $49
 $129
 $23,653
 $24,195
 $1,126,711
 $1,150,906
Real estate construction280
 
 
 28
 308
 220,428
 220,736
Residential real estate4,175
 1,055
 1,315
 6,500
 13,045
 1,211,420
 1,224,465
Commercial real estate781
 
 65
 6,223
 7,069
 1,471,931
 1,479,000
Loans to individuals2,998
 774
 946
 301
 5,019
 603,624
 608,643
Total$8,598
 $1,878
 $2,455
 $36,705
 $49,636
 $4,634,114
 $4,683,750
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 in 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

20

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


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.
Significant nonaccrual loans as of March 31,September 30, 2016, include the following:
$11.5An $11.8 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. AThe collateral valuation completed in the third quarter of the collateral was completed during2016 incorporated certain estimates obtained in the first quarter of 2016.
$6.8A $4.3 million relationship of commercial industrial loans to an oil and gas well services company. These loans were originated in 2014 and were placed in nonaccrual status during the fourth quarter of 2015. AllDuring the nine months ended September 30, 2016, charge-offs of $2.0 million related to this relationship were recorded. Values used in the September 30, 2016 collateral valuationsvaluation were completedupdated in June or November 2015 or Marchthe third quarter of 2016.
$3.8A $4.0 million relationship of commercial industrial loans to a manufacturer of sporting goods.mine safety products. These loans were originated from 20122014 to 2015 and were placed in nonaccrual status during the fourthsecond quarter of 2015. All2016. During the nine months ended September 30, 2016, charge-offs of $6.5 million related to this relationship were recorded. A collateral valuations werevaluation completed in December 2015 or MarchSeptember 2016 incorporated certain estimates obtained in the second quarter of 2016.
$3.8
22

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



A $3.4 million relationship of commercial industrial loans to a local energy company.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 $1.3$1.0 million was modified in 2012, and the other loan totaling $2.5$2.3 million was modified in 2014. During the threenine months ended March 31,September 30, 2016, charge-offs of $1.1$1.3 million related to this relationship were recorded. AThe September 30, 2016 collateral valuation of the collateral was updated duringincorporated estimates obtained in the first quarter of 2016.
$3.7A $3.3 million relationship of commercial industrial loans to an industriala gear manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. ADuring the nine months ended September 30, 2016, charge-offs of $0.4 million related to this relationship were recorded. The September 30, 2016 collateral valuation ofincorporated estimates obtained in the collateral was completed during the fourthsecond quarter of 2015.

21

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


2016.
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,September 30, 2016 and December 31, 2015. 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, 2016 December 31, 2015
 Recorded
investment
 Unpaid
principal
balance
 Related
allowance
 Recorded
investment
 Unpaid
principal
balance
 Related
allowance
 (dollars in thousands)
With no related allowance recorded:           
Commercial, financial, agricultural and other$18,120
 $23,975
 

 $11,344
 $15,673
 

Real estate construction
 
 

 28
 117
 

Residential real estate10,848
 12,893
 

 9,952
 11,819
 

Commercial real estate6,805
 8,474
 

 7,562
 9,449
 

Loans to individuals498
 615
 

 421
 507
 

Subtotal36,271
 45,957
 

 29,307
 37,565
 

With an allowance recorded:           
Commercial, financial, agricultural and other24,526
 24,701
 12,900
 20,132
 22,590
 6,952
Real estate construction
 
 
 
 
 
Residential real estate496
 728
 75
 461
 672
 51
Commercial real estate522
 525
 420
 944
 1,008
 42
Loans to individuals
 
 
 
 
 
Subtotal25,544
 25,954
 13,395
 21,537
 24,270
 7,045
Total$61,815
 $71,911
 $13,395
 $50,844
 $61,835
 $7,045
 For the Three Months Ended March 31,
 2016 2015
 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$17,298
 $152
 $19,375
 $57
Real estate construction17
 44
 239
 
Residential real estate10,724
 47
 10,155
 38
Commercial real estate7,658
 38
 7,711
 20
Loans to individuals480
 1
 307
 1
Subtotal36,177
 282
 37,787
 116
With an allowance recorded:       
Commercial, financial, agricultural and other17,027
 28
 10,917
 28
Real estate construction
 
 
 
Residential real estate497
 
 901
 3
Commercial real estate529
 5
 1,323
 1
Loans to individuals
 
 
 
Subtotal18,053
 33
 13,141
 32
Total$54,230
 $315
 $50,928
 $148
 September 30, 2016 December 31, 2015
 Recorded
investment
 Unpaid
principal
balance
 Related
allowance
 Recorded
investment
 Unpaid
principal
balance
 Related
allowance
 (dollars in thousands)
With no related allowance recorded:           
Commercial, financial, agricultural and other$17,948
 $27,205
 

 $11,344
 $15,673
 

Real estate construction
 
 

 28
 117
 

Residential real estate11,506
 13,513
 

 9,952
 11,819
 

Commercial real estate6,045
 7,244
 

 7,562
 9,449
 

Loans to individuals377
 444
 

 421
 507
 

Subtotal35,876
 48,406
 

 29,307
 37,565
 

With an allowance recorded:           
Commercial, financial, agricultural and other18,238
 20,748
 7,739
 20,132
 22,590
 6,952
Real estate construction
 
 
 
 
 
Residential real estate175
 215
 6
 461
 672
 51
Commercial real estate537
 537
 430
 944
 1,008
 42
Loans to individuals
 
 
 
 
 
Subtotal18,950
 21,500
 8,175
 21,537
 24,270
 7,045
Total$54,826
 $69,906
 $8,175
 $50,844
 $61,835
 $7,045

2223

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


 For the Nine Months Ended September 30,
 2016 2015
 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$24,020
 $421
 $19,199
 $161
Real estate construction6
 44
 102
 
Residential real estate11,546
 232
 10,987
 118
Commercial real estate7,143
 140
 8,545
 69
Loans to individuals423
 10
 312
 14
Subtotal43,138
 847
 39,145
 362
With an allowance recorded:       
Commercial, financial, agricultural and other15,310
 77
 6,125
 100
Real estate construction
 
 
 
Residential real estate111
 
 275
 
Commercial real estate524
 18
 83
 4
Loans to individuals
 
 
 
Subtotal15,945
 95
 6,483
 104
Total$59,083
 $942
 $45,628
 $466
 For the Three Months Ended September 30,
 2016 2015
 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$24,674
 $128
 $14,215
 $40
Real estate construction
 
 32
 
Residential real estate11,636
 94
 10,748
 39
Commercial real estate6,463
 73
 7,894
 26
Loans to individuals384
 7
 314
 5
Subtotal43,157
 302
 33,203
 110
With an allowance recorded:       
Commercial, financial, agricultural and other17,207
 22
 7,700
 29
Real estate construction
 
 
 
Residential real estate174
 
 351
 
Commercial real estate547
 7
 81
 1
Loans to individuals
 
 
 
Subtotal17,928
 29
 8,132
 30
Total$61,085
 $331
 $41,335
 $140
Unfunded commitments related to nonperforming loans were $2.5$0.4 million at March 31,September 30, 2016 and $0.1 million at December 31, 2015. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $43$12 thousand and $13 thousand was established for these off balance sheet exposures at March 31,September 30, 2016 and December 31, 2015, respectively.
 

24

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


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, 2016 December 31, 2015September 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Troubled debt restructured loans      
Accrual status$14,979
 $14,139
$14,286
 $14,139
Nonaccrual status13,366
 12,360
12,723
 12,360
Total$28,345
 $26,499
$27,009
 $26,499
Commitments      
Unused lines of credit$1,367
 $3,252
$349
 $3,252
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, 2016For the Nine Months Ended September 30, 2016
  Type of Modification        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
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)(dollars in thousands)
Commercial, financial, agricultural and other2
 $
 $3,769
 $
 $3,769
 $3,749
 $
5
 $93
 $4,009
 $3,853
 $7,955
 $7,281
 $1,612
Residential real estate8
 
 114
 874
 988
 910
 
35
 
 214
 2,548
 2,762
 2,620
 
Commercial real estate3
 65
 
 133
 198
 169
 
7
 1,348
 
 25
 1,373
 1,285
 68
Loans to individuals3
 
 18
 5
 23
 16
 
10
 
 71
 25
 96
 76
 
Total16
 $65
 $3,901
 $1,012
 $4,978
 $4,844
 $
57
 $1,441
 $4,294
 $6,451
 $12,186
 $11,262
 $1,680

 For the Three Months Ended March 31, 2015
   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 other1
 $1,498
 $
 $
 $1,498
 $1,476
 $
Residential real estate5
 
 252
 17
 269
 203
 
Commercial real estate1
 
 
 464
 464
 449
 
Loans to individuals1
 
 
 18
 18
 11
 
Total8
 $1,498
 $252
 $499
 $2,249
 $2,139
 $

23

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


 For the Nine Months Ended September 30, 2015
   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 other4
 $1,751
 $
 $652
 $2,403
 $2,314
 $52
Residential real estate24
 
 296
 958
 1,254
 1,165
 
Commercial real estate1
 
 
 464
 464
 407
 
Loans to individuals8
 
 61
 35
 96
 77
 
Total37
 $1,751
 $357
 $2,109
 $4,217
 $3,963
 $52
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 reamortizationre-amortization of the principal and an extension of the maturity. For the threenine months ended March 31,September 30, 2016 and 2015, $3.94.3 million and $0.30.4 million, respectively, of total rate modifications represent loans with modifications to the rate as well as

25

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


payment as a result of reamortization.re-amortization. For both 2016 and 2015 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.
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 September 30, 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 other1
 $
 $
 $3,853
 $3,853
 $3,853
 $1,612
Residential real estate11
 
 100
 373
 473
 441
 
Commercial real estate1
 85
 
 
 85
 85
 
Loans to individuals4
 
 42
 10
 52
 45
 
Total17
 $85
 $142
 $4,236
 $4,463
 $4,424
 $1,612
 For the Three Months Ended, September 30, 2015
   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 other1
 $
 $
 $543
 $543
 $525
 $
Residential real estate8
 
 
 455
 455
 455
 
Loans to individuals2
 
 
 18
 18
 16
 
Total11
 $
 $
 $1,016
 $1,016
 $996
 $
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 September 30, 2016, $0.1 million of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. None of the rate modifications for three months ended September 30, 2015 represent loans with modifications to the rate as well as the payment. For both 2016 and 2015 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.



