UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, ~~2016~~2017



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



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

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

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of November ~~8, 2016~~6, 2017, was ~~88,992,077~~97,459,199.

Table of Contents

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~FORM 10-Q~~

~~INDEX~~



		~~PAGE~~

~~PART I.~~	~~Financial Information~~

~~ITEM 1.~~	~~Financial Statements and Supplementary Data~~

	~~Included in Part I of this report:~~

	~~First Commonwealth Financial Corporation and Subsidiaries~~

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

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

~~ITEM 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	64

~~ITEM 4.~~	~~Controls and Procedures~~	64

~~PART II.~~	~~Other Information~~

~~ITEM 1.~~	~~Legal Proceedings~~	65

~~ITEM 1A.~~	~~Risk Factors~~	65

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

~~ITEM 3.~~	~~Defaults Upon Senior Securities~~	65

~~ITEM 4.~~	~~Mine Safety Disclosures~~	65

~~ITEM 5.~~	~~Other Information~~	65

~~ITEM 6.~~	~~Exhibits~~	66

	~~Signatures~~	67

~~Table of Contents~~

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)~~

September 30,
2016 December 31,
2015

(dollars in thousands,
except share data)
Assets
Cash and due from banks $ 76,456
$ 66,644
Interest-bearing bank deposits 5,097
2,808
Securities available for sale, at fair value 813,659
886,560
Securities held to maturity, at amortized cost (Fair value of $396,994 and $382,341 at September 30, 2016 and December 31, 2015, respectively) 389,513
384,324
Other investments 54,066
62,952
Loans held for sale 7,855
5,763
Loans:
Portfolio loans 4,860,652
4,683,750
Allowance for credit losses (54,734 ) (50,812 )
Net loans 4,805,918
4,632,938
Premises and equipment, net 63,356
63,454
Other real estate owned 7,686
9,398
Goodwill 164,437
164,500
Amortizing intangibles, net 912
1,231
Bank owned life insurance 186,034
182,601
Other assets 91,494
103,717
Total assets $ 6,666,483
$ 6,566,890
Liabilities
Deposits (all domestic):
Noninterest-bearing $ 1,241,627
$ 1,116,689
Interest-bearing 3,217,353
3,079,205
Total deposits 4,458,980
4,195,894
Short-term borrowings 1,330,327
1,510,825
Subordinated debentures 72,167
72,167
Other long-term debt 8,892
9,314
Total long-term debt 81,059
81,481
Other liabilities 44,330
59,144
Total liabilities 5,914,696
5,847,344
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued —
—
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at September 30, 2016 and December 31, 2015, and 88,992,077 and 88,961,268 shares outstanding at September 30, 2016 and December 31, 2015, respectively 105,563
105,563
Additional paid-in capital 366,291
365,981
Retained earnings 401,079
378,081
Accumulated other comprehensive income (loss), net 6,762
(2,386 )
Treasury stock (16,571,378 and 16,602,187 shares at September 30, 2016 and December 31, 2015, respectively) (127,908 ) (127,693 )
Total shareholders’ equity 751,787
719,546
Total liabilities and shareholders’ equity $ 6,666,483
$ 6,566,890

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

~~Table of Contents~~

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data (Continued)~~

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	68

ITEM 4.	Controls and Procedures	68

PART II.	Other Information

ITEM 1.	Legal Proceedings	69

ITEM 1A.	Risk Factors	69

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

ITEM 3.	Defaults Upon Senior Securities	69

ITEM 4.	Mine Safety Disclosures	69

ITEM 5.	Other Information	69

ITEM 6.	Exhibits	70

	Signatures	71

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, 2017			December 31, 2016
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	98,319		$	91,033
Interest-bearing bank deposits	29,709			24,644
Securities available for sale, at fair value	778,644			778,612
Securities held to maturity, at amortized cost (Fair value of $434,882 and $368,618 at September 30, 2017 and December 31, 2016, respectively)	436,081			372,513
Other investments	32,302			36,498
Loans held for sale	17,100			7,052
Loans:
Portfolio loans	5,375,847			4,879,347
Allowance for credit losses	(48,176		)	(50,185		)
Net loans	5,327,671			4,829,162
Premises and equipment, net	81,583			67,534
Other real estate owned	5,701			6,805
Goodwill	255,521			186,483
Amortizing intangibles, net	15,826			12,013
Bank owned life insurance	210,859			187,021
Other assets	95,023			84,648
Total assets	$	7,384,339		$	6,684,018
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,416,814		$	1,268,786
Interest-bearing	4,138,243			3,678,622
Total deposits	5,555,057			4,947,408
Short-term borrowings	805,825			867,943
Subordinated debentures	72,167			72,167
Other long-term debt	8,311			8,749
Capital lease obligation	7,677			—
Total long-term debt	88,155			80,916
Other liabilities	41,001			37,822
Total liabilities	6,490,038			5,934,089
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 113,914,902 and 105,563,455 shares issued at September 30, 2017 and December 31, 2016, respectively, and 97,475,575 and 89,007,077 shares outstanding at September 30, 2017 and December 31, 2016, respectively	113,915			105,563
Additional paid-in capital	470,123			366,426
Retained earnings	441,231			412,764
Accumulated other comprehensive loss, net	(3,971		)	(7,027		)
Treasury stock (16,439,327 and 16,556,378 shares at September 30, 2017 and December 31, 2016, respectively)	(126,997		)	(127,797		)
Total shareholders’ equity	894,301			749,929
Total liabilities and shareholders’ equity	$	7,384,339		$	6,684,018

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For the Three Months Ended					For the Nine Months Ended						For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,						September 30,					September 30,
	2016		2015			2016			2015			2017			2016		2017			2016
	(dollars in thousands, except share data)											(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	46,657	$	43,083		$	137,389		$	128,334		$	57,335		$	46,657	$	160,548		$	137,389
Interest and dividends on investments:
Taxable interest	6,763		6,470			20,937			20,022			7,219			6,763		21,577			20,937
Interest exempt from federal income taxes	380		261			1,112			646			410			380		1,212			1,112
Dividends	671		685			2,225			2,727			417			671		1,276			2,225
Interest on bank deposits	8		2			19			7			30			8		97			19
Total interest income	54,479		50,501			161,682			151,736			65,411			54,479		184,710			161,682
Interest Expense
Interest on deposits	2,125		1,757			5,642			5,787			2,491			2,125		6,511			5,642
Interest on short-term borrowings	1,987		1,279			6,322			3,353			2,427			1,987		6,373			6,322
Interest on subordinated debentures	663		588			1,941			1,736			772			663		2,215			1,941
Interest on other long-term debt	86		192			261			633			81			86		245			261
Interest on lease obligations												77			—		156			—
Total interest expense	4,861		3,816			14,166			11,509			5,848			4,861		15,500			14,166
Net Interest Income	49,618		46,685			147,516			140,227			59,563			49,618		169,210			147,516
Provision for credit losses	3,408		4,621			20,306			8,818			1,214			3,408		2,834			20,306
Net Interest Income after Provision for Credit Losses	46,210		42,064			127,210			131,409			58,349			46,210		166,376			127,210
Noninterest Income
Net securities gains	—		—			28			125			92			—		695			28
Trust income	1,523		1,614			4,098			4,511			2,147			1,523		5,275			4,098
Service charges on deposit accounts	3,975		4,081			11,528			11,271			4,803			3,975		13,858			11,528
Insurance and retail brokerage commissions	2,104		2,163			6,048			6,536			2,128			2,104		6,652			6,048
Income from bank owned life insurance	1,350		1,357			3,957			4,089			1,472			1,350		4,213			3,957
Gain on sale of mortgage loans	1,235		832			2,850			1,856			1,418			1,235		3,710			2,850
Gain on sale of other loans and assets	387		808			1,048			1,428			503			387		1,267			1,048
Card-related interchange income	3,698		3,637			11,039			10,784			4,780			3,698		13,873			11,039
Derivatives mark to market	470		(783		)	(1,075		)	(420		)	(14		)	470		(49		)	(1,075		)
Swap fee income	725		84			1,985			727			217			725		458			1,985
Other income	1,527		1,712			4,761			5,136			2,244			1,527		5,674			4,761
Total noninterest income	16,994		15,505			46,267			46,043			19,790			16,994		55,626			46,267
Noninterest Expense
Salaries and employee benefits	20,647		22,446			62,212			66,339			26,169			20,647		74,933			62,212
Net occupancy expense	3,176		3,291			9,843			10,518			3,715			3,176		11,597			9,843
Furniture and equipment expense	2,847		2,670			8,596			7,980			3,342			2,847		9,753			8,596
Data processing expense	1,832		1,558			5,379			4,505			2,229			1,832		6,659			5,379
Advertising and promotion expense	750		789			1,940			1,946			941			750		2,735			1,940
Pennsylvania shares tax expense	914		1,713			2,764			3,617			1,093			914		3,070			2,764
Intangible amortization	67		157			318			469			844			67		2,262			318
Collection and repossession expense	760		801			1,803			2,229			402			760		1,342			1,803
Other professional fees and services	1,202		1,002			2,866			2,877			1,300			1,202		3,355			2,866
FDIC insurance	1,105		963			3,205			3,047			696			1,105		2,466			3,205
Loss on sale or write-down of assets	188		140			629			2,037			167			188		1,486			629
Litigation and operational losses	295		314			1,174			1,637			598			295		1,107			1,174
Merger and acquisition related	118		28			358			28			(69		)	118		10,412			358
Other operating expenses	4,795		4,385			13,163			13,516			5,934			4,795		17,212			13,163
Total noninterest expense	38,696		40,257			114,250			120,745			47,361			38,696		148,389			114,250
Income Before Income Taxes	24,508		17,312			59,227			56,707			30,778			24,508		73,613			59,227
Income tax provision	7,312		4,898			17,551			16,625			9,495			7,312		22,429			17,551
Net Income	$	17,196	$	12,414		$	41,676		$	40,082		$	21,283		$	17,196	$	51,184		$	41,676
Average Shares Outstanding	88,854,448		88,807,294			88,842,143			89,527,560			97,402,816			88,854,448		94,536,472			88,842,143
Average Shares Outstanding Assuming Dilution	88,858,204		88,813,746			88,843,939			89,531,498			97,457,470			88,858,204		94,578,490			88,843,939
Per Share Data:
Basic Earnings per Share	$	0.19	$	0.14		$	0.47		$	0.45		$	0.22		$	0.19	$	0.54		$	0.47
Diluted Earnings per Share	$	0.19	$	0.14		$	0.47		$	0.45		$	0.22		$	0.19	$	0.54		$	0.47
Cash Dividends Declared per Common Share	$	0.07	$	0.07		$	0.21		$	0.21		$	0.08		$	0.07	$	0.24		$	0.21

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

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



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
	(dollars in thousands)
Net Income	$	21,283		$	17,196		$	51,184		$	41,676
Other comprehensive income (loss), before tax (expense) benefit:
Unrealized holding gains (losses) on securities arising during the period	1,690			(751		)	5,935			13,121
Less: reclassification adjustment for gains on securities included in net income	(92		)	—			(695		)	(28		)
Unrealized holding (losses) gains on derivatives arising during the period	(49		)	(1,056		)	(631		)	1,038
Less: reclassification adjustment for losses (gains) on derivatives included in net income	20			(16		)	93			(57		)
Total other comprehensive income (loss), before tax (expense) benefit	1,569			(1,823		)	4,702			14,074
Income tax (expense) benefit related to items of other comprehensive income (loss)	(549		)	638			(1,646		)	(4,926		)
Total other comprehensive income (loss)	1,020			(1,185		)	3,056			9,148
Comprehensive Income	$	22,303		$	16,011		$	54,240		$	50,824

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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


	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity			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, 2015	88,961,268		$	105,563	$	365,981	$	378,081		$	(2,386	)	$	(127,693	)	$	719,546
Balance at December 31, 2016																			89,007,077		$	105,563	$	366,426	$	412,764		$	(7,027	)	$	(127,797	)	$	749,929
Net income							41,676									41,676									51,184									51,184
Other comprehensive income										9,148						9,148												3,056						3,056
Cash dividends declared ($0.21 per share)							(18,678		)							(18,678		)
Cash dividends declared ($0.24 per share)																									(22,717		)							(22,717		)
Treasury stock acquired	(98,687	)											(864		)	(864		)	(85,160	)											(1,187		)	(1,187		)
Treasury stock reissued	23,148				39		—						177			216			181,211				1,170		—						1,387			2,557
Restricted stock	106,348		—		271		—						472			743			21,000		—		138		—						600			738
Balance at September 30, 2016	88,992,077		$	105,563	$	366,291	$	401,079		$	6,762		$	(127,908	)	$	751,787
Common stock issued																			8,351,447		8,352		102,389											110,741
Balance at September 30, 2017																			97,475,575		$	113,915	$	470,123	$	441,231		$	(3,971	)	$	(126,997	)	$	894,301


	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, 2014	91,723,028		$	105,563	$	365,615	$	353,027		$	(4,499	)	$	(103,561	)	$	716,145
Balance at December 31, 2015																			88,961,268		$	105,563	$	365,981	$	378,081		$	(2,386	)	$	(127,693	)	$	719,546
Net income							40,082									40,082									41,676									41,676
Other comprehensive income										9,460						9,460												9,148						9,148
Cash dividends declared ($0.21 per share)							(18,862		)							(18,862		)							(18,678		)							(18,678		)
Treasury stock acquired	(2,918,066	)											(25,383		)	(25,383		)	(98,687	)											(864		)	(864		)
Treasury stock reissued	20,936				32		—						160			192			23,148				39		—						177			216
Restricted stock	135,370		—		303		—						831			1,134			106,348		—		271		—						472			743
Balance at September 30, 2015	88,961,268		$	105,563	$	365,950	$	374,247		$	4,961		$	(127,953	)	$	722,768
Balance at September 30, 2016																			88,992,077		$	105,563	$	366,291	$	401,079		$	6,762		$	(127,908	)	$	751,787

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For the Nine Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2016			2015			2017			2016
Operating Activities	(dollars in thousands)						(dollars in thousands)
Net income	$	41,676		$	40,082		$	51,184		$	41,676
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	20,306			8,818			2,834			20,306
Deferred tax expense	4,332			12,520			3,411			4,332
Depreciation and amortization	5,234			5,750			6,711			5,234
Net gains on securities and other assets	(2,288		)	(952		)	(3,821		)	(2,288		)
Net amortization of premiums and discounts on securities	3,486			2,012			2,685			3,486
Income from increase in cash surrender value of bank owned life insurance	(3,957		)	(4,089		)	(4,213		)	(3,957		)
Increase in interest receivable	(50		)	(167		)	(588		)	(50		)
Mortgage loans originated for sale	(94,611		)	(67,708		)	(116,699		)	(94,611		)
Proceeds from sale of mortgage loans	95,341			67,071			114,819			95,341
Decrease in interest payable	(324		)	(173		)
Decrease in income taxes payable	(3,055		)	(22		)
Increase (decrease) in interest payable							678			(324		)
Increase (decrease) in income taxes payable							3,288			(3,055		)
Other-net	(6,200		)	(10,757		)	2,963			(6,200		)
Net cash provided by operating activities	59,890			52,385			63,252			59,890
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	35,470			3,828			36,620			35,470
Purchases	(42,837		)	(156,756		)	(101,372		)	(42,837		)
Transactions with securities available for sale:
Proceeds from sales	55,744			—			143,660			55,744
Proceeds from maturities and redemptions	122,828			286,924			100,620			122,828
Purchases	(94,777		)	(16,600		)	(150,892		)	(94,777		)
Purchases of FHLB stock	(31,218		)	(46,911		)	(35,346		)	(31,218		)
Proceeds from the redemption of FHLB stock	40,104			36,980			42,791			40,104
Proceeds from bank owned life insurance	203			378			—			203
Proceeds from sale of loans	3,511			2,898			9,986			3,511
Proceeds from sale of other assets	6,021			3,668			3,835			6,021
Acquisition, net of cash acquired							3,188			—
Net increase in loans	(200,269		)	(140,268		)	(132,079		)	(200,269		)
Purchases of other assets	(204		)	—			(638		)	(204		)
Purchases of premises and equipment	(5,511		)	(3,740		)	(8,322		)	(5,511		)
Net cash used in investing activities	(110,935		)	(29,599		)	(87,949		)	(110,935		)
Financing Activities
Net (decrease) increase in federal funds purchased	(1,000		)	11,000
Net (decrease) increase in other short-term borrowings	(179,498		)	212,918
Net increase (decrease) in deposits	263,392			(154,018		)
Net decrease in federal funds purchased							—			(1,000		)
Net decrease in other short-term borrowings							(62,118		)	(179,498		)
Net increase in deposits							123,455			263,392
Repayments of other long-term debt	(422		)	(50,407		)	(440		)	(422		)
Repayments of capital lease obligation							(173		)	—
Dividends paid	(18,678		)	(18,862		)	(22,717		)	(18,678		)
Proceeds from reissuance of treasury stock	216			192			228			216
Purchase of treasury stock	(864		)	(25,383		)	(1,187		)	(864		)
Net cash provided by (used in) financing activities	63,146			(24,560		)
Net increase (decrease) in cash and cash equivalents	12,101			(1,774		)
Net cash provided by financing activities							37,048			63,146
Net increase in cash and cash equivalents							12,351			12,101
Cash and cash equivalents at January 1	69,452			74,538			115,677			69,452
Cash and cash equivalents at September 30	$	81,553		$	72,764		$	128,028		$	81,553

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

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

The results of operations for the nine months ended September 30, ~~2016~~2017 are not necessarily indicative of the results that may be expected for the full year of ~~2016~~2017. These interim financial statements should be read in conjunction with First Commonwealth’s ~~2015~~2016 Annual Report on Form 10-K.

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

Note 2 Acquisition

On April 3, 2017, the Company completed its acquisition of DCB Financial Corporation ("DCB") and its banking subsidiary, The Delaware County Bank and Trust Company, for consideration of $21.2 million in cash and 8.4 million shares of the Company's common stock. Through the acquisition, the Company obtained nine full-service banking offices and four limited service locations which are operating under the First Commonwealth name. This acquisition expands the Company's presence in the central Ohio market and added $383.1 million in loans and $484.4 million in deposits to the Company's balance sheet.

Table of Contents

The table below summarizes the net assets acquired (at fair value) and consideration transferred in connection with the DCB acquisition (dollars in thousands):



Consideration Paid
Cash paid to shareholders	$	21,232
Shares issued to shareholders (8,356,882 shares)	110,812
Total consideration paid			$	132,044

Fair Value of Assets Acquired
Cash and cash equivalents	24,420
Investment securities	88,986
FHLB stock	3,250
Loans	383,083
Premises and other equipment	12,113
Core deposit intangible	5,998
Other real estate	68
Bank owned life insurance	20,522
Other assets	16,305
Total assets acquired	554,745

Fair Value of Liabilities Assumed
Deposits	484,366
Capital lease obligation	7,851
Other liabilities	1,182
Total liabilities assumed	493,399

Total Fair Value of Identifiable Net Assets			61,346

Goodwill			$	70,698

The goodwill of $70.7 million arising from the acquisition represents the value of synergies and economies of scale expected from combining the operations of the Company with DCB Financial Corporation.

The Company determined that this acquisition constitutes a business combination as defined in FASB ASC Topic 805, “Business Combinations.” Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” Acquired loans were recorded at fair value with no carryover of the related allowance for loan losses. Fair value is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments. At the date of acquisition, none of the loans were accounted for under the guidance of ASC Topic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.” We acquired $390.8 million in total loans and recognized a net combined yield and credit market adjustment of $7.7 million.

The fair value of the 8,356,882 common shares issued was determined based on the market price of the Company's common shares on the acquisition date. The fair value of the acquired loans, premises and other equipment, customer deposit intangible, other assets and assumed deposits may change during the provisional period, which may last up to twelve months subsequent to the acquisition date. Adjustments recorded to the acquired assets and liabilities will be applied in accordance with ASU No. 2015-16, “Business Combinations.”

Costs related to the acquisition totaled $10.2 million. These amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the Condensed Consolidated Statements of Income.

As a result of the full integration of the operations of DCB, it is not practicable to determine revenue or net income included in the Company's operating results relating to DCB since the date of acquisition as DCB’s results cannot be separately identified.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 Supplemental Comprehensive Income Disclosures

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


	For the Nine Months Ended September 30,																		For the Nine Months Ended September 30,
	2016									2015									2017									2016
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax 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	$	13,121		$	(4,593	)	$	8,528		$	12,510		$	(4,377	)	$	8,133		$	5,935		$	(2,077	)	$	3,858		$	13,121		$	(4,593	)	$	8,528
Reclassification adjustment for gains on securities included in net income	(28		)	10			(18		)	(125		)	44			(81		)	(695		)	243			(452		)	(28		)	10			(18		)
Total unrealized gains on securities	13,093			(4,583		)	8,510			12,385			(4,333		)	8,052			5,240			(1,834		)	3,406			13,093			(4,583		)	8,510
Unrealized gains on derivatives:
Unrealized holding gains on derivatives arising during the period	1,038			(363		)	675			2,172			(760		)	1,412
Reclassification adjustment for gains on derivatives included in net income	(57		)	20			(37		)	(6		)	2			(4		)
Total unrealized gains on derivatives	981			(343		)	638			2,166			(758		)	1,408
Unrealized (losses) gains on derivatives:
Unrealized holding (losses) gains on derivatives arising during the period																			(631		)	221			(410		)	1,038			(363		)	675
Reclassification adjustment for losses (gains) on derivatives included in net income																			93			(33		)	60			(57		)	20			(37		)
Total unrealized (losses) gains on derivatives																			(538		)	188			(350		)	981			(343		)	638
Total other comprehensive income	$	14,074		$	(4,926	)	$	9,148		$	14,551		$	(5,091	)	$	9,460		$	4,702		$	(1,646	)	$	3,056		$	14,074		$	(4,926	)	$	9,148



	For the Three Months Ended September 30,
	2017									2016
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit		Net of Tax Amount
	(dollars in thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	$	1,690		$	(591	)	$	1,099		$	(751	)	$	262	$	(489	)
Reclassification adjustment for gains on securities included in net income	(92		)	32			(60		)	—			—		—
Total unrealized gains (losses) on securities	1,598			(559		)	1,039			(751		)	262		(489		)
Unrealized losses on derivatives:
Unrealized holding losses on derivatives arising during the period	(49		)	17			(32		)	(1,056		)	370		(686		)
Reclassification adjustment for losses (gains) on derivatives included in net income	20			(7		)	13			(16		)	6		(10		)
Total unrealized losses on derivatives	(29		)	10			(19		)	(1,072		)	376		(696		)
Total other comprehensive income (loss)	$	1,569		$	(549	)	$	1,020		$	(1,823	)	$	638	$	(1,185	)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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


	2016											2015											2017											2016
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)			Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income (Loss)
	(dollars in thousands)																						(dollars in thousands)
Balance at December 31	$	(2,956	)	$	10	$	560		$	(2,386	)	$	(4,875	)	$	76	$	300		$	(4,499	)	$	(7,455	)	$	225	$	203		$	(7,027	)	$	(2,956	)	$	10	$	560		$	(2,386	)
Other comprehensive income before reclassification adjustment	8,528			—		675			9,203			8,133			—		1,412			9,545			3,858			—		(410		)	3,448			8,528			—		675			9,203
Amounts reclassified from accumulated other comprehensive (loss) income	(18		)	—		(37		)	(55		)	(81		)	—		(4		)	(85		)	(452		)	—		60			(392		)	(18		)	—		(37		)	(55		)
Net other comprehensive income during the period	8,510			—		638			9,148			8,052			—		1,408			9,460			3,406			—		(350		)	3,056			8,510			—		638			9,148
Balance at September 30	$	5,554		$	10	$	1,198		$	6,762		$	3,177		$	76	$	1,708		$	4,961		$	(4,049	)	$	225	$	(147	)	$	(3,971	)	$	5,554		$	10	$	1,198		$	6,762

Note 34 Supplemental Cash Flow Disclosures

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


	2016		2015		2017			2016
	(dollars in thousands)				(dollars in thousands)
Cash paid during the period for:
Interest	$	14,768	$	11,682	$	14,995		$	14,768
Income taxes	15,750		4,000		17,394			15,750
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	3,973		7,413		2,154			3,973
Loans transferred from held to maturity to held for sale	3,573		3,071		13,292			3,573
Gross increase in market value adjustment to securities available for sale	13,094		12,381		5,240			13,094
Gross increase in market value adjustment to derivatives	981		2,167
Gross (decrease) increase in market value adjustment to securities derivatives					(538		)	981
Investments committed to purchase, not settled	276		1,350		—			276
Noncash treasury stock reissuance					2,258			—
Net assets acquired through acquisition					36,926			—
Proceeds from death benefit on bank-owned life insurance not received	320		—		897			320

911

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 45 Earnings per Share

The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computations:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Weighted average common shares issued	105,563,455		105,563,455		105,563,455		105,563,455		113,914,902		105,563,455		111,100,495		105,563,455
Average treasury stock shares	(16,609,505	)	(16,602,502	)	(16,617,616	)	(15,858,433	)	(16,436,228	)	(16,609,505	)	(16,465,984	)	(16,617,616	)
Average unearned nonvested shares	(99,502	)	(153,659	)	(103,696	)	(177,462	)	(75,858	)	(99,502	)	(98,039	)	(103,696	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	88,854,448		88,807,294		88,842,143		89,527,560		97,402,816		88,854,448		94,536,472		88,842,143
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	3,756		6,452		1,796		3,938		54,654		3,756		42,018		1,796
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	88,858,204		88,813,746		88,843,939		89,531,498		97,457,470		88,858,204		94,578,490		88,843,939

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the nine months ended September 30 because to do so would have been antidilutive.

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



	2017					2016
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Restricted Stock	22,802	$	8.55	$	13.96	72,432	$	8.38	$	10.09
Restricted Stock Units	22,750	$	15.09	$	15.09	—	$	—	$	—

Note 56 Commitments and Contingent Liabilities

Commitments and Letters of Credit

Standby letters of credit and commercial letters of credit are conditional commitments issued by First Commonwealth to guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.

The following table identifies the notional amount of those instruments at:


	September 30, 2016		December 31, 2015		September 30, 2017		December 31, 2016
	(dollars in thousands)				(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,598,318	$	1,643,187	$	1,776,677	$	1,733,820
Financial standby letters of credit	17,760		17,843		17,979		18,108
Performance standby letters of credit	28,110		26,497		25,704		26,630
Commercial letters of credit	1,528		1,672		837		1,301

The notional amounts outstanding as of September 30, ~~2016~~2017 include amounts issued in ~~2016~~2017 of ~~$23 thousand~~$1.3 million in financial standby letters of credit and $~~2.9~~1.3 million in performance standby letters of ~~credit and~~credit. There were ~~$0.2 million~~no commercial letters of ~~credit.~~credit issued in 2017. A liability of $0.2 million has been recorded as of ~~both~~ September 30, ~~2016~~2017 and December 31, ~~2015~~2016, 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.

1012

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk related to these commitments resulted in the recording of a liability of $~~4.0~~4.6 million as of September 30, ~~2016~~2017 and $~~4.4~~4.1 million as of December 31, ~~2015~~2016. This liability is reflected in "Other liabilities" in the Condensed Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal Proceedings

First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, ~~2016,~~2017, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $7 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.