26

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


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 nine months ended September 30:
 2016 2015
 Number of
Contracts
 Recorded
Investment
 Number of
Contracts
 Recorded
Investment
 (dollars in thousands)
Residential real estate
 $
 3
 $108
Total
 $
 3
 $108

The following table provides information related to restructured loans that were considered to be in default during the three months ended March 31:September 30:

2016 20152016 2015
Number of
Contracts
 Recorded
Investment
 Number of
Contracts
 Recorded
Investment
Number of
Contracts
 Recorded
Investment
 Number of
Contracts
 Recorded
Investment
(dollars in thousands)(dollars in thousands)
Residential real estate2
 $70
 
 $

 $
 2
 $105
Total2
 $70
 
 $

 $
 2
 $105

The following tables provide detail related to the allowance for credit losses:
 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)
Recoveries134
 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 impairment28,821
 901
 2,553
 5,063
 4,489
 41,827
Loans:           
Ending balance1,190,384
 256,856
 1,212,962
 1,552,904
 585,649
 4,798,755
Ending balance: individually evaluated for impairment42,016
 
 6,246
 5,934
 
 54,196
Ending balance: collectively evaluated for impairment1,148,368
 256,856
 1,206,716
 1,546,970
 585,649
 4,744,559
 For the Nine Months Ended September 30, 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(13,308) 
 (976) (418) (3,751) (18,453)
Recoveries261
 227
 407
 803
 371
 2,069
Provision (credit)23,935
 (638) 330
 (6,725) 3,404
 20,306
Ending Balance$41,923
 $476
 $2,367
 $5,584
 $4,384
 $54,734
Ending balance: individually evaluated for impairment$7,739
 $
 $6
 $430
 $
 $8,175
Ending balance: collectively evaluated for impairment34,184
 476
 2,361
 5,154
 4,384
 46,559
Loans:           
Ending balance1,207,447
 229,375
 1,185,759
 1,683,015
 555,056
 4,860,652
Ending balance: individually evaluated for impairment35,501
 
 5,670
 5,081
 
 46,252
Ending balance: collectively evaluated for impairment1,171,946
 229,375
 1,180,089
 1,677,934
 555,056
 4,814,400


2427

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, 2015For the Nine Months Ended September 30, 2015
Commercial,
financial,
agricultural
and other
 Real estate
construction
 Residential
real estate
 Commercial
real estate
 Loans to
individuals
 TotalCommercial,
financial,
agricultural
and other
 Real estate
construction
 Residential
real estate
 Commercial
real estate
 Loans to
individuals
 Total
(dollars in thousands)(dollars in thousands)
Allowance for credit losses:                      
Beginning Balance$29,627
 $2,063
 $3,664
 $11,881
 $4,816
 $52,051
$29,627
 $2,063
 $3,664
 $11,881
 $4,816
 $52,051
Charge-offs(5,080) 
 (566) (202) (1,261) (7,109)(8,579) 
 (1,351) (1,249) (3,283) (14,462)
Recoveries200
 
 96
 138
 162
 596
922
 84
 417
 186
 502
 2,111
Provision (credit)(341) (535) 193
 670
 1,172
 1,159
5,230
 (554) (54) 1,584
 2,612
 8,818
Ending Balance$24,406
 $1,528
 $3,387
 $12,487
 $4,889
 $46,697
$27,200
 $1,593
 $2,676
 $12,402
 $4,647
 $48,518
Ending balance: individually evaluated for impairment$3,397
 $
 $165
 $267
 $
 $3,829
$4,202
 $
 $20
 $33
 $
 $4,255
Ending balance: collectively evaluated for impairment21,009
 1,528
 3,222
 12,220
 4,889
 42,868
22,998
 1,593
 2,656
 12,369
 4,647
 44,263
Loans:                      
Ending balance1,066,788
 107,882
 1,210,511
 1,400,276
 652,144
 4,437,601
1,126,881
 179,710
 1,204,220
 1,435,954
 628,970
 4,575,735
Ending balance: individually evaluated for impairment24,586
 199
 7,071
 7,803
 
 39,659
22,852
 
 6,037
 5,706
 
 34,595
Ending balance: collectively evaluated for impairment1,042,202
 107,683
 1,203,440
 1,392,473
 652,144
 4,397,942
1,104,029
 179,710
 1,198,183
 1,430,248
 628,970
 4,541,140
 For the Three Months Ended September 30, 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$46,357
 $480
 $2,605
 $5,862
 $4,517
 $59,821
Charge-offs(7,163) 
 (374) (10) (1,260) (8,807)
Recoveries63
 
 147
 20
 82
 312
Provision (credit)2,666
 (4) (11) (288) 1,045
 3,408
Ending Balance$41,923
 $476
 $2,367
 $5,584
 $4,384
 $54,734
 For the Three Months Ended, September 30, 2015
 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$23,755
 $1,518
 $2,923
 $12,227
 $4,921
 $45,344
Charge-offs(639) 
 (301) (561) (900) (2,401)
Recoveries564
 
 178
 33
 179
 954
Provision (credit)3,520
 75
 (124) 703
 447
 4,621
Ending Balance$27,200
 $1,593
 $2,676
 $12,402
 $4,647
 $48,518

Note 9 Income Taxes
At March 31,September 30, 2016 and December 31, 2015, 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 tax years 20122013 through 20142015 are open for examination as of March 31,September 30, 2016.

28

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


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. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using quoted market prices.
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

25

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


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.
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 three months,one year, Eurodollar futures contracts and swap rates from three yearsone 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,

29

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


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 2016, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.
The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.
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

26

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


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).

30

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


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)
Fair Value (dollars
in thousands)
 Valuation
Technique
 Unobservable Inputs Range /
(weighted average)
Pooled Trust Preferred Securities$33,273
 Discounted Cash Flow Probability of default 0% - 100% (12.19%)$35,609
 Discounted Cash Flow Probability of default 0% - 100% (10.26%)
  Prepayment rates 0% - 73.15% (5.14%)  Prepayment rates 0% - 72.91% (4.00%)
  Discount rates 5.50% - 12.50% (a)  Discount rates 5.25% - 12.00% (a)
Equities2,206
 Par Value N/A N/A1,670
 Par Value N/A N/A
Impaired Loans2,437 (b) Reserve study Discount rate 10.00%2,348 (b) Reserve study Discount rate 10.00%
  Gas per MCF $1.63 - $3.38 (c)  Gas per MCF $1.63 - $3.38 (c)
  Oil per BBL/d $40.97 - $56.16 (c)  Oil per BBL/d $40.97 - $56.16 (c)
8,285 (b) Discounted Cash Flow Discount Rate 1.9% - 5.58%7,308 (b) Discounted Cash Flow Discount Rate 1.90% - 4.68%
Other Real Estate Owned8
 Internal Valuation N/A N/A
Limited Partnership Investments704
 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 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.

2731

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


The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:
March 31, 2016September 30, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(dollars in thousands)(dollars in thousands)
Obligations of U.S. Government Agencies:              
Mortgage-Backed Securities - Residential$
 $21,700
 $
 $21,700
$
 $17,976
 $
 $17,976
Obligations of U.S. Government-Sponsored Enterprises:              
Mortgage-Backed Securities - Residential
 779,625
 
 779,625

 704,626
 
 704,626
Mortgage-Backed Securities - Commercial
 23
 
 23

 1
 
 1
Other Government-Sponsored Enterprises
 19,203
 
 19,203

 19,307
 
 19,307
Obligations of States and Political Subdivisions
 27,832
 
 27,832

 27,951
 
 27,951
Corporate Securities
 6,336
 
 6,336

 6,519
 
 6,519
Pooled Trust Preferred Collateralized Debt Obligations
 
 33,273
 33,273

 
 35,609
 35,609
Total Debt Securities
 854,719
 33,273
 887,992

 776,380
 35,609
 811,989
Equities
 
 2,206
 2,206

 
 1,670
 1,670
Total Securities Available for Sale
 854,719
 35,479
 890,198

 776,380
 37,279
 813,659
Other Investments
 60,597
 
 60,597

 54,066
 
 54,066
Loans held for sale
 5,849
 
 5,849

 7,855
 
 7,855
Other Assets(a)
 18,907
 
 18,907

 19,224
 704
 19,928
Total Assets$
 $940,072
 $35,479
 $975,551
$
 $857,525
 $37,983
 $895,508
Other Liabilities(a)$
 $17,924
 $
 $17,924
$
 $18,879
 $
 $18,879
Total Liabilities$
 $17,924
 $
 $17,924
$
 $18,879
 $
 $18,879
(a)Hedging and non-hedging interest rate derivatives

 December 31, 2015
 Level 1 Level 2 Level 3 Total
 (dollars in thousands)
Obligations of U.S. Government Agencies:       
Mortgage-Backed Securities - Residential$
 $22,092
 $
 $22,092
Obligations of U.S. Government-Sponsored Enterprises:       
Mortgage-Backed Securities - Residential
 777,577
 
 777,577
Mortgage-Backed Securities - Commercial
 28
 
 28
Other Government-Sponsored Enterprises
 19,118
 
 19,118
Obligations of States and Political Subdivisions
 27,598
 
 27,598
Corporate Securities
 2,319
 
 2,319
Pooled Trust Preferred Collateralized Debt Obligations
 
 35,658
 35,658
Total Debt Securities
 848,732
 35,658
 884,390
Equities
 
 2,170
 2,170
Total Securities Available for Sale
 848,732
 37,828
 886,560
Other Investments
 62,952
 
 62,952
Loans held for sale
 5,763
 
 5,763
Other Assets(a)
 11,273
 
 11,273
Total Assets$
 $928,720
 $37,828
 $966,548
Other Liabilities(a)$
 $10,829
 $
 $10,829
Total Liabilities$
 $10,829
 $
 $10,829
(a)Hedging and non-hedging interest rate derivatives


2832

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


For the threenine months ended March 31September 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
20162016
Pooled Trust Preferred Collateralized Debt Obligations Equities TotalPooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
(dollars in thousands)(dollars in thousands)
Balance, beginning of period$35,658
 $2,170
 $37,828
$35,658
 $2,170
 $
 $37,828
Total gains or losses            
Included in earnings
 
 

 
 
 
Included in other comprehensive income(2,385) 
 (2,385)(19) 
 
 (19)
Purchases, issuances, sales and settlements            
Purchases
 36
 36

 36
 168
 204
Issuances
 
 

 
 
 
Sales
 
 

 
 
 
Settlements
 
 
(30) 
 
 (30)
Transfers from Level 3
 (536) 
 (536)
Transfers into Level 3
 
 

 
 536
 536
Balance, end of period$33,273
 $2,206
 $35,479
$35,609
 $1,670
 $704
 $37,983
 
20152015
Pooled Trust Preferred Collateralized Debt Obligations Equities TotalPooled Trust Preferred Collateralized Debt Obligations Equities Total
(dollars in thousands)(dollars in thousands)
Balance, beginning of period$28,999
 $1,420
 $30,419
$28,999
 $1,420
 $30,419
Total gains or losses          
Included in earnings105
 
 105
105
 
 105
Included in other comprehensive income2,620
 
 2,620
7,729
 
 7,729
Purchases, issuances, sales and settlements          
Purchases
 500
 500

 500
 500
Issuances
 
 

 
 
Sales
 
 

 
 
Settlements(590) 
 (590)(1,054) 
 (1,054)
Transfers into Level 3
 
 

 
 
Balance, end of period$31,134
 $1,920
 $33,054
$35,779
 $1,920
 $37,699
During the threenine months ended March 31,September 30, 2016, $0.5 million in investments in limited partnerships were moved from other equity securities to other assets constituting the transfers into and out of Level 3. During the 2015nine months ended, September 30, 2015, 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,September 30, 2016 and 2015.