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

1113

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 67 Investment Securities

Securities Available for Sale

Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:


	September 30, 2016									December 31, 2015									September 30, 2017									December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		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	$	16,059	$	1,917	$	—		$	17,976	$	20,034	$	2,071	$	(13	)	$	22,092	$	10,988	$	930	$	—		$	11,918	$	15,143	$	1,481	$	(7	)	$	16,617
Mortgage-Backed Securities – Commercial																			24,684		—		(217		)	24,467		—		—		—			—
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	692,092		13,090		(556		)	704,626		778,476		7,983		(8,882		)	777,577		662,858		4,497		(6,584		)	660,771		683,601		4,557		(11,305		)	676,853
Mortgage-Backed Securities – Commercial	1		—		—			1		28		—		—			28		—		—		—			—		1		—		—			1
Other Government-Sponsored Enterprises	19,300		7		—			19,307		19,201		2		(85		)	19,118		1,097		—		—			1,097		16,700		—		(69		)	16,631
Obligations of States and Political Subdivisions	27,073		878		—			27,951		27,066		532		—			27,598		27,081		433		—			27,514		27,075		195		(41		)	27,229
Corporate Securities	5,901		618		—			6,519		1,897		422		—			2,319		15,903		675		—			16,578		5,903		416		—			6,319
Pooled Trust Preferred Collateralized Debt Obligations	43,020		677		(8,088		)	35,609		42,239		916		(7,497		)	35,658		40,594		516		(6,481		)	34,629		39,989		427		(7,124		)	33,292
Total Debt Securities	803,446		17,187		(8,644		)	811,989		888,941		11,926		(16,477		)	884,390		783,205		7,051		(13,282		)	776,974		788,412		7,076		(18,546		)	776,942
Equities	1,670		—		—			1,670		2,170		—		—			2,170		1,670		—		—			1,670		1,670		—		—			1,670
Total Securities Available for Sale	$	805,116	$	17,187	$	(8,644	)	$	813,659	$	891,111	$	11,926	$	(16,477	)	$	886,560	$	784,875	$	7,051	$	(13,282	)	$	778,644	$	790,082	$	7,076	$	(18,546	)	$	778,612

~~Mortgage backed~~Mortgage-backed securities include ~~mortgage backed~~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~~mortgage-backed securities contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds; therefore, First Commonwealth uses computer simulation models to test the average life and yield volatility of all ~~mortgage backed~~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.

1214

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at September 30, ~~2016~~2017, 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	$	5,600	$	5,602	$	997	$	997
Due after 1 but within 5 years	17,697		17,756		14,088		14,214
Due after 5 but within 10 years	27,073		27,951		27,081		27,515
Due after 10 years	44,924		38,077		42,509		37,092
	95,294		89,386		84,675		79,818
Mortgage-Backed Securities (a)	708,152		722,603		698,530		697,156
Total Debt Securities	$	803,446	$	811,989	$	783,205	$	776,974


(a)	~~Mortgage Backed~~Mortgage-Backed Securities include an amortized cost of $~~16.1~~35.7 million and a fair value of $~~18.0~~36.4 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $~~692.1~~662.9 million and a fair value of $~~704.6~~660.8 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

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


	2016			2015		2017			2016
	(dollars in thousands)					(dollars in thousands)
Proceeds from sales	$	55,744		$	—	$	143,660		$	55,744
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	304		$	—	$	359		$	304
Gross losses	(276		)	—		(316		)	(276		)
	28			—		43			28
Maturities and impairment
Gross gains	—			125		712			—
Gross losses	—			—		(60		)	—
Other-than-temporary impairment	—			—
	—			125		652			—
Net gains and impairment	$	28		$	125	$	695		$	28

Proceeds from sales of investments for the nine months ended September 30, 2017 included the liquidation of the DCB investment portfolio in April 2017 and the sale of some CMO's and MBS's in the third quarter of 2017. All of the sales were to liquidate small positions held in the portfolio. Gross gains of $0.7 million recognized in 2017 were a result of the early redemption of one of our trust preferred securities. Securities available for sale with an estimated fair value of $~~498.5~~554.0 million and $~~416.1~~445.8 million were pledged as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, to secure public deposits and for other purposes required or permitted by law.

1315

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity

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


	September 30, 2016									December 31, 2015									September 30, 2017									December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		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	$	4,615	$	154	$	—		$	4,769	$	4,775	$	—	$	(7	)	$	4,768	$	4,113	$	5	$	—		$	4,118	$	4,297	$	—	$	(4	)	$	4,293
Mortgage-Backed Securities- Commercial	35,625		225		—			35,850		16,843		—		(247		)	16,596		58,528		—		(861		)	57,667		34,444		—		(561		)	33,883
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	297,681		5,865		—			303,546		315,609		30		(1,824		)	313,815		318,442		367		(975		)	317,834		280,430		5		(2,527		)	277,908
Mortgage-Backed Securities – Commercial	14,809		378		—			15,187		15,187		—		(178		)	15,009		14,226		—		(4		)	14,222		14,675		—		(142		)	14,533
Obligations of States and Political Subdivisions	36,783		884		(25		)	37,642		31,910		301		(58		)	32,153		40,572		398		(129		)	40,841		38,667		55		(721		)	38,001
Debt Securities Issued by Foreign Governments																			200		—		—			200		—		—		—			—
Total Securities Held to Maturity	$	389,513	$	7,506	$	(25	)	$	396,994	$	384,324	$	331	$	(2,314	)	$	382,341	$	436,081	$	770	$	(1,969	)	$	434,882	$	372,513	$	60	$	(3,955	)	$	368,618

The amortized cost and estimated fair value of debt securities held to maturity at September 30, ~~2016,~~2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(dollars in thousands)				(dollars in thousands)
Due within 1 year	$	—	$	—	$	—	$	—
Due after 1 but within 5 years	1,223		1,249		3,104		3,131
Due after 5 but within 10 years	29,368		30,125		34,126		34,354
Due after 10 years	6,192		6,268		3,542		3,556
	36,783		37,642		40,772		41,041
Mortgage-Backed Securities (a)	352,730		359,352		395,309		393,841
Total Debt Securities	$	389,513	$	396,994	$	436,081	$	434,882


(a)	~~Mortgage Backed~~Mortgage-Backed Securities include an amortized cost of ~~$40.2~~$62.6 million and a fair value of ~~$40.6~~$61.8 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of ~~$312.5~~$332.7 million and a fair value of ~~$318.7~~$332.1 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Securities held to maturity with an amortized cost of ~~$281.9~~$324.6 million and ~~$45.7~~$119.2 million were pledged as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, to secure public deposits and for other purposes required or permitted by law.

1416

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 78 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016, no other-than-temporary impairment charges were recognized.

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

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note ~~10,~~11, “Fair Values of Assets and Liabilities,” for additional information.

The following table presents the gross unrealized losses and estimated fair values at September 30, ~~2016~~2017 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or More					Total					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			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																$	82,134	$	(1,078	)	$	—	$	—			$	82,134	$	(1,078	)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	59,691	$	(137	)	$	60,909	$	(419	)	$	120,600	$	(556	)	377,725		(2,526		)	226,562		(5,033		)		604,287		(7,559		)
Mortgage-Backed Securities – Commercial																14,222		(4		)	—		—				14,222		(4		)
Other Government-Sponsored Enterprises																—		—			100		—			(a)	100		—
Obligations of States and Political Subdivisions	1,781		(25		)	—		—			1,781		(25		)	4,858		(42		)	2,591		(87		)		7,449		(129		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,896		(8,088		)	29,896		(8,088		)	—		—			30,054		(6,481		)		30,054		(6,481		)
Total Securities	$	61,472	$	(162	)	$	90,805	$	(8,507	)	$	152,277	$	(8,669	)	$	478,939	$	(3,650	)	$	259,307	$	(11,601	)		$	738,246	$	(15,251	)

(a) Amount is less than $1 thousand.

At September 30, ~~2016,~~2017, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 6%50% and 7%, respectively, of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for ~~93%~~42% of the unrealized losses primarily due to the illiquid market for this investment type. At September 30, ~~2016~~2017, there are 2273 debt securities in an unrealized loss position.

1517

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~~2016 by investment category and time frame for which securities have been in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or More					Total					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			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 – Residential	$	6,798	$	(20	)	$	—	$	—		$	6,798	$	(20	)	$	4,898	$	(11	)	$	—	$	—		$	4,898	$	(11	)
Mortgage-Backed Securities - Commercial	16,596		(247		)	—		—			16,596		(247		)	33,883		(561		)	—		—			33,883		(561		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	436,011		(3,293		)	263,119		(7,413		)	699,130		(10,706		)	670,708		(11,630		)	56,200		(2,202		)	726,908		(13,832		)
Mortgage-Backed Securities – Commercial	15,009		(178		)	—		—			15,009		(178		)	14,534		(142		)	—		—			14,534		(142		)
Other Government-Sponsored Enterprises	12,316		(85		)	—		—			12,316		(85		)	16,632		(69		)	—		—			16,632		(69		)
Obligation of States and Political Subdivisions	7,208		(58		)	—		—			7,208		(58		)	33,277		(762		)	—		—			33,277		(762		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,957		(7,497		)	29,957		(7,497		)	—		—			28,952		(7,124		)	28,952		(7,124		)
Total Securities	$	493,938	$	(3,881	)	$	293,076	$	(14,910	)	$	787,014	$	(18,791	)	$	773,932	$	(13,175	)	$	85,152	$	(9,326	)	$	859,084	$	(22,501	)

As of September 30, ~~2016~~2017, our corporate securities had an amortized cost and an estimated fair value of $~~5.9~~15.9 million and $~~6.5~~16.6 million, respectively. As of December 31, ~~2015,~~2016, our corporate securities had an amortized cost and estimated fair value of ~~$1.9~~$5.9 million and ~~$2.3~~$6.3 million, respectively. Corporate securities are comprised of debt for large regional banks. There were no corporate securities in an unrealized loss position as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

As of September 30, ~~2016~~2017, the book value of our pooled trust preferred collateralized debt obligations totaled $~~43.0~~40.6 million with an estimated fair value of $~~35.6~~34.6 million, which includes securities comprised of ~~268~~250 banks and other financial institutions. All of our pooled securities are mezzanine tranches, ~~three~~two of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of September 30, ~~2016~~2017, after taking into account management’s best estimates of future interest deferrals and defaults, ~~three~~two of our securities had no excess subordination in the tranches we own and six of our securities had excess subordination which ranged from 2% to ~~82%~~65% of the current performing collateral.

The following table provides information related to our pooled trust preferred collateralized debt obligations as of September 30, 2017:



Deal	Class	Book Value		Estimated Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks	Deferrals and Defaults as a % of Current Collateral		Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL IV	Mezzanine	$	1,820	$	1,393	$	(427	)	Ba1/BB	6	18.05	%	65.06	%
Pre TSL VIII	Mezzanine	2,013		2,215		202			C/C	26	38.52		0.00
Pre TSL IX	Mezzanine	2,439		2,023		(416		)	B1/C	37	27.83		10.00
Pre TSL X	Mezzanine	1,831		2,062		231			Caa1/C	42	30.10		2.06
Pre TSL XII	Mezzanine	6,044		5,064		(980		)	B3/C	63	23.26		0.00
Pre TSL XIII	Mezzanine	13,131		11,292		(1,839		)	Ba1/CCC	51	8.88		48.56
Pre TSL XIV	Mezzanine	13,101		10,282		(2,819		)	Ba2/CCC	49	12.95		40.28
MMCap I	Mezzanine	215		298		83			Ca/C	8	58.11		58.72
Total		$	40,594	$	34,629	$	(5,965	)

1618

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at September 30, ~~2016~~2017. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

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

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

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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

Credit Analysis – A quarterly credit evaluation is performed for each of the ~~268~~250 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they will become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of September 30, ~~2016~~2017, default probabilities for performing collateral ranged from 0.33% to 75%.

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Our cash flow analysis as of September 30, ~~2016~~2017, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the nine months ended September 30, ~~2016~~2017. Based upon the analysis performed by management, it is probable that ~~three~~two of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the previous table ~~on page 17~~ with 0.00% “Excess Subordination as a ~~Percentage~~% of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of September 30, ~~2016~~2017 indicates it is probable that we will collect all contractual principal and interest payments. For ~~four~~five of those securities, PreTSL IX, PreTSL X, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of September 30, ~~2016~~2017, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities' current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from ~~19%~~18% to ~~123%~~108% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(dollars in thousands)												(dollars in thousands)
Balance, beginning (a)	$	24,310		$	25,366		$	24,851		$	26,246		$	16,610		$	24,310		$	17,056		$	24,851
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—			—			—			—			—			—			—			—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—			—			—			—			—			—			—			—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	(270		)	(255		)	(811		)	(917		)	(219		)	(270		)	(665		)	(811		)
Reduction for debt securities called during the period	—			—			—			(218		)	—			—			—			—
Balance, ending	$	24,040		$	25,111		$	24,040		$	25,111		$	16,391		$	24,040		$	16,391		$	24,040


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


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

In the first nine months of ~~2016~~2017 and ~~2015~~2016, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of September 30, ~~2016~~2017 and ~~2015~~2016, there were no equity securities in an unrealized loss position.

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

transfer price is determined by FHLB membership rules and not by market participants. As of September 30, ~~2016~~2017 and December 31, ~~2015~~2016, our FHLB stock totaled $~~54.1~~32.3 million and $~~63.0~~36.5 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three and nine months ended September 30, ~~2016.~~2017.