33

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


For the three months ended September 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 2016
 Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
 (dollars in thousands)
Balance, beginning of period$33,723
 $1,670
 $704
 $36,097
Total gains or losses       
Included in earnings
 
 
 
Included in other comprehensive income1,886
 
 
 1,886
Purchases, issuances, sales and settlements       
Purchases
 
 
 
Issuances
 
 
 
Sales
 
 
 
Settlements
 
 
 
Transfers from Level 3
 
 
 
Transfers into Level 3
 
 
 
Balance, end of period$35,609
 $1,670
 $704
 $37,983
 2015
 Pooled Trust Preferred Collateralized Debt Obligations Equities Total
 (dollars in thousands)
Balance, beginning of period$35,521
 $1,920
 37,441
Total gains or losses     
Included in earnings
 
 
Included in other comprehensive income258
 
 258
Purchases, issuances, sales and settlements     
Purchases
 
 
Issuances
 
 
Sales
 
 
Settlements
 
 
Transfers into Level 3
 
 
Balance, end of period$35,779
 $1,920
 $37,699
During the three months ended September 30, 2016 and 2015, 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 September 30, 2016 and 2015.



2934

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


The tables below present the balances of assets measured at fair value on a nonrecurring basis at:
March 31, 2016September 30, 2016
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(dollars in thousands)(dollars in thousands)
Impaired loans$
 $29,911
 $18,509
 $48,420
$
 $28,158
 $18,493
 $46,651
Other real estate owned
 9,852
 8
 9,860

 8,620
 
 8,620
Total Assets$
 $39,763
 $18,517
 $58,280
$
 $36,778
 $18,493
 $55,271
 December 31, 2015
 Level 1 Level 2 Level 3 Total
 (dollars in thousands)
Impaired loans$
 $30,979
 $12,820
 $43,799
Other real estate owned
 10,039
 8
 10,047
Total Assets$
 $41,018
 $12,828
 $53,846
The following lossesgain (losses) were realized on the assets measured on a nonrecurring basis:
For the Three Months Ended March 31,For the Three Months Ended September 30, For the Nine Months Ended September 30,
2016 20152016 2015 2016 2015
(dollars in thousands)(dollars in thousands)
Impaired loans$(7,702) $(555)$386
 $(2,838) $(13,982) $(3,532)
Other real estate owned(13) (69)(114) (78) (331) (1,205)
Total losses$(7,715) $(624)$272
 $(2,916) $(14,313) $(4,737)
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 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 $8.67.7 million as of March 31,September 30, 2016 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 threenine months ended March 31,September 30, 2016.
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.

3035

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


Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities available for sale and held to maturity are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock, 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 both March 31,September 30, 2016 and December 31, 2015, 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.
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.

3136

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 carrying amounts and fair values of First Commonwealth’s financial instruments:
March 31, 2016September 30, 2016
  Fair Value Measurements Using:  Fair Value Measurements Using:
Carrying
Amount
 Total Level 1 Level 2 Level 3Carrying
Amount
 Total Level 1 Level 2 Level 3
(dollars in thousands)(dollars in thousands)
Financial assets                  
Cash and due from banks$62,141
 $62,141
 $62,141
 $
 $
$76,456
 $76,456
 $76,456
 $
 $
Interest-bearing deposits11,024
 11,024
 11,024
 
 
5,097
 5,097
 5,097
 
 
Securities available for sale890,198
 890,198
 
 854,719
 35,479
813,659
 813,659
 
 776,380
 37,279
Securities held to maturity396,444
 400,964
 
 400,964
 
389,513
 396,994
 
 396,994
 
Other investments60,597
 60,597
 
 60,597
 
54,066
 54,066
 
 54,066
 
Loans held for sale5,849
 5,849
 
 5,849
 
7,855
 7,855
 
 7,855
 
Loans4,798,755
 4,791,929
 
 29,911
 4,762,018
4,860,652
 4,882,076
 
 28,158
 4,853,918
Financial liabilities                  
Deposits4,301,655
 4,303,085
 
 4,303,085
 
4,458,980
 4,461,516
 
 4,461,516
 
Short-term borrowings1,518,742
 1,518,561
 
 1,518,561
 
1,330,327
 1,329,740
 
 1,329,740
 
Subordinated debt72,167
 61,208
 
 
 61,208
72,167
 63,858
 
 
 63,858
Long-term debt9,175
 9,999
 
 9,999
 
8,892
 9,840
 
 9,840
 

 December 31, 2015
   Fair Value Measurements Using:
 Carrying
Amount
 Total Level 1 Level 2 Level 3
 (dollars in thousands)
Financial assets         
Cash and due from banks$66,644
 $66,644
 $66,644
 $
 $
Interest-bearing deposits2,808
 2,808
 2,808
 
 
Securities available for sale886,560
 886,560
 
 848,732
 37,828
Other investments62,952
 62,952
 
 62,952
 
Loans held for sale5,763
 5,763
 
 5,763
 
Loans4,683,750
 4,690,852
 
 30,979
 4,659,873
Financial liabilities         
Deposits4,195,894
 4,198,817
 
 4,198,817
 
Short-term borrowings1,510,825
 1,510,718
 
 1,510,718
 
Subordinated debt72,167
 62,794
 
 
 62,794
Long-term debt9,314
 9,834
 
 9,834
 
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.

3237

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


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 1727 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 foureight 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 and nine months ended March 31,September 30, 2016, there was a $0.4 million and $1.3 million impact on interest income as a result of these interest rate swaps.swaps, respectively. Changes in the fair value of the effective portion of cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in "Interest and fees on loans," the same line item in the Condensed Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at March 31,September 30, 2016, and December 31, 2015, and changes in the fair value attributed to hedge ineffectiveness were not material.
The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:
March 31, 2016 December 31, 2015September 30, 2016 December 31, 2015
(dollars in thousands)(dollars in thousands)
Derivatives not Designated as Hedging Instruments      
Credit value adjustment$(1,544) $(542)$(1,604) $(542)
Notional Amount:      
Interest rate derivatives303,212
 276,860
343,193
 276,860
Interest rate caps21,981
 22,793
20,356
 22,793
Risk participation agreements128,481
 126,612
195,075
 126,612
Sold credit protection on risk participation agreements(20,267) (20,383)(40,536) (20,383)
Derivatives Designated as Hedging Instruments      
Fair value adjustment2,657
 922
(1,960) 922
Notional Amount - Interest rate derivatives200,000
 200,000
200,000
 200,000

3338

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


 
The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in "Other income" on the Condensed Consolidated Statements of Income:
For the Three Months Ended March 31,For the Three Months Ended September 30, For the Nine Months Ended September 30,
2016 20152016 2015 2016 2015
(dollars in thousands)(dollars in thousands)
Non-hedging interest rate derivatives          
Decrease in other income$(1,014) $(230)
Increase (decrease) in other income$470
 $(783) $(1,075) $(420)
Hedging interest rate derivatives          
Increase in interest and fees on loans430
 381
Increase (decrease) in interest and fees on loans404
 (565) 1,258
 1,503
Increase in other expense15
 9
16
 
 57
 21

The fair value of our derivatives is included in a table in Note 18, “Fair Values of Assets and Liabilities,” in the line items
“Other assets” and “Other liabilities.”

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 March 31,September 30, 2016 and December 31, 2015 was $164.4 million and $164.5 million.million, respectively. No impairment charges on goodwill or other intangible assets were incurred in 2016 or 2015.
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,September 30, 2016, 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 are currently evaluating the potential impact of ASU 2015-14 on our financial statements.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10)," which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This ASU addresses: 1. requiring equity investments to be measured at fair value, recognizing the changes in fair value through net income; 2. simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3. eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public entities; 4. eliminating the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost; 5. requiring

39

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


public entities to use the exit price notion when measuring the fair value of financial instruments; 6. requiring andan entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 7. requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements;

34

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


and 8. clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 for public entities and for fiscal years beginning after December 15, 2018 for entities that are not public entities. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
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. Management has not yet evaluated the impact of the ASU on First Commonwealth's financial condition or results of operations and will be monitoring developments and additional guidance closely to determineWe are currently evaluating the potential impact of the new standard.ASU 2016-02 on our financial statements.
In March 2016, FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815)," which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignationde-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU is effective for public entities beginning after December 15, 2016, and interim periods within those fiscal years. 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 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” This update requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
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 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

3540

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


effective for the Company as of January 1, 2018. Management is currently evaluating the impact of the amended guidance on First Commonwealth’s financial condition or results of operations.
Note 14 Subsequent Event

On October 3, 2016, the Company announced the signing of a definitive Agreement and Plan of Merger providing for the merger of DCB Financial Corporation with and into the Company in a stock and cash transaction valued at approximately $14.50 per share, or $106 million in the aggregate. The acquisition of DCB Financial Corporation includes approximately $556 million in total assets, $467 million in deposits, $397 million in total loans and 9 full-service banking offices in the Columbus market area. This transaction is subject to regulatory approval and is expected to close in the second quarter of 2017.

41

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 and nine months ended March 31,September 30, 2016 and 2015, 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 3845 and 52 for the nine and three months ended March 31,September 30, 2016 and 2015, respectively.

3642

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 is not covered by the auditor’s report and 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,For the Three Months Ended September 30, For the Nine Months Ended September 30,
2016 20152016 2015 2016 2015
(dollars in thousands, except per share data)(dollars in thousands, except per share data)
Net Income$12,473
 $14,221
$17,196
 $12,414
 $41,676
 $40,082
Per Share Data:          
Basic Earnings per Share$0.14
 $0.16
$0.19
 $0.14
 $0.47
 $0.45
Diluted Earnings per Share0.14
 0.16
0.19
 0.14
 0.47
 0.45
Cash Dividends Declared per Common Share0.07
 0.07
0.07
 0.07
 0.21
 0.21
Average Balance:          
Total assets$6,617,594
 $6,358,391
$6,679,676
 $6,343,009
 $6,668,176
 $6,354,128
Total equity730,354
 718,315
748,078
 718,178
 739,347
 716,200
End of Period Balance:          
Net loans$4,749,382
 $4,390,904
    $4,813,773
 $4,532,203
Total assets6,699,154
 6,331,842
    6,666,483
 6,384,749
Total deposits4,301,655
 4,293,749
    4,458,980
 4,161,490
Total equity733,314
 712,860
    751,787
 722,768
Key Ratios:          
Return on average assets0.76% 0.91%1.02% 0.78% 0.83% 0.84%
Return on average equity6.87% 8.03%9.14% 6.86% 7.53% 7.48%
Dividends payout ratio50.00% 43.75%36.84% 50.00% 44.68% 46.67%
Average equity to average assets ratio11.04% 11.30%11.20% 11.32% 11.09% 11.27%
Net interest margin3.29% 3.35%3.29% 3.25% 3.28% 3.29%
Net loans to deposits ratio110.41% 102.26%    107.96% 108.91%

Results of Operations
ThreeNine Months Ended March 31,September 30, 2016 Compared to ThreeNine Months Ended March 31,September 30, 2015
Net Income
For the threenine months ended March 31,September 30, 2016, First Commonwealth had net income of $12.541.7 million, or $0.140.47 diluted earnings per share, compared to net income of $14.240.1 million, or $0.160.45 diluted earnings per share, in the threenine months ended March 31,September 30, 2015. The decreaseincrease in net income was primarily the result of an increase in the provision for credit lossesnet interest income and a decrease in noninterest expense, offset by an increase in net interest income and declines in noninterest expense.the provision for credit losses.
For the threenine months ended March 31,September 30, 2016, the Company’s return on average equity was 6.87%7.53% and its return on average assets was 0.76%0.83%, compared to 8.03%7.48% and 0.91%0.84%, respectively, for the threenine months ended March 31,September 30, 2015.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $49.7150.4 million in the first threenine months of 2016, compared to $48.0142.8 million for the same period in 2015. This increase was primarily due to growth in average interest earning assets of $258.6$310.2 million. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income), at 78%76% and 77%75% for the threenine months ended March 31,September 30, 2016 and 2015, respectively.
The net interest margin, on a fully taxable equivalent basis, was 3.29%3.28% and 3.35%3.29% for the threenine months ended March 31,September 30, 2016 and March 31,September 30, 2015, respectively. The sixone basis point decline in the net interest margin is attributable to a $1.0 million FHLB special dividend receivedan increase in the first quarteroverall cost of 2015, which added seven basis points to the net interest margin for that period.bearing liabilities.
 

3743

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 3.59% for the threenine months ended March 31,September 30, 2016, a decreasean increase of 3four basis points compared to the 3.62%3.55% yield for the same period in 2015. Excluding the impact of the previously noteda special FHLB dividend in the first quarter of 2015, the yield on interest-earning assets would have increased by foursix basis points. This increase is largely due to the investment portfolio yield, which, after excluding the impact of the $1.0 million special FHLB dividend, improved by 3119 basis points when compared to the threenine months ended March 31, September 30, 2015. This increase can be attributed to the runoff or sale of lower yielding U.S. Agency securities, which were replaced with higher yielding investment securities. Investment portfolio purchases during the threenine months ended March 31,September 30, 2016 have been primarily in mortgage-related assets with approximate durations of 48-60 months and municipal securities with a durationdurations of approximately five years. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities asif interest rates rise.
The cost of interest-bearing liabilities increased to 0.39%0.40% for the threenine months ended March 31,September 30, 2016, from 0.35%0.34% for the same period in 2015, primarily due to an increase in the cost of short-term borrowings. Offsetting that increase was a 157 basis point decline in the cost of time deposits, as higher costingcost time deposits ran off and were replaced with growth in noninterest-bearing demand deposits, interest bearing demand deposits and short-term borrowings.
For the threenine months ended March 31,September 30, 2016, changes in interest rates negatively impacted net interest income by $1.32.3 million when compared with the same period in 2015. The lowerhigher yield on interest-earning assets adverselypositively impacted net interest income by $269 thousand1.1 million, while the increase in the cost of interest-bearing liabilities had an additionala negative impact of $1.13.4 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 with theby re-investing cash flow from runoff and from sales of lower yieldinglower-yielding investments.
While decreasesincreases in interest rates and yieldsthe cost of interest-bearing liabilities compressed the net interest margin, increases in average interest-earning assets more than offset the effect on net interest income. Average earning assets for the threenine months ended March 31,September 30, 2016 increased $258.6$310.2 million, or 4%5%, compared to the same period in 2015. Average loans for the threenine months ended March 31,September 30, 2016 increased $267.0$296.4 million, or 6.0%7%, compared to the same period in 2015.
Changes in the volumesvolume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $3.19.9 million in the threenine months ended March 31,September 30, 2016, as compared to the same period in 2015. Higher levels of interest-earning assets resulted in an increase of $2.79.1 million in interest income, while changes in the volume changesof interest-bearing liabilities decreased interest expense by $0.40.7 million, primarily as the result of changesdecreases in long-term debt and time deposits, including brokered deposits.
Net interest income also benefited from a $104.2117.3 million increase in average net free funds at March 31,September 30, 2016 as compared to March 31,September 30, 2015. 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 $94.2$91.5 million, or 9.4%8.8%, 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 threenine months ended March 31,September 30, 2016 decreased by $194.3127.4 million compared to the comparable period in 2015.
 
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 threenine months ended March 31:September 30:
 
2016201520162015
(dollars in thousands)(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income$53,353
$51,085
$161,682
$151,736
Adjustment to fully taxable equivalent basis942
818
2,836
2,536
Interest income adjusted to fully taxable equivalent basis (non-GAAP)54,295
51,903
164,518
154,272
Interest expense4,546
3,913
14,166
11,509
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)$49,749
$47,990
$150,352
$142,763



3844

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 threenine months ended March 31September 30:
 
2016201520162015
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
(dollars in thousands)(dollars in thousands)
Assets        
Interest-earning assets:        
Interest-bearing deposits with banks$4,339
$6
0.56%$5,205
$3
0.23%$5,350
$19
0.47%$3,993
$7
0.23%
Tax-free investment securities59,987
556
3.73
27,731
269
3.93
61,968
1,711
3.69
34,374
994
3.87
Taxable investment securities1,266,907
7,952
2.52
1,306,746
8,306
2.58
1,244,828
23,162
2.49
1,260,030
22,749
2.41
Loans, net of unearned income (b)(c)4,745,252
45,781
3.88
4,478,240
43,325
3.92
4,806,061
139,626
3.88
4,509,628
130,522
3.87
Total interest-earning assets6,076,485
54,295
3.59
5,817,922
51,903
3.62
6,118,207
164,518
3.59
5,808,025
154,272
3.55
Noninterest-earning assets:        
Cash65,120
  63,048
  68,860
  66,249
  
Allowance for credit losses(52,714)  (53,654)  (56,905)  (49,617)  
Other assets528,703
  531,075
  538,014
  529,471
  
Total noninterest-earning assets541,109
  540,469
  549,969
  546,103
  
Total Assets$6,617,594
  $6,358,391
  $6,668,176
  $6,354,128
  
Liabilities and Shareholders’ Equity        
Interest-bearing liabilities:        
Interest-bearing demand deposits (d)$701,778
$85
0.05%$639,831
$43
0.03%$735,297
$355
0.06%$653,737
$172
0.04%
Savings deposits (d)1,852,118
590
0.13
1,861,314
602
0.13
1,887,277
2,524
0.18
1,857,077
1,872
0.13
Time deposits594,929
914
0.62
789,272
1,505
0.77
586,638
2,763
0.63
714,005
3,743
0.70
Short-term borrowings1,503,013
2,235
0.60
1,141,098
958
0.34
1,447,207
6,322
0.58
1,193,122
3,353
0.38
Long-term debt81,409
722
3.57
147,389
805
2.22
81,268
2,202
3.62
126,896
2,369
2.50
Total interest-bearing liabilities4,733,247
4,546
0.39
4,578,904
3,913
0.35
4,737,687
14,166
0.40
4,544,837
11,509
0.34
Noninterest-bearing liabilities and shareholders’ equity:        
Noninterest-bearing demand deposits (d)1,096,692
  1,002,498
  1,129,511
  1,038,016
  
Other liabilities57,301
  58,674
  61,631
  55,075
  
Shareholders’ equity730,354
  718,315
  739,347
  716,200
  
Total Noninterest-Bearing Funding Sources1,884,347
  1,779,487
  1,930,489
  1,809,291
  
Total Liabilities and Shareholders’ Equity$6,617,594
  $6,358,391
  $6,668,176
  $6,354,128
  
Net Interest Income and Net Yield on Interest-Earning Assets $49,749
3.29% $47,990
3.35% $150,352
3.28% $142,763
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.

 

3945

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 threenine months ended March 31,September 30, 2016 compared with March 31,September 30, 2015:
 
 Analysis of Year-to-Year Changes in Net Interest Income Analysis of Year-to-Year Changes in Net Interest Income
 Total
Change
 Change Due To
Volume
 Change Due To
Rate (a)
 Total
Change
 Change Due To
Volume
 Change Due To
Rate (a)
 (dollars in thousands) (dollars in thousands)
Interest-earning assets:            
Interest-bearing deposits with banks $3
 $
 $3
 $12
 $2
 $10
Tax-free investment securities 287
 315
 (28) 717
 799
 (82)
Taxable investment securities (354) (256) (98) 413
 (274) 687
Loans 2,456
 2,602
 (146) 9,104
 8,580
 524
Total interest income (b) 2,392
 2,661
 (269) 10,246
 9,107
 1,139
Interest-bearing liabilities:            
Interest-bearing demand deposits 42
 5
 37
 183
 24
 159
Savings deposits (12) (3) (9) 652
 29
 623
Time deposits (591) (372) (219) (980) (667) (313)
Short-term borrowings 1,277
 306
 971
 2,969
 722
 2,247
Long-term debt (83) (364) 281
 (167) (853) 686
Total interest expense 633
 (428) 1,061
 2,657
 (745) 3,402
Net interest income $1,759
 $3,089
 $(1,330) $7,589
 $9,852
 $(2,263)
 
(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 threenine months ended March 31September 30:
 
2016 20152016 2015
DollarsPercentage DollarsPercentageDollarsPercentage DollarsPercentage
(dollars in thousands)(dollars in thousands)
Commercial, financial, agricultural and other$11,944
183 % $(341)(30)%$23,935
118 % $5,230
59 %
Real estate construction(209)(3) (535)(46)(638)(3) (554)(6)
Residential real estate286
4
 193
17
330
2
 (54)(1)
Commercial real estate(6,932)(106) 670
58
(6,725)(33) 1,584
18
Loans to individuals1,437
22
 1,172
101
3,404
16
 2,612
30
Total$6,526
100 % $1,159
100 %$20,306
100 % $8,818
100 %
The provision for credit losses for the threenine months ended March 31,September 30, 2016 increased in comparison to the threenine months ended March 31,September 30, 2015 by $5.411.5 million. The level of provision expense in the first quarternine months of 2016 provision expense is primarily due to commercial, financial, agricultural and other loans as the result of an increasespecific reserves established for two loan relationships, as well as increases in historical loss factors an increaseand increases in qualitative factors related to certain recovery rates as well as specific reserves established for one loan relationship. The negative provision expense for commercial real estate loans is a result of decreases in historical loss factors.and economic indicators. The provision for loans to individuals is related to charge-offs in the indirect automobile portfolio as well as changes in economic related qualitative factors which relate to the automobile industry.factors. The negative provision for commercial real estate loans and real estate construction loans are a result of declines in historical loss factors.
The majority of the 2015 provision expense is attributable to loans to individuals as a result of charge-offs in the indirect auto portfolio. The negative provision in 2015 for the commercial, financial and agricultural category can be attributed to $4.2 millionloans resulting from an increase in historical loss factors, as well as specific reserves established for three loans, transferred to held for sale which resulted inpartially offset by the release of $1.1 million in specific reserves. Real estate construction reflects a negative reservereserves for loans transferred to held for sale in 2015 as the resultfirst quarter of a decline in historical loss factors2015. Provision expense for this category.

4046

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



commercial real estate loans was impacted by charge-offs and increases in qualitative factors including those associated with vacancy and rents. The provision for loans to individuals is primarily due to charge-offs in the indirect automobile portfolio. Real estate construction and residential real estate reflect a negative provision expense in 2015 due to a decline in historical loss factors for these categories.
The allowance for credit losses was $55.254.7 million, or 1.15%1.13%, of total loans outstanding at March 31,September 30, 2016, compared to $50.8 million, or 1.08%, at December 31, 2015 and $46.748.5 million, or 1.05%1.06%, at March 31,September 30, 2015. The change compared to December 31, 2015, can be attributed to an increase of $8.74.0 million, or 6%, increase in criticized loans, which includes an increase of $11.0 million, or 22%8%, in nonperforming loans, as well asresulting in a $6.4$1.1 million increase in the level of specific reserves held on impaired loans. Nonperforming loans as a percentage of total loans increased to 1.29%1.13% at March 31,September 30, 2016 from 1.08%1.09% at December 31, 2015 and 1.11%0.89% as of March 31,September 30, 2015. The allowance to nonperforming loan ratio was 89.33%99.83%, 99.94% and 101.09%118.84% as of March 31,September 30, 2016, December 31, 2015 and March 31,September 30, 2015, respectively.
 