Note 89 Loans and Allowance for Credit Losses

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

September 30, 2016 December 31, 2015
(dollars in thousands)
Commercial, financial, agricultural and other $ 1,207,447
$ 1,150,906
Real estate construction 229,375
220,736
Residential real estate 1,185,759
1,224,465
Commercial real estate 1,683,015
1,479,000
Loans to individuals 555,056
608,643
Total loans $ 4,860,652
$ 4,683,750

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~



	September 30, 2017						December 31, 2016
	Originated		Acquired		Total		Originated		Acquired		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,111,332	$	42,893	$	1,154,225	$	1,131,148	$	8,399	$	1,139,547
Real estate construction	248,907		10,222		259,129		217,840		1,781		219,621
Residential real estate	1,190,862		232,560		1,423,422		1,165,851		63,341		1,229,192
Commercial real estate	1,857,563		132,701		1,990,264		1,717,043		25,167		1,742,210
Loans to individuals	542,185		6,622		548,807		546,589		2,188		548,777
Total loans	$	4,950,849	$	424,998	$	5,375,847	$	4,778,471	$	100,876	$	4,879,347

Credit Quality Information

As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:



Pass		Acceptable levels of risk exist in the relationship. Includes all loans not classified as OAEM, substandard or doubtful.



Other Assets Especially Mentioned (OAEM)		Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Company’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.



Substandard		Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.



Doubtful		Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

~~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
OAEM 26,758
283
5,962
7,002
—
40,005
Substandard 75,267
—
7,623
14,105
264
97,259
Doubtful —
—
—
—
—
—
Total Non-Pass 102,025
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

2021

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:


	December 31, 2015												September 30, 2017
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total		Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)												(dollars in thousands)
Originated loans
Pass	$	1,074,858	$	220,267	$	1,209,606	$	1,436,714	$	608,342	$	4,549,787	$	1,050,929	$	248,907	$	1,177,592	$	1,820,425	$	541,946	$	4,839,799
Non-Pass
OAEM	11,825		442		5,244		30,012		—		47,523		28,981		—		2,669		20,274		—		51,924
Substandard	64,223		27		9,615		12,274		301		86,440		26,740		—		10,601		16,864		239		54,444
Doubtful	—		—		—		—		—		—		4,682		—		—		—		—		4,682
Total Non-Pass	76,048		469		14,859		42,286		301		133,963		60,403		—		13,270		37,138		239		111,050
Total	$	1,150,906	$	220,736	$	1,224,465	$	1,479,000	$	608,643	$	4,683,750	$	1,111,332	$	248,907	$	1,190,862	$	1,857,563	$	542,185	$	4,950,849

Acquired loans
Pass													$	36,107	$	10,222	$	230,020	$	128,060	$	6,605	$	411,014
Non-Pass
OAEM													5,714		—		810		638		—		7,162
Substandard													1,072		—		1,730		4,003		17		6,822
Doubtful													—		—		—		—		—		—
Total Non-Pass													6,786		—		2,540		4,641		17		13,984
Total													$	42,893	$	10,222	$	232,560	$	132,701	$	6,622	$	424,998



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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Portfolio Risks

The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital ~~regulatory agency relationships, investment community reputation~~ and ~~shareholder returns.~~liquidity. First Commonwealth devotes a substantial ~~amount of~~ resources to managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting ~~activities.~~loans. Credit administration is independent of our 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 September 30, ~~2016~~2017. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.


	September 30, 2016														September 30, 2017
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total		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)														(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	780	$	37	$	826	$	30,868	$	32,511	$	1,174,936	$	1,207,447	$	239	$	8	$	75	$	11,217	$	11,539	$	1,099,793	$	1,111,332
Real estate construction	—		—		—		—		—		229,375		229,375		—		—		—		—		—		248,907		248,907
Residential real estate	3,736		878		527		6,031		11,172		1,174,587		1,185,759		3,165		734		564		6,465		10,928		1,179,934		1,190,862
Commercial real estate	785		73		195		3,377		4,430		1,678,585		1,683,015		1,444		—		—		3,417		4,861		1,852,702		1,857,563
Loans to individuals	2,038		615		795		264		3,712		551,344		555,056		2,078		449		656		239		3,422		538,763		542,185
Total	$	7,339	$	1,603	$	2,343	$	40,540	$	51,825	$	4,808,827	$	4,860,652	$	6,926	$	1,191	$	1,295	$	21,338	$	30,750	$	4,920,099	$	4,950,849

Acquired loans
Commercial, financial, agricultural and other															$	157	$	—	$	—	$	1,006	$	1,163	$	41,730	$	42,893
Real estate construction															—		—		—		—		—		10,222		10,222
Residential real estate															175		83		—		791		1,049		231,511		232,560
Commercial real estate															—		—		—		3,199		3,199		129,502		132,701
Loans to individuals															43		5		37		17		102		6,520		6,622
Total															$	375	$	88	$	37	$	5,013	$	5,513	$	419,485	$	424,998

2123

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														December 31, 2016
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total		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)														(dollars in thousands)
Originated loans
Commercial, financial, agricultural and other	$	364	$	49	$	129	$	23,653	$	24,195	$	1,126,711	$	1,150,906	$	2,380	$	171	$	75	$	17,928	$	20,554	$	1,110,594	$	1,131,148
Real estate construction	280		—		—		28		308		220,428		220,736		183		—		—		—		183		217,657		217,840
Residential real estate	4,175		1,055		1,315		6,500		13,045		1,211,420		1,224,465		4,133		1,089		995		5,792		12,009		1,153,842		1,165,851
Commercial real estate	781		—		65		6,223		7,069		1,471,931		1,479,000		265		327		57		3,443		4,092		1,712,951		1,717,043
Loans to individuals	2,998		774		946		301		5,019		603,624		608,643		1,640		776		970		273		3,659		542,930		546,589
Total	$	8,598	$	1,878	$	2,455	$	36,705	$	49,636	$	4,634,114	$	4,683,750	$	8,601	$	2,363	$	2,097	$	27,436	$	40,497	$	4,737,974	$	4,778,471

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

Nonaccrual Loans

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans, which are placed inon nonaccrual status at 150 days past due.

When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal becomes current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer in doubt.

Impaired Loans

Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are also considered to be impaired loans.

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

~~Significant nonaccrual loans as of September 30, 2016, include the following:~~

An $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. The collateral valuation completed in the third quarter of 2016 incorporated certain estimates obtained in the first quarter of 2016.

A $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. During 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 valuation were updated in the third quarter of 2016.

A $4.0 million relationship of commercial industrial loans to a manufacturer of mine safety products. These loans were originated from 2014 to 2015 and were placed in nonaccrual status during the second quarter of 2016. During the nine months ended September 30, 2016, charge-offs of $6.5 million related to this relationship were recorded. A collateral valuation completed in September 2016 incorporated certain estimates obtained in the second quarter of 2016.

2224

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~~At September 30, 2017 and December 31, 2016, there were no nonaccrual loans ~~to a local energy company involved~~held for sale. In addition, $21 thousand in ~~the drilling and production of natural gas wells. These loans~~gains were ~~originated from 2008 to 2011 and were placed~~recognized in ~~nonaccrual status~~income during the ~~third~~second quarter of ~~2013. Two~~2017 as the result of ~~these loans~~the sale of a nonaccrual loan held for sale at March 31, 2017. There were ~~modified resulting~~no gains or losses recognized in ~~TDR classification: one loan totaling $1.0 million was modified in 2012, and the other loan totaling $2.3 million was modified in 2014. During~~income for the nine months ended September 30, ~~2016, charge-offs of $1.3 million related to this relationship were recorded. The September 30, 2016 collateral valuation incorporated estimates obtained in the first quarter of 2016.~~

A $3.3 million relationship of commercial industrial loans to a gear manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. During 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 incorporated estimates obtained in the second quarter of 2016.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on their period-end allowance position.


	September 30, 2016						December 31, 2015						September 30, 2017						December 31, 2016
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)												(dollars in thousands)
Originated loans:
With no related allowance recorded:
Commercial, financial, agricultural and other	$	17,948	$	27,205			$	11,344	$	15,673			$	7,028	$	13,464			$	9,549	$	15,369
Real estate construction	—		—				28		117				—		—				—		—
Residential real estate	11,506		13,513				9,952		11,819				10,970		12,810				10,873		13,004
Commercial real estate	6,045		7,244				7,562		9,449				6,203		6,958				5,765		6,905
Loans to individuals	377		444				421		507				357		417				382		507
Subtotal	35,876		48,406				29,307		37,565				24,558		33,649				26,569		35,785
With an allowance recorded:
Commercial, financial, agricultural and other	18,238		20,748		7,739		20,132		22,590		6,952		8,394		12,631		$	1,346	13,423		19,226		$	2,530
Real estate construction	—		—		—		—		—		—		—		—		—		—		—		—
Residential real estate	175		215		6		461		672		51		517		562		97		424		475		164
Commercial real estate	537		537		430		944		1,008		42		309		309		217		810		810		434
Loans to individuals	—		—		—		—		—		—		—		—		—		—		—		—
Subtotal	18,950		21,500		8,175		21,537		24,270		7,045		9,220		13,502		1,660		14,657		20,511		3,128
Total	$	54,826	$	69,906	$	8,175	$	50,844	$	61,835	$	7,045	$	33,778	$	47,151	$	1,660	$	41,226	$	56,296	$	3,128

2325

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 construction 6
44
102
—
Residential real estate 11,546
232
10,987
118
Commercial real estate 7,143
140
8,545
69
Loans to individuals 423
10
312
14
Subtotal 43,138
847
39,145
362
With an allowance recorded:
Commercial, financial, agricultural and other 15,310
77
6,125
100
Real estate construction —
—
—
—
Residential real estate 111
—
275
—
Commercial real estate 524
18
83
4
Loans to individuals —
—
—
—
Subtotal 15,945
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 estate 11,636
94
10,748
39
Commercial real estate 6,463
73
7,894
26
Loans to individuals 384
7
314
5
Subtotal 43,157
302
33,203
110
With an allowance recorded:
Commercial, financial, agricultural and other 17,207
22
7,700
29
Real estate construction —
—
—
—
Residential real estate 174
—
351
—
Commercial real estate 547
7
81
1
Loans to individuals —
—
—
—
Subtotal 17,928
29
8,132
30
Total $ 61,085
$ 331
$ 41,335
$ 140

~~Unfunded commitments related to nonperforming loans were $0.4 million at 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 $12 thousand and $13 thousand was established for these off balance sheet exposures at September 30, 2016 and ~~December 31, 2015, respectively.~~



	September 30, 2017						December 31, 2016
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
Acquired loans
With no related allowance recorded:
Commercial, financial, agricultural and other	$	72	$	72			$	—	$	—
Real estate construction	—		—				—		—
Residential real estate	707		1,015				406		480
Commercial real estate	3,047		3,961				162		162
Loans to individuals	17		17				3		3
Subtotal	3,843		5,065				571		645
With an allowance recorded:
Commercial, financial, agricultural and other	934		940		$	472	—		—		$	—
Real estate construction	—		—		—		—		—		—
Residential real estate	94		123		5		16		16		16
Commercial real estate	153		159		44		—		—		—
Loans to individuals	—		—		—		—		—		—
Subtotal	1,181		1,222		521		16		16		16
Total	$	5,024	$	6,287	$	521	$	587	$	661	$	16



	For the Nine Months Ended September 30,
	2017								2016
	Originated Loans				Acquired Loans				Originated Loans
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	11,627	$	142	$	48	$	1	$	24,020	$	421
Real estate construction	—		—		33		—		6		44
Residential real estate	11,417		245		487		—		11,546		232
Commercial real estate	6,439		522		2,076		—		7,143		140
Loans to individuals	350		16		2		—		423		10
Subtotal	29,833		925		2,646		1		43,138		847
With an allowance recorded:
Commercial, financial, agricultural and other	8,984		77		316		—		15,310		77
Real estate construction	—		—		—		—		—		—
Residential real estate	266		—		68		—		111		—
Commercial real estate	354		14		159		—		524		18
Loans to individuals	—		—		—		—		—		—
Subtotal	9,604		91		543		—		15,945		95
Total	$	39,437	$	1,016	$	3,189	$	1	$	59,083	$	942

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,
	2017								2016
	Originated Loans				Acquired Loans				Originated Loans
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	7,106	$	62	$	72	$	1	$	24,674	$	128
Real estate construction	—		—		—		—		—		—
Residential real estate	11,217		82		653		—		11,636		94
Commercial real estate	5,928		452		3,078		—		6,463		73
Loans to individuals	366		5		6		—		384		7
Subtotal	24,617		601		3,809		1		43,157		302
With an allowance recorded:
Commercial, financial, agricultural and other	8,510		32		786		—		17,207		22
Real estate construction	—		—		—		—		—		—
Residential real estate	377		—		95		—		174		—
Commercial real estate	315		4		154		—		547		7
Loans to individuals	—		—		—		—		—		—
Subtotal	9,202		36		1,035		—		17,928		29
Total	$	33,819	$	637	$	4,844	$	1	$	61,085	$	331

Unfunded commitments related to nonperforming loans were $1.5 million at September 30, 2017 and $1.8 million at December 31, 2016. After consideration of the requirements to draw and available collateral related to these commitments, a reserve of $0.1 million and $12 thousand was established for these off balance sheet exposures at September 30, 2017 and December 31, 2016, respectively.

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

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


	September 30, 2016		December 31, 2015		September 30, 2017		December 31, 2016
	(dollars in thousands)				(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	14,286	$	14,139	$	12,451	$	13,790
Nonaccrual status	12,723		12,360		11,408		11,569
Total	$	27,009	$	26,499	$	23,859	$	25,359
Commitments
Letters of credit					$	60	$	—
Unused lines of credit	$	349	$	3,252	241		358
Total					$	301	$	358

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings:


	For the Nine Months Ended September 30, 2016													For the Nine Months Ended September 30, 2017
		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 other	5	$	93	$	4,009	$	3,853	$	7,955	$	7,281	$	1,612	6	$	6,768	$	1,786	$	47	$	8,601	$	6,307	$	669
Residential real estate	35	—		214		2,548		2,762		2,620		—		15	129		204		513		846		777		2
Commercial real estate	7	1,348		—		25		1,373		1,285		68		4	179		—		111		290		280		—
Loans to individuals	10	—		71		25		96		76		—		8	—		17		60		77		62		—
Total	57	$	1,441	$	4,294	$	6,451	$	12,186	$	11,262	$	1,680	33	$	7,076	$	2,007	$	731	$	9,814	$	7,426	$	671


	For the Nine Months Ended September 30, 2015													For 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 other	4	$	1,751	$	—	$	652	$	2,403	$	2,314	$	52	5	$	93	$	4,009	$	3,853	$	7,955	$	7,281	$	1,612
Residential real estate	24	—		296		958		1,254		1,165		—		35	—		214		2,548		2,762		2,620		—
Commercial real estate	1	—		—		464		464		407		—		7	1,348		—		25		1,373		1,285		68
Loans to individuals	8	—		61		35		96		77		—		10	—		71		25		96		76		—
Total	37	$	1,751	$	357	$	2,109	$	4,217	$	3,963	$	52	57	$	1,441	$	4,294	$	6,451	$	12,186	$	11,262	$	1,680

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 nine months endedSeptember 30, ~~2016~~2017 and ~~2015~~, ~~$4.3~~2016, $0.3 million and ~~$0.4~~$4.3 million,, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. For both 2017 and 2016 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

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 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, 2017
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	1	$	—	$	—	$	47	$	47	$	47	$	—
Residential real estate	4	—		17		100		117		106		—
Commercial real estate	1	—		—		27		27		25		—
Loans to individuals	1	—		—		12		12		11		—
Total	7	$	—	$	17	$	186	$	203	$	189	$	—


	For the Three Months Ended September 30, 2016													For the Three 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 other	1	$	—	$	—	$	3,853	$	3,853	$	3,853	$	1,612	1	$	—	$	—	$	3,853	$	3,853	$	3,853	$	1,612
Residential real estate	11	—		100		373		473		441		—		11	—		100		373		473		441		—
Commercial real estate	1	85		—		—		85		85		—		1	85		—		—		85		85		—
Loans to individuals	4	—		42		10		52		45		—		4	—		42		10		52		45		—
Total	17	$	85	$	142	$	4,236	$	4,463	$	4,424	$	1,612	17	$	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 other 1
$ —
$ —
$ 543
$ 543
$ 525
$ —
Residential real estate 8
—
—
455
455
455
—
Loans to individuals 2
—
—
18
18
16
—
Total 11
$ —
$ —
$ 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, 2017 and 2016 ~~$0.1~~, $17 thousand and $0.1 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of re-amortization. ~~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~~2017 and ~~2015~~2016 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

2629

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 loans that were restructured ~~loans~~within the past twelve months and that were considered to be in default during the nine months ended September 30:


	2016			2015			2017			2016
	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 estate	—	$	—	3	$	108	1	$	9	—	$	—
Loans to individuals							1	2		—	—
Total	—	$	—	3	$	108	2	$	11	—	$	—

The following table provides information related to loans that were restructured ~~loans~~within the past twelve months and that were considered to be in default during the three months ended September 30:


	2016			2015			2017			2016
	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 estate	—	$	—	2	$	105
Loans to individuals							1	$	2	—	$	—
Total	—	$	—	2	$	105	1	$	2	—	$	—

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	For the Nine Months Ended September 30, 2016																		For the Nine Months Ended September 30, 2017
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total			Commercial, financial, agricultural and other				Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)																		(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	31,035		$	887		$	2,606		$	11,924		$	4,360		$	50,812
Originated loans:
Beginning balance																			$	35,974			$	577		$	2,492		$	6,619		$	4,504		$	50,166
Charge-offs	(13,308		)	—			(976		)	(418		)	(3,751		)	(18,453		)	(5,776		)		—			(954		)	(95		)	(3,185		)	(10,010		)
Recoveries	261			227			407			803			371			2,069			3,819				465			259			206			355			5,104
Provision (credit)	23,935			(638		)	330			(6,725		)	3,404			20,306			(11,353		)		299			1,095			10,593			1,752			2,386
Ending Balance	$	41,923		$	476		$	2,367		$	5,584		$	4,384		$	54,734
Ending balance																			22,664				1,341			2,892			17,323			3,426			47,646
Acquired loans:
Beginning balance																			—				—			19			—			—			19
Charge-offs																			—				—			(26		)	—			(17		)	(43		)
Recoveries																			1			—	5			45			4			51			106
Provision (credit)																			479				(5		)	(32		)	40			(34		)	448
Ending balance																			480				—			6			44			—			530
Total ending balance																			$	23,144			$	1,341		$	2,898		$	17,367		$	3,426		$	48,176
Ending balance: individually evaluated for impairment	$	7,739		$	—		$	6		$	430		$	—		$	8,175		$	1,818			$	—		$	102		$	261		$	—		$	2,181
Ending balance: collectively evaluated for impairment	34,184			476			2,361			5,154			4,384			46,559			21,326				1,341			2,796			17,106			3,426			45,995
Loans:
Ending balance	1,207,447			229,375			1,185,759			1,683,015			555,056			4,860,652			1,154,225				259,129			1,423,422			1,990,264			548,807			5,375,847
Ending balance: individually evaluated for impairment	35,501			—			5,670			5,081			—			46,252			15,995				—			7,142			8,189			—			31,326
Ending balance: collectively evaluated for impairment	1,171,946			229,375			1,180,089			1,677,934			555,056			4,814,400			1,138,230				259,129			1,416,280			1,982,075			548,807			5,344,521



	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		)
Recoveries	261			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 impairment	34,184			476			2,361			5,154			4,384			46,559
Loans:
Ending balance	1,207,447			229,375			1,185,759			1,683,015			555,056			4,860,652
Ending balance: individually evaluated for impairment	35,501			—			5,670			5,081			—			46,252
Ending balance: collectively evaluated for impairment	1,171,946			229,375			1,180,089			1,677,934			555,056			4,814,400

2731

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
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 $ 29,627
$ 2,063
$ 3,664
$ 11,881
$ 4,816
$ 52,051
Charge-offs (8,579 ) —
(1,351 ) (1,249 ) (3,283 ) (14,462 )
Recoveries 922
84
417
186
502
2,111
Provision (credit) 5,230
(554 ) (54 ) 1,584
2,612
8,818
Ending Balance $ 27,200
$ 1,593
$ 2,676
$ 12,402
$ 4,647
$ 48,518
Ending balance: individually evaluated for impairment $ 4,202
$ —
$ 20
$ 33
$ —
$ 4,255
Ending balance: collectively evaluated for impairment 22,998
1,593
2,656
12,369
4,647
44,263
Loans:
Ending balance 1,126,881
179,710
1,204,220
1,435,954
628,970
4,575,735
Ending balance: individually evaluated for impairment 22,852
—
6,037
5,706
—
34,595
Ending balance: collectively evaluated for impairment 1,104,029
179,710
1,198,183
1,430,248
628,970
4,541,140



	For the Three Months Ended September 30, 2017
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Total
	(dollars in thousands)
Allowance for credit losses:
Originated loans:
Beginning balance	$	33,372		$	768		$	2,116		$	7,307		$	4,332		$	47,895
Charge-offs	(499		)	—			(344		)	(35		)	(1,015		)	(1,893		)
Recoveries	183			369			67			60			107			786
Provision (credit)	(10,392		)	204			1,053			9,991			2			858
Ending balance	22,664			1,341			2,892			17,323			3,426			47,646
Acquired loans:
Beginning balance	118			—			4			50			—			172
Charge-offs	—			—			(17		)	—			(9		)	(26		)
Recoveries	1			4			18			—			5			28
Provision (credit)	361			(4		)	1			(6		)	4			356
Ending balance	480			—			6			44			—			530
Total ending balance	$	23,144		$	1,341		$	2,898		$	17,367		$	3,426		$	48,176

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 )
Recoveries 63
—
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																	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			Commercial, 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	$	23,755		$	1,518	$	2,923		$	12,227		$	4,921		$	45,344
Beginning balance																		$	46,357		$	480		$	2,605		$	5,862		$	4,517		$	59,821
Charge-offs	(639		)	—		(301		)	(561		)	(900		)	(2,401		)	(7,163		)	—			(374		)	(10		)	(1,260		)	(8,807		)
Recoveries	564			—		178			33			179			954			63			—			147			20			82			312
Provision (credit)	3,520			75		(124		)	703			447			4,621			2,666			(4		)	(11		)	(288		)	1,045			3,408
Ending Balance	$	27,200		$	1,593	$	2,676		$	12,402		$	4,647		$	48,518
Ending balance																		$	41,923		$	476		$	2,367		$	5,584		$	4,384		$	54,734

Note 910 Income Taxes

At September 30, ~~2016~~2017 and December 31, ~~2015~~2016, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. Federal and state returns for tax years ~~2013 through 2015 are~~2014 and forward remain open for examination as of September 30, ~~2016~~.2107.

During the first quarter of 2017, First Commonwealth adopted ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718)." Adoption of this ASU resulted in a $0.1 million tax benefit.

~~ITEM 1.~~ ~~Financial Statements and Supplementary Data~~

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Note 1011 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.

In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, loans held for sale, interest rate derivatives (including interest rate caps, interest rate 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 7,8, “Impairment of Investment Securities.”

Loans held for sale include residential mortgage loans originated for sale in the secondary mortgage market. The estimated fair value for these loans was determined on the basis of rates obtained in the respective secondary market. Also included in loans

held for sale are commercial loans for which fair value is determined using an executed trade or market bid obtained from potential buyers.

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' (loan customers') credit risk since origination of the interest rate swap as well as interest rate caps and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note ~~11,~~12, “Derivatives.”

For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default,

~~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~~2017, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest rate derivatives also include interest rate forwards entered into to hedge residential mortgage loans held for sale and the related interest-rate lock commitments. This includes forward commitments to sell mortgage loans. The fair value of these derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

In addition, the Company hedges foreign currency risk through the use of foreign exchange forward contracts. The fair value of foreign exchange forward contracts is based on the differential between the contract price and the market-based forward rate.

The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.

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 7,8, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

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

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

The estimated fair value of limited partnership investments included in Level 3 is based on par value.

For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).

3034

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

35,609

Discounted Cash Flow

Probability of default

0% - 100% (10.26%)

34,629

Discounted Cash Flow

Probability of default

0% - 100% (9.71%)

Prepayment rates

0% - 72.91% (4.00%)

Prepayment rates

0% - 72.15% (3.41%)

Discount rates

5.25% - 12.00% (a)

Discount rates

5.00% - 11.50% (a)

Equities

1,670

Par Value

N/A

1,670

Par Value

N/A

Impaired Loans

2,348

(b)

Reserve study

Discount rate

10.00%

2,146

(b)

Reserve study

Discount rate

10.00%

Gas per MCF

$1.63 - $3.38 (c)

Gas per MMBTU

$2.87 - $3.61 (c)

Oil per BBL/d

$40.97 - $56.16 (c)

Oil per BBL/d

$56.05 - $57.65 (c)

7,308

(b)

Discounted Cash Flow

Discount Rate

1.90% - 4.68%

7,122

(b)

Discounted Cash Flow

Discount Rate

1.90% - 4.68%

Limited Partnership Investments

704

Par Value

N/A

1,562

Par Value

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~~MMBTU - million ~~cubic feet;~~British thermal units; 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.

3135

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:


	September 30, 2016								September 30, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in thousands)								(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	17,976	$	—	$	17,976	$	—	$	11,918	$	—	$	11,918
Mortgage-Backed Securities - Commercial									—		24,467		—		24,467
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		704,626		—		704,626		—		660,771		—		660,771
Mortgage-Backed Securities - Commercial	—		1		—		1		—		—		—		—
Other Government-Sponsored Enterprises	—		19,307		—		19,307		—		1,097		—		1,097
Obligations of States and Political Subdivisions	—		27,951		—		27,951		—		27,514		—		27,514
Corporate Securities	—		6,519		—		6,519		—		16,578		—		16,578
Pooled Trust Preferred Collateralized Debt Obligations	—		—		35,609		35,609		—		—		34,629		34,629
Total Debt Securities	—		776,380		35,609		811,989		—		742,345		34,629		776,974
Equities	—		—		1,670		1,670		—		—		1,670		1,670
Total Securities Available for Sale	—		776,380		37,279		813,659		—		742,345		36,299		778,644
Other Investments	—		54,066		—		54,066		—		32,302		—		32,302
Loans held for sale	—		7,855		—		7,855
Loans Held for Sale									—		17,100		—		17,100
Other Assets(a)	—		19,224		704		19,928		—		3,909		1,562		5,471
Total Assets	$	—	$	857,525	$	37,983	$	895,508	$	—	$	795,656	$	37,861	$	833,517
Other Liabilities(a)	$	—	$	18,879	$	—	$	18,879	$	—	$	4,882	$	—	$	4,882
Total Liabilities	$	—	$	18,879	$	—	$	18,879	$	—	$	4,882	$	—	$	4,882


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


	December 31, 2015								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in thousands)								(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential	$	—	$	22,092	$	—	$	22,092	$	—	$	16,617	$	—	$	16,617
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential	—		777,577		—		777,577		—		676,853		—		676,853
Mortgage-Backed Securities - Commercial	—		28		—		28		—		1		—		1
Other Government-Sponsored Enterprises	—		19,118		—		19,118		—		16,631		—		16,631
Obligations of States and Political Subdivisions	—		27,598		—		27,598		—		27,229		—		27,229
Corporate Securities	—		2,319		—		2,319		—		6,319		—		6,319
Pooled Trust Preferred Collateralized Debt Obligations	—		—		35,658		35,658		—		—		33,292		33,292
Total Debt Securities	—		848,732		35,658		884,390		—		743,650		33,292		776,942
Equities	—		—		2,170		2,170		—		—		1,670		1,670
Total Securities Available for Sale	—		848,732		37,828		886,560		—		743,650		34,962		778,612
Other Investments	—		62,952		—		62,952		—		36,498		—		36,498
Loans held for sale	—		5,763		—		5,763
Loans Held for Sale									—		7,052		—		7,052
Other Assets(a)	—		11,273		—		11,273		—		6,089		930		7,019
Total Assets	$	—	$	928,720	$	37,828	$	966,548	$	—	$	793,289	$	35,892	$	829,181
Other Liabilities(a)	$	—	$	10,829	$	—	$	10,829	$	—	$	5,972	$	—	$	5,972
Total Liabilities	$	—	$	10,829	$	—	$	10,829	$	—	$	5,972	$	—	$	5,972