Below is an analysis of the consolidated allowance for credit losses for the threenine months ended March 31,September 30, 2016 and 2015 and the year-ended December 31, 2015:
 
 March 31, 2016 March 31, 2015 December 31, 2015 September 30, 2016 September 30, 2015 December 31, 2015
 (dollars in thousands) (dollars in thousands)
Balance, beginning of period $50,812
 $52,051
 $52,051
 $50,812
 $52,051
 $52,051
Loans charged off:            
Commercial, financial, agricultural and other 1,392
 5,080
 11,429
 13,308
 8,579
 11,429
Real estate construction 
 
 8
 
 
 8
Residential real estate 382
 566
 1,539
 976
 1,351
 1,539
Commercial real estate 265
 202
 1,538
 418
 1,249
 1,538
Loans to individuals 1,469
 1,261
 4,354
 3,751
 3,283
 4,354
Total loans charged off 3,508
 7,109
 18,868
 18,453
 14,462
 18,868
Recoveries of loans previously charged off:            
Commercial, financial, agricultural and other 134
 200
 1,097
 261
 922
 1,097
Real estate construction 223
 
 84
 227
 84
 84
Residential real estate 118
 96
 587
 407
 417
 587
Commercial real estate 756
 138
 229
 803
 186
 229
Loans to individuals 161
 162
 684
 371
 502
 684
Total recoveries 1,392
 596
 2,681
 2,069
 2,111
 2,681
Net credit losses 2,116
 6,513
 16,187
 16,384
 12,351
 16,187
Provision charged to expense 6,526
 1,159
 14,948
 20,306
 8,818
 14,948
Balance, end of period $55,222
 $46,697
 $50,812
 $54,734
 $48,518
 $50,812


4147

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Noninterest Income
The following table presents the components of noninterest income for the threenine months ended March 31September 30: 
 2016 2015 $ Change % Change 2016 2015 $ Change % Change
 (dollars in thousands) (dollars in thousands)
Noninterest Income:                
Trust income $1,255
 $1,421
 $(166) (12)% $4,098
 $4,511
 $(413) (9)%
Service charges on deposit accounts 3,708
 3,318
 390
 12
 11,528
 11,271
 257
 2
Insurance and retail brokerage commissions 1,959
 2,195
 (236) (11) 6,048
 6,536
 (488) (7)
Income from bank owned life insurance 1,296
 1,354
 (58) (4) 3,957
 4,089
 (132) (3)
Card-related interchange income 3,557
 3,418
 139
 4
 11,039
 10,784
 255
 2
Swap fee income 1,985
 727
 1,258
 173
Other income 2,076
 1,947
 129
 7
 4,761
 5,136
 (375) (7)
Subtotal 13,851
 13,653
 198
 1
 43,416
 43,054
 362
 1
Net securities gains 
 105
 (105) (100) 28
 125
 (97) (78)
Gain on sale of mortgage loans 683
 439
 244
 56
 2,850
 1,856
 994
 54
Gain on sale of other loans and assets 195
 224
 (29) (13) 1,048
 1,428
 (380) (27)
Derivatives mark to market expense (1,014) (230) (784) 341
Derivatives mark to market (1,075) (420) (655) 156
Total noninterest income $13,715
 $14,191
 $(476) (3)% $46,267
 $46,043
 $224
  %
 
Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivativederivatives mark to market, increased $0.20.4 million, or 1%, for the first threenine months of 2016 compared to 2015. Swap fee income increased compared to 2015, by $1.3 million due to an increase in the number of interest rate swaps entered into for our commercial loan customers during the first nine months of 2016 compared to the same period in the prior year. Service charges on deposit accounts increased $0.4$0.3 million and card-related interchange income increased $0.1$0.3 million, due to growth in the number of deposit accounts and increases in customer fee-related activity. Offsetting these increases were insurance and retail brokerage commissions and trust income, both of which decreased $0.2$0.5 million and $0.4 million, respectively, due to lower annuity and mutual fund sales. Other income increased compared to 2015, primarily due to a $0.1 million increase in fees received for interest rate swaps entered into by our commercial loan customers.
Total noninterest income for the threenine months ended March 31,September 30, 2016 decreased $0.5increased $0.2 million in comparison to the threenine months ended March 31,September 30, 2015. The most significant change includes an $0.8a $0.7 million decrease related to the mark to market adjustment on interest rate swaps entered into for our commercial loan customers. This negative adjustment does not reflect an actual loss on the swaps, but rather relates to a change in fair value due to increases in corporate bond spreads and decreases in swap rates.
Offsetting the derivative mark to market adjustment was a $0.2$1.0 million increase in the gainsgain on sale of mortgage loans due to the continuing expansion of our mortgage business.


4248

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Noninterest Expense
The following table presents the components of noninterest expense for the threenine months ended March 31September 30: 
 2016 2015 $ Change % Change 2016 2015 $ Change % Change
 (dollars in thousands) (dollars in thousands)
Noninterest Expense:                
Salaries and employee benefits $21,677
 $21,892
 $(215) (1)% $62,212
 $66,339
 $(4,127) (6)%
Net occupancy expense 3,481
 3,911
 (430) (11) 9,843
 10,518
 (675) (6)
Furniture and equipment expense - excluding IT conversion 2,867
 2,680
 187
 7
Furniture and equipment expense 8,596
 7,980
 616
 8
Data processing expense 1,759
 1,438
 321
 22
 5,379
 4,505
 874
 19
Advertising and promotion expense 1,940
 1,946
 (6) 
Pennsylvania shares tax expense 758
 794
 (36) (5) 2,764
 3,617
 (853) (24)
Intangible amortization 137
 156
 (19) (12) 318
 469
 (151) (32)
Collection and repossession expense 569
 511
 58
 11
 1,803
 2,229
 (426) (19)
Other professional fees and services 791
 930
 (139) (15) 2,866
 2,877
 (11) 
FDIC insurance 1,038
 1,059
 (21) (2) 3,205
 3,047
 158
 5
Other operating expenses 4,727
 5,221
 (494) (9) 13,163
 13,516
 (353) (3)
Subtotal 37,804
 38,592
 (788) (2) 112,089
 117,043
 (4,954) (4)
Loss on sale or write-down of assets 96
 262
 (166) (63) 629
 2,037
 (1,408) (69)
Merger and acquisition related 358
 28
 330
 1,179 %
Litigation and operational losses 244
 1,000
 (756) 76 % 1,174
 1,637
 (463) 28 %
Total noninterest expense $38,144
 $39,854
 $(1,710) (4)% $114,250
 $120,745
 $(6,495) (5)%

Noninterest expense, excluding loss on sale or write-down of assets, and litigation and operational losses and merger and acquisition related expenses, decreased $0.85.0 million, or 2%4%, for the threenine months ended March 31,September 30, 2016 compared to the same period in 2015. Contributing to the 2016 decrease is $0.5a $4.1 million decline in other operating expensessalaries and employee benefits primarily due to the retail transformation initiative, which resulted in some staffing reductions as well as a $0.4higher than normal level of open positions in the second and third quarters of 2016. The $0.9 million decrease in Pennsylvania shares tax expense is the required reserves for unfunded loan commitments.result of a $0.7 million settlement paid in the third quarter of 2015. Despite the addition of four branch locations as a result of the acquisition of First Community Bank in the fourth quarter of 2015, net occupancy expense was $0.4$0.7 million lower in the first quarternine months of 2016 as compared to the same period in 2015. Contributing to this decline is $0.2$0.3 million in lower snow removal costs and efficiencies related to the closure of four branch locations during 2015. Offsetting these decreases is an increase of $0.3$0.9 million in data processing expense primarily due to the issuance of chip debit cards to our customers during the first quarternine months of 2016.

Loss on sale or write-down of assets decreased $1.4 million for the first nine months of 2016 due to $1.1 million in write-downs taken on three OREO properties, as well as a $0.4 million write-down due to the anticipated sale of a bank building during 2015. There was no similar activity in 2016. Litigation and operational losses decreased $0.80.5 million for the threenine months ended March 31,September 30, 2016. In the first threenine months of 2015, operational losses arewere largely due to fraud losses recognized in conjunction with several merchant debit card breaches. ThereLosses of this type were no similar losses recognizedlower in the first threenine months of 2016.
Income Tax
The provision for income taxes decreasedincreased $0.80.9 million for the threenine months ended March 31,September 30, 2016, compared to the corresponding period in 2015. The lowerhigher provision for income taxes was the result of a $2.5 million decreaseincrease 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 threenine months ended March 31,September 30, 2016 and 2015.
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 30.1%29.6% and 29.3% for both the threenine months ended March 31,September 30, 2016 and 2015., respectively.

49

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



As of March 31,September 30, 2016, our deferred tax assets totaled $31.027.2 million. Based on our evaluation as of March 31,September 30, 2016, 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.
Results of Operations
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Net Income
For the three months ended September 30, 2016, First Commonwealth had net income of $17.2 million, or $0.19 diluted earnings per share, compared to net income of $12.4 million, or $0.14 diluted earnings per share, in the three months ended September 30, 2015. The increase in net income was primarily the result of an in increase in net interest income, as well as decreases in the provision for credit losses and noninterest expense.
For the three months ended September 30, 2016, the Company’s return on average equity was 9.14% and its return on average assets was 1.02%, compared to 6.86% and 0.78%, respectively, for the three months ended September 30, 2015.

Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $50.6 million in the third quarter of 2016, compared to $47.6 million for the same period in 2015. This increase was primarily due to growth in average interest earning assets of $324.3 million. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income) at 74% and 75% for the three months ended September 30, 2016 and 2015, respectively.
The net interest margin, on a fully taxable equivalent basis, was 3.29% and 3.25% for the three months ended September 30, 2016 and September 30, 2015, respectively. The four basis point increase in the net interest margin is primarily due to an increase in the yield on earning assets.
The taxable equivalent yield on interest-earning assets was 3.60% for the three months ended September 30, 2016, an increase of eight basis points compared to the 3.52% yield for the same period in 2015. This increase is largely due to the investment portfolio yield, which improved by 8 basis points when compared to the three months ended September 30, 2015. This increase can be attributed to the runoff or sale of lower yielding U.S. Agency securities, which were replaced with higher yielding investment securities. Investment portfolio purchases during the three months ended September 30, 2016 have been primarily in mortgage-related assets with approximate durations of 48-60 months and municipal 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 increased to 0.41% for the three months ended September 30, 2016, from 0.34% for the same period in 2015, primarily due to an increase of 16 basis points in the cost of short-term borrowings and 8 basis points in the cost of savings deposits.
For the three months ended September 30, 2016, changes in interest rates negatively impacted net interest income by $0.2 million when compared with the same period in 2015. The higher yield on interest-earning assets positively impacted net interest income by $1.0 million, while the increase in the cost of interest-bearing liabilities had a negative impact of $1.2 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 reinvesting cash flow from runoff and from sales of lower-yielding investments.
While changes in interest rates and yields negatively impacted the net interest margin, increases in average interest-earning assets more than offset the effect on net interest income. Average earning assets for the three months ended September 30, 2016 increased $324.3 million, or 5.6%, compared to the same period in 2015. Average loans for the three months ended September 30, 2016 increased $288.3 million, or 6.3%, compared to the same period in 2015.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $3.2 million in the three months ended September 30, 2016, as compared to the same period in 2015. Higher levels of interest-

4350

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



earning assets resulted in an increase of $3.1 million in interest income, while changes in the volume of interest-bearing liabilities decreased interest expense by $0.1 million, primarily as the result of decreases in long-term debt and time deposits, including brokered deposits.
Net interest income also benefited from a $120.4 million increase in average net free funds at September 30, 2016 as compared to September 30, 2015. 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 $88.7 million, or 8.3%, 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 September 30, 2016 declined by $73.0 million compared to the comparable period in 2015.
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 September 30:
 2016 2015
 (dollars in thousands)
Interest income per Condensed Consolidated Statements of Income$54,479
 $50,501
Adjustment to fully taxable equivalent basis951
 883
Interest income adjusted to fully taxable equivalent basis (non-GAAP)55,430
 51,384
Interest expense4,861
 3,816
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)$50,569
 $47,568




51

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 September 30:
 20162015
 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$5,853
$8
0.54%$3,221
$2
0.25%
Tax-free investment securities64,098
585
3.63
41,671
401
3.82
Taxable investment securities1,214,542
7,434
2.44
1,203,603
7,155
2.36
Loans, net of unearned income (b)(c)4,839,206
47,403
3.90
4,550,882
43,826
3.82
Total interest-earning assets6,123,699
55,430
3.60
5,799,377
51,384
3.52
Noninterest-earning assets:      
Cash71,099
  66,685
  
Allowance for credit losses(61,264)  (47,152)  
Other assets546,142
  524,099
  
Total noninterest-earning assets555,977
  543,632
  
Total Assets$6,679,676
  $6,343,009
  
Liabilities and Shareholders’ Equity      
Interest-bearing liabilities:      
Interest-bearing demand deposits (d)$748,932
$135
0.07%$656,008
$66
0.04%
Savings deposits (d)1,903,630
1,034
0.22
1,848,508
647
0.14
Time deposits586,470
956
0.65
659,445
1,044
0.63
Short-term borrowings1,391,766
1,987
0.57
1,232,795
1,279
0.41
Long-term debt81,128
749
3.67
111,285
780
2.78
Total interest-bearing liabilities4,711,926
4,861
0.41
4,508,041
3,816
0.34
Noninterest-bearing liabilities and shareholders’ equity:      
Noninterest-bearing demand deposits (d)1,153,945
  1,065,204
  
Other liabilities65,727
  51,586
  
Shareholders’ equity748,078
  718,178
  
Total noninterest-bearing funding sources1,967,750
  1,834,968
  
Total Liabilities and Shareholders’ Equity$6,679,676
  $6,343,009
  
Net Interest Income and Net Yield on Interest-Earning Assets $50,569
3.29% $47,568
3.25%
(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.


52

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 September 30, 2016 compared with September 30, 2015:
  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
 $2
 $4
Tax-free investment securities 184
 216
 (32)
Taxable investment securities 279
 65
 214
Loans 3,577
 2,776
 801
Total interest income (b) 4,046
 3,059
 987
Interest-bearing liabilities:      
Interest-bearing demand deposits 69
 9
 60
Savings deposits 387
 19
 368
Time deposits (88) (116) 28
Short-term borrowings 708
 164
 544
Long-term debt (31) (211) 180
Total interest expense 1,045
 (135) 1,180
Net interest income $3,001
 $3,194
 $(193)
(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.

The table below provides a breakout of the provision for credit losses by loan category for the three months ended September 30:
 2016 2015
 DollarsPercentage DollarsPercentage
 (dollars in thousands)
Commercial, financial, agricultural and other$2,666
78 % $3,520
76 %
Real estate construction(4)
 75
2
Residential real estate(11)
 (124)(3)
Commercial real estate(288)(8) 703
15
Loans to individuals1,045
30
 447
10
Total$3,408
100 % $4,621
100 %
The provision for credit losses for the three months ended September 30, 2016 decreased in comparison to the three months ended September 30, 2015 by $1.2 million. The level of the third quarter 2016 provision expense is primarily due to commercial, financial, agricultural and other loans as the result of an increase in historical loss factors and specific reserves established for one loan relationship. The negative provision expense for commercial real estate loans and residential real estate is a result of decreases in historical loss factors. The provision for loans to individuals is related to charge-offs in the indirect automobile portfolio.
The majority of the provision in 2015 is related to the commercial, financial, and agricultural category because of a $2.5 million increase in specific reserves for two impaired loans. Increases in commercial real estate and loans to individual categories are the result of charge-offs during the quarter, while the negative provision for residential real estate can be attributed to declines in qualitative factors, including those associated with inflation and wages.


53

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Below is an analysis of the consolidated allowance for credit losses for the three months ended September 30, 2016 and 2015 and the year-ended December 31, 2015:

  September 30, 2016 September 30, 2015 December 31, 2015
  (dollars in thousands)
Balance, beginning of period $59,821
 $45,344
 $52,051
Loans charged off:      
Commercial, financial, agricultural and other 7,163
 639
 11,429
Real estate construction 
 
 8
Residential real estate 374
 301
 1,539
Commercial real estate 10
 561
 1,538
Loans to individuals 1,260
 900
 4,354
Total loans charged off 8,807
 2,401
 18,868
Recoveries of loans previously charged off:      
Commercial, financial, agricultural and other 63
 564
 1,097
Real estate construction 
 
 84
Residential real estate 147
 178
 587
Commercial real estate 20
 33
 229
Loans to individuals 82
 179
 684
Total recoveries 312
 954
 2,681
Net credit losses 8,495
 1,447
 16,187
Provision charged to expense 3,408
 4,621
 14,948
Balance, end of period $54,734
 $48,518
 $50,812



Noninterest Income
The following table presents the components of noninterest income for the three months ended September 30:
  2016 2015 $ Change % Change
  (dollars in thousands)
Noninterest Income:        
Trust income $1,523
 $1,614
 $(91) (6)%
Service charges on deposit accounts 3,975
 4,081
 (106) (3)
Insurance and retail brokerage commissions 2,104
 2,163
 (59) (3)
Income from bank owned life insurance 1,350
 1,357
 (7) (1)
Card related interchange income 3,698
 3,637
 61
 2
Swap fee income 725
 84
 641
 763
Other income 1,527
 1,712
 (185) (11)
Subtotal 14,902
 14,648
 254
 2
Net securities gains 
 
 
 N/A
Gain on sale of mortgage loans 1,235
 832
 403
 48
Gain on sale of other loans and assets 387
 808
 (421) (52)
Derivatives mark to market 470
 (783) 1,253
 (160)
Total noninterest income $16,994
 $15,505
 $1,489
 10 %


54

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 $0.3 million for the third quarter of 2016 compared to 2015. Swap fee income increased $0.6 million due to an increase in the number of swaps entered into for our commercial loan customers during the current quarter compared to the same period in the prior year. Offsetting these increases were insurance and retail brokerage commissions and trust income, which each decreased $0.1 million due to lower annuity and mutual fund sales.
Total noninterest income for the three months ended September 30, 2016 increased $1.5 million in comparison to the three months ended September 30, 2015. The most significant change includes a $1.3 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 an actual gain on the swaps, but rather relates to a change in fair value due to decreases in corporate bond spreads and increases in swap rates.

Noninterest Expense
The following table presents the components of noninterest expense for the three months ended September 30:
  2016 2015 $ Change % Change
  (dollars in thousands)
Noninterest Expense:        
Salaries and employee benefits $20,647
 $22,446
 $(1,799) (8)%
Net occupancy expense 3,176
 3,291
 (115) (3)
Furniture and equipment expense 2,847
 2,670
 177
 7
Data processing expense 1,832
 1,558
 274
 18
Advertising and promotion expense 750
 789
 (39) (5)
Pennsylvania shares tax expense 914
 1,713
 (799) (47)
Intangible amortization 67
 157
 (90) (57)
Collection and repossession expense 760
 801
 (41) (5)
Other professional fees and services 1,202
 1,002
 200
 20
FDIC insurance 1,105
 963
 142
 15
Other operating expenses 4,795
 4,385
 410
 9
Subtotal 38,095
 39,775
 (1,680) (4)
Loss on sale or write-down of assets 188
 140
 48
 34
Merger and acquisition related 118
 28
 90
 321
Litigation and operational losses 295
 314
 (19) (6)
Total noninterest expense $38,696
 $40,257
 $(1,561) (4)%

Noninterest expense decreased $1.6 million, or 4%, for the three months ended September 30, 2016 compared to the same period in 2015. This decrease can be attributed to a $1.8 million decrease in salaries and employee benefits expense due to staff reductions and a higher than normal level of open positions in 2016 compared to 2015, as well as a $0.8 million decrease in Pennsylvania shares tax expense due to a $0.7 million settlement of a tax dispute in the third quarter of 2015. Despite the addition of four branch locations as a result of the acquisition of First Community Bank in the fourth quarter of 2015, net occupancy expense was $0.1 million lower in the third quarter of 2016 as compared to the same period in 2015. Offsetting these decreases is an increase of $0.3 million in data processing expense, primarily due to the issuance of chip debit cards to our customers during the third quarter of 2016 and a $0.5 million increase in the reserve for unfunded loan commitments, which is included in other operating expenses.

Income Tax
The provision for income taxes increased $2.4 million for the three months ended September 30, 2016, compared to the corresponding period in 2015. The higher provision for income taxes was the result of a $7.2 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 September 30, 2016 and 2015.

55

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



We generate an annual effective tax rate that is less than the statutory rate of 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 29.8% and 28.3% for the three months ended September 30, 2016 and 2015, respectively.

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 threenine months of 2016, liquidity provided fromused by the net increasedecrease in short-term borrowings totaled $7.9$180.5 million, while the sales, maturity and redemption of investment securities provided $42.7$214.0 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,September 30, 2016, our maximum borrowing capacity under this program was $1.0 billion and as of that date there was $0.6 million outstanding. Also included in this amount is a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. As of March 31,September 30, 2016, our outstanding certificates of deposits from this program have an average weighted rate of 0.45%0.77% and an average original term of 276364 days.
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,September 30, 2016, the borrowing capacity under this program totaled $651.3688.7 million and there were no amounts outstanding.
As of March 31,September 30, 2016, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.6 billion and as of that date amounts used against this capacity included $1.41.2 billion in outstanding borrowings.borrowings and $10.2 million in outstanding letters of credit.
We also have available unused federal funds lines with four correspondent banks. These lines have an aggregate commitment of $170.0$195.0 million and there are no amountswith a total of $3.0 million outstanding as of March 31,September 30, 2016.
First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As of March 31,September 30, 2016, there are no amounts outstanding on this line.
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, 2016 December 31, 2015 September 30, 2016 December 31, 2015
 (dollars in thousands) (dollars in thousands)
Noninterest-bearing demand deposits $1,155,795
 $1,116,689
 $1,241,627
 $1,116,689
Interest-bearing demand deposits 92,125
 86,365
 87,507
 86,365
Savings deposits 2,467,978
 2,390,607
 2,552,754
 2,390,607
Time deposits 585,757
 602,233
 577,092
 602,233
Total $4,301,655
 $4,195,894
 $4,458,980
 $4,195,894
During the first threenine months of 2016, total deposits increased $105.8263.1 million due to an $83.1a $163.3 million increase in interest-bearing demand and savings deposits and a $39.1 million$124.9 million increase in noninterest-bearing demand deposits. These increases were offset by a $16.525.1 million decrease in time deposits. The decrease in time deposits is the result of a decline in wholesale certificates of deposit of $3.0 million coupled with a decline in core certificates of deposit of $13.5$22.1 million.