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

3236

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, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	2016											2017
	Pooled Trust Preferred Collateralized Debt Obligations			Equities			Other Assets		Total			Pooled 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		$	33,292		$	1,670	$	930		$	35,892
Total gains or losses
Included in earnings	—			—			—		—			—			—		—			—
Included in other comprehensive income	(19		)	—			—		(19		)	1,391			—		—			1,391
Purchases, issuances, sales and settlements
Purchases	—			36			168		204			—			—		638			638
Issuances	—			—			—		—			—			—		—			—
Sales	—			—			—		—			—			—		—			—
Settlements	(30		)	—			—		(30		)	(54		)	—		(6		)	(60		)
Transfers from Level 3	—			(536		)	—		(536		)	—			—		—			—
Transfers into Level 3	—			—			536		536			—			—		—			—
Balance, end of period	$	35,609		$	1,670		$	704	$	37,983		$	34,629		$	1,670	$	1,562		$	37,861


	2015								2016
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Total			Pooled Trust Preferred Collateralized Debt Obligations			Equities			Other Assets		Total
	(dollars in thousands)								(dollars in thousands)
Balance, beginning of period	$	28,999		$	1,420	$	30,419		$	35,658		$	2,170		$	—	$	37,828
Total gains or losses
Included in earnings	105			—		105			—			—			—		—
Included in other comprehensive income	7,729			—		7,729			(19		)	—			—		(19		)
Purchases, issuances, sales and settlements
Purchases	—			500		500			—			36			168		204
Issuances	—			—		—			—			—			—		—
Sales	—			—		—			—			—			—		—
Settlements	(1,054		)	—		(1,054		)	(30		)	—			—		(30		)
Transfers from Level 3									—			(536		)			(536		)
Transfers into Level 3	—			—		—			—			—			536		536
Balance, end of period	$	35,779		$	1,920	$	37,699		$	35,609		$	1,670		$	704	$	37,983

During the nine months ended September 30, ~~2016~~2017, there were no transfers between fair value Levels 1, 2 or 3. During the nine months ended 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~~ ~~nine 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 September 30, ~~2016~~2017 and ~~2015~~2016.

3337

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								2017
	Pooled Trust Preferred Collateralized Debt Obligations		Equities		Other Assets		Total		Pooled Trust Preferred Collateralized Debt Obligations		Equities		Other Assets			Total
	(dollars in thousands)								(dollars in thousands)
Balance, beginning of period	$	33,723	$	1,670	$	704	$	36,097	$	33,648	$	1,670	$	1,477		$	36,795
Total gains or losses
Included in earnings	—		—		—		—		—		—		—			—
Included in other comprehensive income	1,886		—		—		1,886		981		—		—			981
Purchases, issuances, sales and settlements
Purchases	—		—		—		—		—		—		91			91
Issuances	—		—		—		—		—		—		—			—
Sales	—		—		—		—		—		—		—			—
Settlements	—		—		—		—		—		—		(6		)	(6		)
Transfers from Level 3	—		—		—		—		—		—		—			—
Transfers into Level 3	—		—		—		—		—		—		—			—
Balance, end of period	$	35,609	$	1,670	$	704	$	37,983	$	34,629	$	1,670	$	1,562		$	37,861


	2015						2016
	Pooled Trust Preferred Collateralized Debt Obligations		Equities		Total		Pooled Trust Preferred Collateralized Debt Obligations		Equities		Other Assets		Total
	(dollars in thousands)						(dollars in thousands)
Balance, beginning of period	$	35,521	$	1,920	37,441		$	33,723	$	1,670	$	704	36,097
Total gains or losses
Included in earnings	—		—		—		—		—		—		—
Included in other comprehensive income	258		—		258		1,886		—		—		1,886
Purchases, issuances, sales and settlements
Purchases	—		—		—		—		—		—		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		—		—		—		—
Settlements	—		—		—		—		—		—		—
Transfers from Level 3							—		—		—		—
Transfers into Level 3	—		—		—		—		—		—		—
Balance, end of period	$	35,779	$	1,920	$	37,699	$	35,609	$	1,670	$	704	$	37,983

During the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, there were no transfers between fair value Levels 1, 2 or 3. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at September 30, ~~2016~~2017 and ~~2015.~~2016.

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



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	19,878	$	16,743	$	36,621
Other real estate owned	—		6,083		—		6,083
Total Assets	$	—	$	25,961	$	16,743	$	42,704

3438

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:~~

September 30, 2016
Level 1 Level 2 Level 3 Total
(dollars in thousands)
Impaired loans $ —
$ 28,158
$ 18,493
$ 46,651
Other real estate owned —
8,620
—
8,620
Total Assets $ —
$ 36,778
$ 18,493
$ 55,271


	December 31, 2015								December 31, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(dollars in thousands)								(dollars in thousands)
Impaired loans	$	—	$	30,979	$	12,820	$	43,799	$	—	$	18,679	$	19,990	$	38,669
Other real estate owned	—		10,039		8		10,047		—		7,566		—		7,566
Total Assets	$	—	$	41,018	$	12,828	$	53,846	$	—	$	26,245	$	19,990	$	46,235

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(dollars in thousands)												(dollars in thousands)
Impaired loans	$	386		$	(2,838	)	$	(13,982	)	$	(3,532	)	$	(156	)	$	386		$	160		$	(13,982	)
Other real estate owned	(114		)	(78		)	(331		)	(1,205		)	(116		)	(114		)	(1,196		)	(331		)
Total losses	$	272		$	(2,916	)	$	(14,313	)	$	(4,737	)	$	(272	)	$	272		$	(1,036	)	$	(14,313	)

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 $~~7.7~~5.7 million as of September 30, ~~2016~~2017 and consists primarily of residential and commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note ~~12,~~13, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, ~~2016~~2017.

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

~~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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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~~held for ~~Sale~~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 $0.2 million at ~~both~~ September 30, ~~2016~~2017 and December 31, ~~2015~~2016. See Note 5,6, “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~~type borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.

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

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



	September 30, 2017
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	98,319	$	98,319	$	98,319	$	—	$	—
Interest-bearing deposits	29,709		29,709		29,709		—		—
Securities available for sale	778,644		778,644		—		742,345		36,299
Securities held to maturity	436,081		434,882		—		434,882		—
Other investments	32,302		32,302		—		32,302		—
Loans held for sale	17,100		17,100		—		17,100		—
Loans	5,375,847		5,403,523		—		19,878		5,383,645
Financial liabilities
Deposits	5,555,057		5,556,870		—		5,556,870		—
Short-term borrowings	805,825		805,721		—		805,721		—
Subordinated debt	72,167		66,779		—		—		66,779
Long-term debt	8,311		8,805		—		8,805		—
Capital lease obligation	7,677		7,677		—		7,677		—

3640

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:~~


	September 30, 2016										December 31, 2016
			Fair Value Measurements Using:										Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3		Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)										(dollars in thousands)
Financial assets
Cash and due from banks	$	76,456	$	76,456	$	76,456	$	—	$	—	$	91,033	$	91,033	$	91,033	$	—	$	—
Interest-bearing deposits	5,097		5,097		5,097		—		—		24,644		24,644		24,644		—		—
Securities available for sale	813,659		813,659		—		776,380		37,279		778,612		778,612		—		743,650		34,962
Securities held to maturity	389,513		396,994		—		396,994		—		372,513		368,618		—		368,618		—
Other investments	54,066		54,066		—		54,066		—		36,498		36,498		—		36,498		—
Loans held for sale	7,855		7,855		—		7,855		—		7,052		7,052		—		7,052		—
Loans	4,860,652		4,882,076		—		28,158		4,853,918		4,879,347		4,878,254		—		18,679		4,859,575
Financial liabilities
Deposits	4,458,980		4,461,516		—		4,461,516		—		4,947,408		4,949,714		—		4,949,714		—
Short-term borrowings	1,330,327		1,329,740		—		1,329,740		—		867,943		867,667		—		867,667		—
Subordinated debt	72,167		63,858		—		—		63,858		72,167		65,656		—		—		65,656
Long-term debt	8,892		9,840		—		9,840		—		8,749		9,169		—		9,169		—

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 deposits 2,808
2,808
2,808
—
—
Securities available for sale 886,560
886,560
—
848,732
37,828
Other investments 62,952
62,952
—
62,952
—
Loans held for sale 5,763
5,763
—
5,763
—
Loans 4,683,750
4,690,852
—
30,979
4,659,873
Financial liabilities
Deposits 4,195,894
4,198,817
—
4,198,817
—
Short-term borrowings 1,510,825
1,510,718
—
1,510,718
—
Subordinated debt 72,167
62,794
—
—
62,794
Long-term debt 9,314
9,834
—
9,834
—

Note 1112 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.

~~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 2732 risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. We have eight risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.

First Commonwealth is also party to interest rate caps that are not designated as hedging instruments. These derivatives relate to contracts that First Commonwealth enters into with loan customers that provide a maximum interest rate on their variable rate loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap contracts are identical.

The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.

Derivatives Designated as Hedging Instruments

The Company has entered into ~~four~~three interest rate swap contracts that were designated as cash flow hedges. The interest rate swaps have a total notional amount of ~~$200.0~~$150.0 million, ~~$85.0~~$35.0 million with an original maturity of three years and $115.0 million with ~~and~~an original maturity of four years. The Company's risk management objective for these hedges is to reduce its exposure to

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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~~$150.0 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 September 30, ~~2016,~~2017, there was a $35 thousand and $0.4 million ~~and $1.3 million~~ impact, respectively, on interest income as a result of these interest rate swaps, respectively. Changes in the fair value of the effective portion of cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in "Interest and fees on loans," the same line item in the Condensed Consolidated Statements of Income as the income on the hedged items. The cash flow hedges were highly effective at September 30, ~~2016,~~2017 and December 31, ~~2015,~~2016, and changes in the fair value attributed to hedge ineffectiveness were not material.

The ~~following table depicts~~Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the ~~credit~~interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value ~~adjustment~~with changes in fair value recorded in "Other noninterest expense" in the Condensed Consolidated Statements of Income. The impact to noninterest expense for the nine months ended September 30, 2017 totaled $34 thousand.

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At September 30, 2017, the underlying funded mortgage loan commitments had a carrying value of $13.8 million and a fair value of $14.3 million, while the underlying unfunded mortgage loan commitments had a notional amount of $23.3 million.

In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the ~~notional amount~~translation of ~~derivatives outstanding as well as~~foreign denominated transactions into U.S. dollars, the ~~notional amount~~Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Condensed Consolidated Statements of ~~risk participation agreements participated to~~Income. The impact on other ~~banks:~~

September 30, 2016 December 31, 2015
(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment $ (1,604 ) $ (542 )
Notional Amount:
Interest rate derivatives 343,193
276,860
Interest rate caps 20,356
22,793
Risk participation agreements 195,075
126,612
Sold credit protection on risk participation agreements (40,536 ) (20,383 )
Derivatives Designated as Hedging Instruments
Fair value adjustment (1,960 ) 922
Notional Amount - Interest rate derivatives 200,000
200,000
noninterest expense for the nine months ended September 30, 2017 totaled $3 thousand. At September 30, 2017 and December 31, 2016, the underlying loans had a carrying value of $7.8 million and $4.7 million, respectively, and a fair value of $7.8 million and $4.7 million, respectively.

3842

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 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:



	September 30, 2017			December 31, 2016
	(dollars in thousands)
Derivatives not Designated as Hedging Instruments
Credit value adjustment	$	(366	)	$	(317	)
Notional amount:
Interest rate derivatives	311,748			345,102
Interest rate caps	36,500			14,762
Risk participation agreements	188,854			174,213
Sold credit protection on risk participation agreements	(39,464		)	(40,281		)
Derivatives Designated as Hedging Instruments
Interest rate swaps:
Fair value adjustment	(189		)	(443		)
Notional amount	150,000			200,000
Interest rate forwards:
Fair value adjustment	(34		)	—
Notional amount	28,000			—
Foreign exchange forwards:
Fair value adjustment	4			(8		)
Notional amount	7,785			4,749

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


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,						For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016			2015			2017			2016		2017			2016
	(dollars in thousands)											(dollars in thousands)
Non-hedging interest rate derivatives
Increase (decrease) in other income	$	470	$	(783	)	$	(1,075	)	$	(420	)
(Decrease) increase in other income												$	(13	)	$	470	$	(49	)	$	(1,075	)
Hedging interest rate derivatives
Increase (decrease) in interest and fees on loans	404		(565		)	1,258			1,503
Increase in interest and fees on loans												35			404		420			1,258
Increase in other expense	16		—			57			21			9			16		82			57
Hedging interest rate forwards
Increase (decrease) in other expense												61			—		(34		)	—
Hedging foreign exchange forwards
Increase in other expense												2			7		3			14

The fair value of our derivatives is included in a table in Note ~~18,~~11, “Fair Values of Assets and Liabilities,” in the line items

“Other assets” and “Other liabilities.”

Note 1213 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.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 was ~~$164.4~~$255.5 million and ~~$164.5~~$186.5 million, respectively. Goodwill increased $69.0 million during the nine months ended September 30, 2017 due to $70.7 million recognized as a result of the DCB acquisition in the second quarter of 2017 and a $1.6 million decrease related to adjustments to the fair value of assets acquired as part of the branch acquisition in the fourth quarter of 2016. No impairment charges on goodwill or other intangible assets were incurred in ~~2016~~2017 or ~~2015~~.2016.

We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur during a quarter that may affect goodwill.

As of September 30, ~~2016~~2017, goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance, the fair value of our assets and liabilities, or our stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

Note 1314 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 andA significant ~~assumptions used to estimate the fair value of financial instruments measured at amortized cost; 5. requiring~~

~~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 an entity to present separately in other comprehensive income the portion~~component 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 ofCompany’s revenues, net interest income on financial assets and ~~financial~~ liabilities, ~~by measurement category~~is excluded from the scope of the amended guidance. The Company is substantially complete with its overall assessment of additional revenue streams, including trust and ~~form of financial~~ asset onmanagement fees, insurance commissions and fees, brokerage and annuity sales, deposit related fees, interchange fees, and merchant income. The Company’s revenue recognition for these revenue streams is not expected to change significantly from current practice, therefore we do not expect the balance sheet or in the accompanying notes to the financial statements; 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~~the Company’s Consolidated Financial Statements. The Company has decided to use the modified retrospective method for transition in which the cumulative effect will be recognized at the date of ~~operations.~~adoption with no restatement of comparative periods presented. In addition, we are reviewing our business processes, systems and controls in reference to this new standard as well as the expanded disclosure requirements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Entities have the option to use certain relief; full retrospective application is prohibited. We are currently evaluating the potential impact of ASU 2016-02 on our financial statements.

In 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 de-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~~operations.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

~~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~~The adoption of this ASU is ~~currently evaluating the~~not expected to have a material impact ~~of the amended guidance~~ on First Commonwealth’s financial condition or results of operations.

~~Note 14 Subsequent Event~~

~~On October 3, 2016,~~In January 2017, the ~~Company announced~~FASB issued ASU No. 2017-01, "Business Combinations (Topic 805), Clarifying the ~~signing~~Definition of a ~~definitive Agreement~~Business" which provides a screen to determine when a set of assets and ~~Plan~~activities (a "set") is not a business. The screen requires, that when substantially all of ~~Merger providing~~the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen thereby reduces the number of transactions that need to be further evaluated. If the screen is not met, this ASU: 1. requires that to be considered a business, a set must include, at a minimum, an input and substantive process that significantly contributes to the ability to create output and 2. removes the evaluation of whether a market participant could replace the missing elements. The amendment provides a framework to assist entities in evaluating whether both an input and substantive process is present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. This ASU also narrows the definition of the term output so that the term is consistent with how outputs are described in Topic 606. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2017. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment should be recognized for the ~~merger~~amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of ~~DCB Financial Corporation~~goodwill allocated to the reporting unit. Income tax effects from any tax deductible goodwill should be taken into consideration of the carrying amount of the reporting unit when measuring for goodwill impairment, if applicable. An entity still has the option to perform the qualitative assessment for the reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This standard is effective for annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships to better portray the economic results of risk management activities in its financial statements. The main provisions of this ASU update the hedge accounting model to expand the ability to hedge risk, reduce complexity, and ~~into~~ease certain documentation and assessment requirements. It also eliminates the ~~Company~~requirement to separately measure and report hedge ineffectiveness, and generally requires the change in fair value of a ~~stock and cash transaction valued at approximately $14.50 per share, or $106 million~~hedging instrument to be presented in the ~~aggregate.~~same income statement line as the hedged item. The ~~acquisition~~standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption 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 transactionthis ASU is ~~subject to regulatory approval and is~~not expected to ~~close in the second quarter~~have a material impact on First Commonwealth’s financial condition or results of ~~2017.~~operations.

4145

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 September 30, ~~2016~~2017 and ~~2015~~2016, and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q.

Forward-Looking Statements

Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute “forward-looking statements” as well. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors, including, but not limited to: (1) local, regional, national and international economic conditions and the impact they may have on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth or its customers must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth’s goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth’s borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth’s ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth’s markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (19) the reliability of First Commonwealth’s vendors, internal control systems or information systems; (20) the costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals; and (21) other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Explanation of Use of Non-GAAP Financial Measure

In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe this non-GAAP financial measure provides information useful to investors in understanding our underlying operational performance and our business and performance trends as it facilitates comparison with the performance of others in the financial services industry. Although we believe that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP.

We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Condensed Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 4548 and 5255 for the nine and three months ended September 30, ~~2016~~2017 and ~~2015~~2016, respectively.

4246

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Selected Financial Data

The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the Condensed Consolidated Financial Statements and related notes.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(dollars in thousands, except per share data)												(dollars in thousands, except per share data)
Net Income	$	17,196		$	12,414		$	41,676		$	40,082		$	21,283		$	17,196		$	51,184		$	41,676
Per Share Data:
Basic Earnings per Share	$	0.19		$	0.14		$	0.47		$	0.45		$	0.22		$	0.19		$	0.54		$	0.47
Diluted Earnings per Share	0.19			0.14			0.47			0.45			0.22			0.19			0.54			0.47
Cash Dividends Declared per Common Share	0.07			0.07			0.21			0.21			0.08			0.07			0.24			0.21
Average Balance:
Total assets	$	6,679,676		$	6,343,009		$	6,668,176		$	6,354,128		$	7,377,373		$	6,679,676		$	7,158,451		$	6,668,176
Total equity	748,078			718,178			739,347			716,200			888,781			748,078			839,846			739,347
End of Period Balance:
Net loans(1)							$	4,813,773		$	4,532,203								$	5,344,771		$	4,813,773
Total assets							6,666,483			6,384,749									7,384,339			6,666,483
Total deposits							4,458,980			4,161,490									5,555,057			4,458,980
Total equity							751,787			722,768									894,301			751,787
Key Ratios:
Return on average assets	1.02		%	0.78		%	0.83		%	0.84		%	1.14		%	1.02		%	0.96		%	0.83		%
Return on average equity	9.14		%	6.86		%	7.53		%	7.48		%	9.50		%	9.14		%	8.15		%	7.53		%
Dividends payout ratio	36.84		%	50.00		%	44.68		%	46.67		%	36.36		%	36.84		%	44.44		%	44.68		%
Average equity to average assets ratio	11.20		%	11.32		%	11.09		%	11.27		%	12.05		%	11.20		%	11.73		%	11.09		%
Net interest margin	3.29		%	3.25		%	3.28		%	3.29		%	3.61		%	3.29		%	3.55		%	3.28		%
Net loans to deposits ratio							107.96		%	108.91		%							96.21		%	107.96		%

⁽¹⁾Includes loans held for sale.

Results of Operations

Nine Months Ended September 30, ~~2016~~2017 Compared to Nine Months Ended September 30, ~~2015~~2016

Net Income

For the nine months ended September 30, ~~2016~~2017, First Commonwealth had net income of $51.2 million, or $0.54 diluted earnings per share, compared to net income of $41.7 million, or $0.47 diluted earnings per share, ~~compared to net income of~~ ~~$40.1 million, or~~ ~~$0.45~~ ~~diluted earnings per share,~~ in the nine months ended September 30, ~~2015~~2016. The increase in net income ~~was~~occurred despite $10.4 million in merger related expenses recognized in the nine months ended September 30, 2017 as a result of the DCB acquisition. Growth in net income is primarily the result of an increase in net interest income and noninterest income coupled with a decrease ~~in noninterest expense, offset by an increase~~ in the provision for credit losses.

For the nine months ended September 30, ~~2016,~~2017, the Company’s return on average equity was ~~7.53%~~8.15% and its return on average assets was ~~0.83%~~0.96%, compared to ~~7.48%~~7.53% and ~~0.84%~~0.83%, respectively, for the nine months ended September 30, ~~2015.~~2016.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $~~150.4~~172.4 million in the first nine months of ~~2016~~2017, compared to $~~142.8~~150.4 million for the same period in ~~2015~~2016. This increase was ~~primarily~~ due to both growth in average interest earning assets of ~~$310.2 million.~~$371.7 million and a 28 basis point increase in the yield on interest earning assets. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income), at ~~76%~~75% and ~~75%~~76% for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016, respectively.

The net interest margin, on a fully taxable equivalent basis, was 3.28% and 3.29% for the nine months ended September 30, 2016 and September 30, 2015, respectively. The one basis point decline in the net interest margin is attributable to an increase in the overall cost of interest bearing liabilities.

4347

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The net interest margin, on a fully taxable equivalent basis, was 3.55% and 3.28% for the nine months ended September 30, 2017 and September 30, 2016, respectively. The 27 basis point increase in the net interest margin is attributable to an increase in the overall yield on interest earning assets, primarily loans.

The taxable equivalent yield on interest-earning assets was ~~3.59%~~3.87% for the nine months ended September 30, ~~2016~~2017, an increase of ~~four~~28 basis points compared to the ~~3.55%~~3.59% yield for the same period in ~~2015~~2016. ~~Excluding the impact of a special FHLB dividend in the first quarter of 2015, the yield on interest-earning assets would have increased six basis points.~~ This increase is largely due to the ~~investment~~loan portfolio yield, which ~~after excluding the impact of the $1.0 million special FHLB dividend,~~ improved by 1929 basis points when compared to the nine months ended September 30, ~~2015.~~2016. Contributing to this increase was the yield on our adjustable and variable rate commercial loan portfolios, which increased 34 basis points largely due to the Federal Reserve increasing short term interest rates three times since December 2016. In addition, the yield on the investment portfolio increased 10 basis points in comparison to the prior year. This increase can be attributed to ~~the~~investment security runoff ~~or sale of lower yielding U.S. Agency securities, which were~~being replaced with higher yielding ~~investment securities.~~investments. Investment portfolio purchases during the nine months ended September 30, ~~2016~~2017 have been primarily in mortgage-related assets with approximate durations of 48-60 months and municipal and corporate securities with durations of approximately five years. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities at higher rates if interest rates rise.

The cost of interest-bearing liabilities increased to ~~0.40%~~0.42% for the nine months ended September 30, ~~2016~~2017, from ~~0.34%~~0.40% for the same period in ~~2015~~2016, primarily due to an increase in the cost of short-term borrowings. ~~Offsetting that increase was~~While deposits acquired in our recent acquisitions contributed to a ~~7 basis point~~ decline in average short-term borrowings of $559.7 million for the nine months ended September 30, 2017 compared to the same period in 2016, higher market interest rates resulted in the cost of ~~time deposits, as higher cost time deposits ran off and were replaced with growth~~short-term borrowings increasing 38 basis points in ~~noninterest-bearing demand deposits, interest bearing demand deposits and short-term borrowings.~~comparison to the same period last year.

For the nine months ended September 30, ~~2016~~2017, changes in interest rates ~~negatively~~positively impacted net interest income by $~~2.3~~9.2 million when compared with the same period in ~~2015~~2016. The higher yield on interest-earning assets positively impacted net interest income by $~~1.1~~12.1 million, while the increase in the cost of interest-bearing liabilities ~~had a negative impact of~~ ~~$3.4 million. We have been able to partially mitigate the impact of low interest rates and the effect on~~negatively impacted net interest income ~~through improving the mix of deposits and borrowed funds, growing the loan portfolio and increasing our investment yields~~ by ~~re-investing cash flow from runoff and from sales of lower-yielding investments.~~

While increases in the 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 ~~nine months ended~~$2.9 million September 30, 2016 increased $310.2 million, or 5%, compared to the same period in 2015. Average loans for the nine months ended September 30, 2016 increased $296.4 million, or 7%, 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 $~~9.9~~12.8 million in the nine months ended September 30, ~~2016~~2017, as compared to the same period in ~~2015~~2016. Higher levels of interest-earning assets resulted in an increase of $~~9.1~~11.2 million in interest income, ~~while~~and changes in the volume of interest-bearing liabilities decreased interest expense by $~~0.7~~1.6 million, primarily as the result of decreases in ~~long-term debt and time deposits, including brokered deposits.~~short-term borrowings. Average earning assets for the nine months ended September 30, 2017 increased $371.7 million, or 6.1%, compared to the same period in 2016. Average loans for the comparable period increased $420.3 million, or 8.7%.

Net interest income also benefited from a $~~117.3~~165.6 million increase in average net free funds at September 30, ~~2016~~2017 as compared to September 30, ~~2015~~2016. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of ~~$91.5~~$207.8 million, or ~~8.8%~~18.4%, in noninterest-bearing demand deposit average balances. The increase in these deposits is largely impacted by deposits acquired from thirteen FirstMerit branches in December 2016 as well as deposits from the acquisition of DCB in April 2017. Additionally, higher cost time deposits continue to mature and reprice into lower cost deposits or other funding alternatives. Average time deposits for the nine months ended September 30, ~~2016~~2017 decreased by $~~127.4~~14.5 million compared to the comparable period in ~~2015~~2016.