56

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Market Risk
The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The ratio of rate-sensitive assets to rate-sensitive liabilities repricing within a one-year period was 0.710.75 and 0.71 at both March 31,September 30, 2016 and December 31, 2015., 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

44

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



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,September 30, 2016 and December 31, 2015:
 
 March 31, 2016 September 30, 2016
 0-90 Days 91-180
Days
 181-365
Days
 Cumulative
0-365 Days
 Over 1 Year
Through 5
Years
 Over 5
Years
 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) (dollars in thousands)
Loans $2,431,725
 $203,131
 $295,675
 $2,930,531
 $1,436,901
 $390,677
 $2,485,254
 $165,618
 $327,440
 $2,978,312
 $1,466,263
 $383,392
Investments 118,582
 53,225
 100,352
 272,159
 591,435
 469,755
 115,805
 50,053
 103,688
 269,546
 594,317
 378,881
Other interest-earning assets 11,024
 
 
 11,024
 
 
 5,097
 
 
 5,097
 
 
Total interest-sensitive assets (ISA) 2,561,331
 256,356
 396,027
 3,213,714
 2,028,336
 860,432
 2,606,156
 215,671
 431,128
 3,252,955
 2,060,580
 762,273
Certificates of deposit 114,685
 95,200
 139,061
 348,946
 232,532
 4,279
 92,091
 86,658
 131,660
 310,409
 262,342
 4,341
Other deposits 2,560,103
 
 
 2,560,103
 
 
 2,640,261
 
 
 2,640,261
 
 
Borrowings 1,591,050
 141
 287
 1,591,478
 2,504
 6,103
 1,402,637
 145
 293
 1,403,075
 2,559
 5,752
Total interest-sensitive liabilities (ISL) 4,265,838
 95,341
 139,348
 4,500,527
 235,036
 10,382
 4,134,989
 86,803
 131,953
 4,353,745
 264,901
 10,093
Gap $(1,704,507) $161,015
 $256,679
 $(1,286,813) $1,793,300
 $850,050
 $(1,528,833) $128,868
 $299,175
 $(1,100,790) $1,795,679
 $752,180
ISA/ISL 0.60
 2.69
 2.84
 0.71
 8.63
 82.88
 0.63
 2.48
 3.27
 0.75
 7.78
 75.52
Gap/Total assets 25.44% 2.40% 3.83% 19.21% 26.77% 12.69% 22.93% 1.93% 4.49% 16.51% 26.94% 11.28%

 

57

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



  December 31, 2015
  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 $2,371,092
 $184,323
 $315,162
 $2,870,577
 $1,439,199
 $343,538
Investments 115,292
 50,950
 102,357
 268,599
 597,263
 454,200
Other interest-earning assets 2,808
 
 
 2,808
 
 
Total interest-sensitive assets (ISA) 2,489,192
 235,273
 417,519
 3,141,984
 2,036,462
 797,738
Certificates of deposit 125,403
 89,522
 139,133
 354,058
 244,173
 4,000
Other deposits 2,476,973
 
 
 2,476,973
 
 
Borrowings 1,583,132
 140
 285
 1,583,557
 2,487
 6,263
Total interest-sensitive liabilities (ISL) 4,185,508
 89,662
 139,418
 4,414,588
 246,660
 10,263
Gap $(1,696,316) $145,611
 $278,101
 $(1,272,604) $1,789,802
 $787,475
ISA/ISL 0.59
 2.62
 2.99
 0.71
 8.26
 77.73
Gap/Total assets 25.83% 2.22% 4.23% 19.38% 27.25% 11.99%

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.

45

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



 
 Net interest income change (12 months) Net interest income change (12 months)
 -200 -100 +100 +200 -200 -100 +100 +200
 (dollars in thousands) (dollars in thousands)
March 31, 2016 ($) $(7,042) $(3,566) $1,287
 $2,381
March 31, 2016 (%) (3.54)% (1.79)% 0.65% 1.20%
September 30, 2016 ($) $(6,928) $(2,661) $2,363
 $4,715
September 30, 2016 (%) (3.53)% (1.35)% 1.20% 2.40%
                
December 31, 2015 ($) $(7,293) $(2,438) $916
 $1,900
 $(7,293) $(2,438) $916
 $1,900
December 31, 2015 (%) (3.74)% (1.25)% 0.47% 0.97% (3.74)% (1.25)% 0.47% 0.97%
The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates versus if rates remained unchanged and there are no changes in balance sheet categories.
 Net interest income change (12 months) Net interest income change (12 months)
 -200 -100 +100 +200 -200 -100 +100 +200
 (dollars in thousands) (dollars in thousands)
March 31, 2016 ($) $(10,046) $(5,339) $1,503
 $2,863
March 31, 2016 (%) (5.05)% (2.68)% 0.75% 1.44%
September 30, 2016 ($) $(11,342) $(7,637) $3,273
 $6,416
September 30, 2016 (%) (5.77)% (3.89)% 1.67% 3.27%
                
December 31, 2015 ($) $(11,405) $(5,132) $1,842
 $3,658
 $(11,405) $(5,132) $1,842
 $3,658
December 31, 2015 (%) (5.85)% (2.63)% 0.94% 1.88% (5.85)% (2.63)% 0.94% 1.88%
The analysis and model used to quantify the sensitivity of our net interest income becomes less reliable 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%, and therefore cannot decline 100 or 200 basis points, yet our interest-sensitive assets are able to decline by these amounts. In the threenine months ended March 31,September 30, 2016 and 2015, the cost of our interest-bearing liabilities averaged 0.39%0.40% and 0.35%0.34%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.59% and 3.62%3.55%, respectively.
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 add approximately two basis points of protection to the net interest margin as a hedge against a

58

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



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 $4.1$4.0 million at March 31,September 30, 2016 and is classified in "Other liabilities" on the Condensed Consolidated Statements of Financial Condition.

46

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



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,September 30, 2016, the Company had a total of $146.3$126.4 million in commitments to the Oil and Gas Industry, with $63.7$66.1 million in outstanding loan balances against those commitments. Of this total, commitments of $40.3$29.4 million with outstanding balances of $10.6$6.5 million are for exploration and production, while $106.0$96.9 million in commitments, with outstanding balances of $53.0$59.6 million, are related to ancillary businesses.
One customer accounts for 49.6%34.0% 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 totaling $6.5$2.7 million is categorized as a non-pass accruing credit. One commercial relationship in this category, totaling $2.4 million, ishas been on non-performing status since before the oil price decline in the third quarter of 2014.
The ancillary businesses sector consisstconsists of well services, transportation, and providing equipment and materials to support the oil and gas industry. Two customers, which account for 36.7%32.4% 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 $28.2$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 $10.9$7.7 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 threenine months of 2016, 1657 loans totaling $5.0$12.2 million were identified as troubled debt restructurings.
The balance of troubled debt restructured loans increased $1.8$0.5 million from December 31, 2015 due primarily to the addition of a $3.7$7.6 million related to two commercial and industrial loan,loans, partially offset by a $1.1$2.7 million paydown and a $1.3 million charge-off on a $3.8 million loan relationship previously categorized as a troubled debt restructure. Additionally during the third quarter, three loans totaling $1.8 million for borrowers who are no longer experiencing financial difficulties have been subsequently restructured with no concessions granted, therefore, they have been removed from TDR status. 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 when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the

59

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



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 $11.0$4.0 million to $61.8$54.8 million at March 31,September 30, 2016 compared to $50.8 million at December 31, 2015. This increase is primarily due to the addition of an $11.5a $11.8 million commercial loan relationship with a steel and aluminum servicing company.company and a $10.5 million commercial loan relationship with a coal industry customer. Offsetting the loans moved to nonperforming are $12.3 million in charge-offs recognized in relation to the largest nonaccrual relationships.
The allowance for credit losses as a percentage of nonperforming loans was 89.33%99.83% as of March 31,September 30, 2016 compared to 99.94% at December 31, 2015 and 101.09%118.84% at March 31,September 30, 2015. 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 $13.4$8.2 million and general reserves of $41.8$46.6 million as of March 31,September 30, 2016. Specific reserves increased $6.4$1.1 million from December 31, 2015, and $9.6$3.9 million from March 31,September 30, 2015. The increase in specific reserves in the first threenine 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,September 30, 2016.
Criticized loans totaled $142.6137.3 million at March 31,September 30, 2016 and represented 3.0%2.8% of the loan portfolio. The level of criticized loans increased as of March 31,September 30, 2016 when compared to December 31, 2015, by $8.73.3 million, or 6.5%2.5%. Classified loans totaled $110.8$97.3 million at March 31,September 30, 2016 compared to $86.4 million at December 31, 2015, an increase of $24.4$10.8 million, or 28.2%12.5%. Delinquency on accruing loans for the same period decreased$1.6 million, or 12.7%, the majority of which are commercial, financial, agricultural and other loans and residential real estate loans.
The allowance for credit losses was $54.7 million at September 30, 2016 or 1.13% of total loans outstanding, compared to 1.08% reported at December 31, 2015 and 1.06% at September 30, 2015. 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 0.97% at September 30, 2016 compared to 0.94% at December 31, 2015 and 0.98% at September 30, 2015.

4760

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Delinquency on accruing loans for the same period decreased$2.7 million, or 21.2%, the majority of which are commercial real estate and residential real estate loans.
The allowance for credit losses was $55.2 million at March 31, 2016 or 1.15% of total loans outstanding compared to 1.08% reported at December 31, 2015 and 1.05% at March 31, 2015. General reserves, or the portion of the allowance related to loans which were not specifically evaluated for impairment, as a percentage of non-impaired loans were 0.88% at March 31, 2016 compared to 0.94% at December 31, 2015 and 0.98% at March 31, 2015.
The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures:
 
 March 31,   December 31, 2015   September 30,   December 31, 2015  
 2016   2015    2016   2015   
 (dollars in thousands)   (dollars in thousands)  
Nonperforming Loans:      
Loans on nonaccrual basis $33,470
    $24,587
 
 $24,345
    $27,817
    $20,220
 
 $24,345
   
Loans held for sale on a nonaccrual basis 
    3,011
    
   
Troubled debt restructured loans on nonaccrual basis 13,366
    8,978
    12,360
    12,723
    8,583
    12,360
   
Troubled debt restructured loans on accrual basis 14,979
    12,630
    14,139
    14,286
    12,024
    14,139
   
Total nonperforming loans $61,815
    $49,206
    $50,844
    $54,826
    $40,827
    $50,844
   
Loans past due 30 to 90 days and still accruing $8,866
 $10,192
 $10,476
  $8,942
 $12,482
 $10,476
 
Loans past due in excess of 90 days and still accruing $1,330
    $4,245
    $2,455
    $2,343
    $2,054
    $2,455
   
Other real estate owned $8,636
    $7,025
    $9,398
    $7,686
    $10,542
    $9,398
   
Loans held for sale at end of period $5,849
 $5,892
 $5,763
  $7,855
 $4,986
 $5,763
 
Loans outstanding at end of period $4,798,755
    $4,437,601
 
 $4,683,750
    $4,860,652
    $4,575,735
 
 $4,683,750
   
Average loans outstanding $4,745,252
 (a)  $4,478,240
 (a)  $4,553,634
 (b)  $4,806,061
 (a)  $4,509,628
 (a)  $4,553,634
 (b) 
Nonperforming loans as a percentage of total loans 1.29% 1.11% 1.08%  1.13% 0.89% 1.09% 
Provision for credit losses $6,526
 (a)  $1,159
 (a)  $14,948
 (b)  $20,306
 (a)  $8,818
 (a)  $14,948
 (b) 
Allowance for credit losses $55,222
    $46,697
    $50,812
    $54,734
    $48,518
    $50,812
   
Net charge-offs $2,116
 (a)  $6,513
 (a)  $16,187
 (b)  $16,384
 (a)  $12,351
 (a)  $16,187
 (b) 
Net charge-offs as a percentage of average loans outstanding (annualized) 0.18% 0.59% 0.36%  0.46% 0.37% 0.36% 
Provision for credit losses as a percentage of net charge-offs 308.41% (a)  17.80% (a)  92.35% (b)  123.94% (a)  71.40% (a)  92.35% (b) 
Allowance for credit losses as a percentage of end-of-period loans outstanding 1.15% 1.05% 1.08%  1.13% 1.06% 1.08% 
Allowance for credit losses as a percentage of nonperforming loans (c) 89.33% 101.09% 99.94%  99.83% 118.84% 99.94% 
 
(a)
For the threenine-month period ended.
(b)For the twelve-month period ended.
(c)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, 2016 December 31, 2015
  Amount % Amount %
  (dollars in thousands)
Commercial, financial, agricultural and other $1,190,384
 25% $1,150,906
 25%
Real estate construction 256,856
 5
 220,736
 5
Residential real estate 1,212,962
 25
 1,224,465
 26
Commercial real estate 1,552,904
 33
 1,479,000
 31
Loans to individuals 585,649
 12
 608,643
 13
Total loans and leases net of unearned income $4,798,755
 100% $4,683,750
 100%

48

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



  September 30, 2016 December 31, 2015
  Amount % Amount %
  (dollars in thousands)
Commercial, financial, agricultural and other $1,207,447
 25% $1,150,906
 25%
Real estate construction 229,375
 5
 220,736
 5
Residential real estate 1,185,759
 24
 1,224,465
 26
Commercial real estate 1,683,015
 35
 1,479,000
 31
Loans to individuals 555,056
 11
 608,643
 13
Total loans and leases net of unearned income $4,860,652
 100% $4,683,750
 100%
During the threenine months ended March 31,September 30, 2016, loans increased $115.0176.9 million, or 2%4%, compared to balances outstanding at December 31, 2015. During the threenine months ended March 31,September 30, 2016, growth in the commercial, financial, agricultural and other portfolio and commercial real estate loans can largely be attributed to growth in middle market lending in Pennsylvania and contiguous states.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 loans. The decrease in residential real estate loans is the result of continued runoff in our mortgage portfolio, as many of the loans originated by our mortgage banking area are sold in the secondary market.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



Net charge-offs for the threenine months ended March 31,September 30, 2016 totaled $2.116.4 million, compared to $6.512.4 million for the threenine months ended March 31,September 30, 2015. The most significant charge-offs during the threenine months ended March 31,September 30, 2016 include a $6.5 million partial charge-off related to a manufacturer of mine safety products, a $2.0 million partial charge-off of one loan to an oil and gas wells services company, a $1.1 million charge-off of loans related to a manufacturer of sporting goods, a $1.3 million partial charge-off of two commercial industrial loans related to a local energy company.company and a $1.1 million charge-off of a loan to a machine manufacturer. During the threenine months ended March 31,September 30, 2015, the most significant charge-offs included a $3.3$2.3 million partial charge-off of two commercial industrial loans related to a local energy company and a $1.2 million charge-off of a commercial relationship that was transferred to loans held for sale.
 For the Three Months Ended March 31, 2016 As of March 31, 2016 For the Nine Months Ended September 30, 2016 As of September 30, 2016
 
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
 
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) (dollars in thousands)
Commercial, financial, agricultural and other $1,258
 59.45 % 0.11 % $42,646
 68.99% 0.89% $13,047
 79.63 % 0.36 % $36,186
 66.00% 0.74%
Real estate construction (223) (10.54) (0.02) 
 
 
 (227) (1.39) (0.01) 
 
 
Residential real estate 264
 12.48
 0.02
 11,344
 18.35
 0.24
 569
 3.48
 0.03
 11,681
 21.31
 0.24
Commercial real estate (491) (23.20) (0.04) 7,327
 11.85
 0.15
 (385) (2.35) (0.01) 6,582
 12.00
 0.14
Loans to individuals 1,308
 61.81
 0.11
 498
 0.81
 0.01
 3,380
 20.63
 0.09
 377
 0.69
 0.01
Total loans, net of unearned income $2,116
 100.00 % 0.18 % $61,815
 100.00% 1.29% $16,384
 100.00 % 0.46 % $54,826
 100.00% 1.13%
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,September 30, 2016. See discussions related to the provision for credit losses and loans for more information.
Capital Resources
At March 31,September 30, 2016, shareholders’ equity was $733.3751.8 million, an increase of $13.832.2 million from December 31, 2015. The increase was primarily the result of a $12.5$41.7 million increase in net income and an increase of $7.7$9.1 million in the fair value of available for sale investments. These increases were partially offset by $6.218.7 million of dividends paid to shareholders and $0.5$0.9 million of common stock repurchases. Cash dividends declared per common share were $0.070.21 for the threenine months ended March 31,September 30, 2016 and 2015.
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 aan annual basis. This analysis is subject to Board of Director review and approval. Our most recent capital stress test was completed in December 2015.
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

49

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



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.

62

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,September 30, 2016, 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
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
 RatioCapital
Amount
 Ratio Capital
Amount
 Ratio Capital
Amount
 Ratio Capital
Amount
 Ratio
(dollars in thousands)(dollars in thousands)
Total Capital to Risk Weighted Assets                              
First Commonwealth Financial Corporation$692,174
 12.13% $492,266
 8.625% $599,281
 10.50% $570,743
 10.00%$708,808
 12.64% $483,826
 8.625% $589,005
 10.50% $560,957
 10.00%
First Commonwealth Bank661,798
 11.60
 492,207
 8.625
 599,209
 10.50
 570,675
 10.00
640,868
 11.47
 481,935
 8.625
 586,703
 10.50
 558,765
 10.00
Tier I Capital to Risk Weighted Assets                              
First Commonwealth Financial Corporation$632,879
 11.09% $378,118
 6.625% $485,132
 8.50% $456,595
 8.00%$650,038
 11.59% $371,634
 6.625% $476,814
 8.50% $448,766
 8.00%
First Commonwealth Bank602,503
 10.56
 378,072
 6.625
 485,074
 8.50
 456,540
 8.00
582,098
 10.42
 370,182
 6.625
 474,950
 8.50
 447,012
 8.00
Tier I Capital to Average Assets                              
First Commonwealth Financial Corporation$632,879
 9.81% $258,097
 4.000% $258,097
 4.00% $322,622
 5.00%$650,038
 9.98% $260,588
 4.000% $260,588
 4.00% $325,735
 5.00%
First Commonwealth Bank602,503
 9.36
 257,466
 4.000
 257,466
 4.00
 321,832
 5.00
582,098
 8.95
 260,111
 4.000
 260,111
 4.00
 325,138
 5.00
Common Equity Tier I to Risk Weighted Assets                              
First Commonwealth Financial Corporation$562,879
 9.86% $292,506
 5.125% $399,520
 7.00% $370,983
 6.50%$580,038
 10.34% $287,491
 5.125% $392,670
 7.00% $364,622
 6.50%
First Commonwealth Bank537,927
 9.43
 292,471
 5.125
 399,473
 7.00
 370,939
 6.50
582,098
 10.42
 286,367
 5.125
 391,135
 7.00
 363,197
 6.50
On February 17, 2016, First Commonwealth's Board of Directors authorized a $25.0 million common stock repurchase program. As of March 31,September 30, 2016, First Commonwealth had repurchased 19,44745,612 shares at an average price of $8.44$8.46 per share under this program. This repurchase program was suspended in July 2016 as a result of the pending acquisition of 13 branches in Ohio, which management believes represents a better use of capital for shareholders.

On AprilJuly 27, 2016, the Company announced that it had reached an agreement with FirstMerit Bank, NA to acquire 13 retail
branches in Canton and Ashtabula, Ohio with approximately $735 million of deposits and $115 million of performing retail and
business loans. In September 2016, the necessary regulatory approvals were received from the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. This transaction is expected to close in the fourth quarter of 2016.
On October 26, 2016, First Commonwealth Financial Corporation declared a quarterly dividend of $0.07 per share payable on May 20,November 18, 2016 to shareholders of record as of May 6,November 7, 2016. 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, 2015.






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PART II – OTHER INFORMATION
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
On February 17, 2016, First Commonwealth's Board of Directors authorized a $25.0 million common stock repurchase program. In July 2016, this program was suspended due to the acquisition of 13 branches in Ohio which management believes represents a better use of capital for shareholders. The following table details the amount of shares repurchased under this program during the firstthird quarter of 2016:

Month Ending:Total Number of
Shares
Purchased
 Average Price
Paid per Share
(or Unit)
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs*
January 31, 201632,169
 $9.07
 0
 2,863,688
February 29, 201619,447
 8.44
 19,447
 2,891,304
March 31, 20163,685
 8.77
 0
 2,803,194
        
Total55,301
 $8.83
 19,447
  
        
* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $8.73 at January 31, 2016, $8.59 at February 29, 2016, and $8.86 at March 31, 2016.
Month Ending:Total Number of
Shares
Purchased
 Average Price
Paid per Share
(or Unit)
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs*
July 31, 20160
 $0.00
 0
��2,550,790
August 31, 2016918
 9.88
 
 2,410,884
September 30, 20160
 0.00
 0
 2,439,556
        
Total918
 $9.88
 
  
        
* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $9.65 at July 31, 2016, $10.21 at August 31, 2016, and $10.09 at September 30, 2016.


ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.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 
Employment Agreement dated September 19, 2016 Annual Incentive Planbetween First Commonwealth Financial Corporation and Brian G. Karrip

 Filed herewith
     
10.2 2016-2018 Long-Term Incentive PlanChange of Control Agreement dated September 19, 2016 between First Commonwealth Financial Corporation and Brian G. KarripFiled herewith
10.3Restricted Stock Agreement dated September 19, 2016 between First Commonwealth Financial Corporation and Brian G. Karrip 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: MayNovember 9, 2016 /s/ T. Michael Price
  
T. Michael Price
President and Chief Executive Officer
  
DATED: MayNovember 9, 2016 /s/ James R. Reske
  
James R. Reske
Executive Vice President, Chief Financial Officer and Treasurer


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