The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the nine months ended September 30:


	2016		2015		2017		2016
	(dollars in thousands)				(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	161,682	$	151,736	$	184,710	$	161,682
Adjustment to fully taxable equivalent basis	2,836		2,536		3,171		2,836
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	164,518		154,272		187,881		164,518
Interest expense	14,166		11,509		15,500		14,166
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	150,352	$	142,763	$	172,381	$	150,352

4448

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 nine months endedSeptember 30:30:


	2016							2015							2017							2016
	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	$	5,350		$	19	0.47	%	$	3,993		$	7	0.23	%	$	12,838		$	97	1.01	%	$	5,350		$	19	0.47	%
Tax-free investment securities	61,968			1,711		3.69		34,374			994		3.87		67,202			1,865		3.71		61,968			1,711		3.69
Taxable investment securities	1,244,828			23,162		2.49		1,260,030			22,749		2.41		1,183,574			22,852		2.58		1,244,828			23,162		2.49
Loans, net of unearned income (b)(c)	4,806,061			139,626		3.88		4,509,628			130,522		3.87		5,226,320			163,067		4.17		4,806,061			139,626		3.88
Total interest-earning assets	6,118,207			164,518		3.59		5,808,025			154,272		3.55		6,489,934			187,881		3.87		6,118,207			164,518		3.59
Noninterest-earning assets:
Cash	68,860							66,249							90,072							68,860
Allowance for credit losses	(56,905		)					(49,617		)					(51,493		)					(56,905		)
Other assets	538,014							529,471							629,938							538,014
Total noninterest-earning assets	549,969							546,103							668,517							549,969
Total Assets	$	6,668,176						$	6,354,128						$	7,158,451						$	6,668,176
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	735,297		$	355	0.06	%	$	653,737		$	172	0.04	%	$	1,045,242		$	962	0.12	%	$	735,297		$	355	0.06	%
Savings deposits (d)	1,887,277			2,524		0.18		1,857,077			1,872		0.13		2,353,186			2,905		0.17		1,887,277			2,524		0.18
Time deposits	586,638			2,763		0.63		714,005			3,743		0.70		572,128			2,644		0.62		586,638			2,763		0.63
Short-term borrowings	1,447,207			6,322		0.58		1,193,122			3,353		0.38		887,463			6,373		0.96		1,447,207			6,322		0.58
Long-term debt	81,268			2,202		3.62		126,896			2,369		2.50		85,843			2,616		4.07		81,268			2,202		3.62
Total interest-bearing liabilities	4,737,687			14,166		0.40		4,544,837			11,509		0.34		4,943,862			15,500		0.42		4,737,687			14,166		0.40
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,129,511							1,038,016							1,337,328							1,129,511
Other liabilities	61,631							55,075							37,415							61,631
Shareholders’ equity	739,347							716,200							839,846							739,347
Total Noninterest-Bearing Funding Sources	1,930,489							1,809,291							2,214,589							1,930,489
Total Liabilities and Shareholders’ Equity	$	6,668,176						$	6,354,128						$	7,158,451						$	6,668,176
Net Interest Income and Net Yield on Interest-Earning Assets				$	150,352	3.28	%				$	142,763	3.29	%				$	172,381	3.55	%				$	150,352	3.28	%


(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.

4549

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 nine months ended September 30, ~~2016~~2017 compared with September 30, ~~2015~~2016:


	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	$	12		$	2		$	10		$	78		$	26		$	52
Tax-free investment securities	717			799			(82		)	154			145			9
Taxable investment securities	413			(274		)	687			(310		)	(1,142		)	832
Loans	9,104			8,580			524			23,441			12,207			11,234
Total interest income (b)	10,246			9,107			1,139			23,363			11,236			12,127
Interest-bearing liabilities:
Interest-bearing demand deposits	183			24			159			607			139			468
Savings deposits	652			29			623			381			628			(247		)
Time deposits	(980		)	(667		)	(313		)	(119		)	(68		)	(51		)
Short-term borrowings	2,969			722			2,247			51			(2,430		)	2,481
Long-term debt	(167		)	(853		)	686			414			124			290
Total interest expense	2,657			(745		)	3,402			1,334			(1,607		)	2,941
Net interest income	$	7,589		$	9,852		$	(2,263	)	$	22,029		$	12,843		$	9,186


(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 nine months ended September 30:


	2016					2015					2017					2016
	Dollars			Percentage		Dollars			Percentage		Dollars			Percentage		Dollars			Percentage
	(dollars in thousands)										(dollars in thousands)
Commercial, financial, agricultural and other	$	23,935		118	%	$	5,230		59	%	$	(10,874	)	(384	)%	$	23,935		118	%
Real estate construction	(638		)	(3	)	(554		)	(6	)	294			10		(638		)	(3	)
Residential real estate	330			2		(54		)	(1	)	1,063			38		330			2
Commercial real estate	(6,725		)	(33	)	1,584			18		10,633			375		(6,725		)	(33	)
Loans to individuals	3,404			16		2,612			30		1,718			61		3,404			16
Total	$	20,306		100	%	$	8,818		100	%	$	2,834		100	%	$	20,306		100	%

The provision for credit losses for the nine months ended September 30, ~~2016~~2017 ~~increased~~decreased in comparison to the nine months ended September 30, ~~2015~~2016 by $~~11.5~~17.5 million. The level of provision expense in the first nine months of ~~2016~~2017 is primarily ~~due~~a result of net charge-offs in the loans to individual and commercial, financial, agricultural and other categories as well as a $1.0 million decrease in specific reserves related to nonperforming loans. Net charge-offs in the loans to individual category totaled $2.8 million for the nine months ended September 30, 2017, with $1.9 million related to indirect auto loans and $0.7 million to personal lines of credit. Net charge-offs in the commercial, financial, agricultural and other category totaled $2.0 million for the same period. The level of provision expense for the commercial, financial, agricultural and other category was impacted by a decline in outstanding balances, while growth in commercial real estate loans contributed to an increase in provision expense for that loan type. Additionally, the provision expense for both of these categories was impacted by the Company’s periodic assessment of the allowance for loan loss methodology, the current lending environment, and associated risks for each portfolio which resulted in changes to certain qualitative factors, such as collateral recovery rates and vacancy rates.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The majority of the 2016 provision expense is attributable to commercial, financial, agricultural and other loans as the result of specific reserves established for two loan relationships, as well as increases in historical loss factors and increases in qualitative factors related to certain recovery ~~rates and economic indicators.~~rates. The negative provision expense for commercial real estate loans is a result of declines in historical loss factors related to this category. 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. 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 commercial, financial and agricultural loans resulting from an increase in historical loss factors, as well as specific reserves established for three loans, partially offset by the release of $1.1 million in specific reserves for loans transferred to held for sale in the first quarter of 2015. Provision expense for

~~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~~that relate 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.~~industry.

The allowance for credit losses was$48.2 million, or 0.90%, of total loans outstanding and 0.97% of total originated loans outstanding at September 30, 2017, compared to $50.2 million, or 1.03%, and 1.05%, respectively, at December 31, 2016 and $54.7 million, or 1.13%, ~~of total loans outstanding~~and 1.13%, respectively, at September 30, 2016~~, compared to~~ ~~$50.8 million, or~~ ~~1.08%, at~~ ~~December 31, 2015~~ ~~and~~ ~~$48.5 million, or~~ ~~1.06%, at~~ ~~September 30, 2015~~. ~~The change compared to~~ ~~December 31, 2015, can be attributed to an increase of~~ ~~$4.0 million, or~~ 8%~~, in nonperforming loans, resulting in a $1.1 million increase in the level of specific reserves held on impaired loans.~~ Nonperforming loans as a percentage of total loans ~~increased~~improved to ~~1.13%~~0.72% at September 30, ~~2016~~2017 from ~~1.09%~~0.86% at December 31, ~~2015~~2016 and ~~0.89%~~1.13% as of September 30, ~~2015~~2016. The allowance to nonperforming loan ratio was ~~99.83%~~124.16%, ~~99.94%~~120.02% and ~~118.84%~~99.83% as of September 30, ~~2016~~2017, December 31, ~~2015~~2016 and September 30, ~~2015~~2016, respectively.

Below is an analysis of the consolidated allowance for credit losses for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 and the year-ended December 31, ~~2015~~2016:


	September 30, 2016		September 30, 2015		December 31, 2015		September 30, 2017		September 30, 2016		December 31, 2016
	(dollars in thousands)						(dollars in thousands)
Balance, beginning of period	$	50,812	$	52,051	$	52,051	$	50,185	$	50,812	$	50,812
Loans charged off:
Commercial, financial, agricultural and other	13,308		8,579		11,429		5,776		13,308		19,603
Real estate construction	—		—		8		—		—		—
Residential real estate	976		1,351		1,539		980		976		1,189
Commercial real estate	418		1,249		1,538		95		418		570
Loans to individuals	3,751		3,283		4,354		3,202		3,751		4,943
Total loans charged off	18,453		14,462		18,868		10,053		18,453		26,305
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	261		922		1,097		3,820		261		4,164
Real estate construction	227		84		84		470		227		562
Residential real estate	407		417		587		304		407		481
Commercial real estate	803		186		229		210		803		1,522
Loans to individuals	371		502		684		406		371		469
Total recoveries	2,069		2,111		2,681		5,210		2,069		7,198
Net credit losses	16,384		12,351		16,187		4,843		16,384		19,107
Provision charged to expense	20,306		8,818		14,948		2,834		20,306		18,480
Balance, end of period	$	54,734	$	48,518	$	50,812	$	48,176	$	54,734	$	50,185

4751

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 nine months ended September 30:


	2016			2015			$ Change			% Change		2017			2016			$ Change			% Change
	(dollars in thousands)											(dollars in thousands)
Noninterest Income:
Trust income	$	4,098		$	4,511		$	(413	)	(9	)%	$	5,275		$	4,098		$	1,177		29	%
Service charges on deposit accounts	11,528			11,271			257			2		13,858			11,528			2,330			20
Insurance and retail brokerage commissions	6,048			6,536			(488		)	(7	)	6,652			6,048			604			10
Income from bank owned life insurance	3,957			4,089			(132		)	(3	)	4,213			3,957			256			6
Card-related interchange income	11,039			10,784			255			2		13,873			11,039			2,834			26
Swap fee income	1,985			727			1,258			173		458			1,985			(1,527		)	(77	)
Other income	4,761			5,136			(375		)	(7	)	5,674			4,761			913			19
Subtotal	43,416			43,054			362			1		50,003			43,416			6,587			15
Net securities gains	28			125			(97		)	(78	)	695			28			667			2,382
Gain on sale of mortgage loans	2,850			1,856			994			54		3,710			2,850			860			30
Gain on sale of other loans and assets	1,048			1,428			(380		)	(27	)	1,267			1,048			219			21
Derivatives mark to market	(1,075		)	(420		)	(655		)	156		(49		)	(1,075		)	1,026			(95	)
Total noninterest income	$	46,267		$	46,043		$	224		—	%	$	55,626		$	46,267		$	9,359		20	%

Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market, increased $~~0.4~~6.6 million for the first nine months of ~~2016~~2017 compared to ~~2015~~2016. ~~Swap fee~~Service charges on deposit accounts increased $2.3 million, of which $1.4 million can be attributed to deposit accounts acquired in the December 2016 acquisition of thirteen FirstMerit branches and the acquisition of DCB in April 2017. Card-related interchange income increased ~~compared~~$2.8 million during the first nine months of 2017, of which $2.0 million is attributable to ~~2015, by $1.3~~the recent acquisitions. Insurance and retail brokerage commissions increased $0.6 million due to ~~an increase~~higher annuity and mutual fund sales. Trust income increased $1.2 million, of which $0.7 million can be attributed to accounts obtained in the DCB acquisition. Offsetting these increases was a decrease in swap fee income compared to 2016 of $1.5 million due to a decline in the number of interest rate swaps entered into for our commercial loan customers during the first nine months of ~~2016~~2017 compared to the same period in the prior year. Service charges on deposit accounts increased $0.3 million and card-related interchange income increased $0.3 million, due to increases in customer fee-related activity. Offsetting these increases were insurance and retail brokerage commissions and trust income, which decreased $0.5 million and $0.4 million, respectively, due to lower annuity and mutual fund sales.

Total noninterest income for the nine months ended September 30, ~~2016~~2017 increased ~~$0.2~~$9.4 million in comparison to the nine months ended September 30, ~~2015~~2016. The most significant change, other than the changes noted above, includes a ~~$0.7~~$1.0 million ~~decrease~~increase 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~~a realized gain on the swaps, but rather relates to a change in fair value due to ~~increases~~movements in corporate bond spreads and ~~decreases in~~ swap rates. ~~Offsetting the derivative mark to market adjustment was a $1.0 million increase in the gain~~Gain on sale of mortgage loans increased $0.9 million as a result of continued growth in our mortgage lending area. In addition, net securities gains increased $0.7 million, primarily due to the ~~continuing expansion~~early redemption of one of our ~~mortgage business.~~pooled trust preferred securities.

4852

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 nine months ended September 30:


	2016		2015		$ Change			% Change		2017		2016		$ Change			% Change
	(dollars in thousands)									(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	62,212	$	66,339	$	(4,127	)	(6	)%	$	74,933	$	62,212	$	12,721		20	%
Net occupancy expense	9,843		10,518		(675		)	(6	)	11,597		9,843		1,754			18
Furniture and equipment expense	8,596		7,980		616			8		9,753		8,596		1,157			13
Data processing expense	5,379		4,505		874			19		6,659		5,379		1,280			24
Advertising and promotion expense	1,940		1,946		(6		)	—		2,735		1,940		795			41
Pennsylvania shares tax expense	2,764		3,617		(853		)	(24	)	3,070		2,764		306			11
Intangible amortization	318		469		(151		)	(32	)	2,262		318		1,944			611
Collection and repossession expense	1,803		2,229		(426		)	(19	)	1,342		1,803		(461		)	(26	)
Other professional fees and services	2,866		2,877		(11		)	—		3,355		2,866		489			17
FDIC insurance	3,205		3,047		158			5		2,466		3,205		(739		)	(23	)
Other operating expenses	13,163		13,516		(353		)	(3	)	17,212		13,163		4,049			31
Subtotal	112,089		117,043		(4,954		)	(4	)	135,384		112,089		23,295			21
Loss on sale or write-down of assets	629		2,037		(1,408		)	(69	)	1,486		629		857			136
Merger and acquisition related	358		28		330			1,179	%	10,412		358		10,054			2,808	%
Litigation and operational losses	1,174		1,637		(463		)	28	%	1,107		1,174		(67		)	(6	)%
Total noninterest expense	$	114,250	$	120,745	$	(6,495	)	(5	)%	$	148,389	$	114,250	$	34,139		30	%

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, ~~decreased~~increased $~~5.0~~23.3 million, or 4%21%, for the nine months ended September 30, ~~2016~~2017 compared to the same period in ~~2015~~2016. Contributing to the higher expenses in ~~2016~~2017 ~~decrease~~ is a ~~$4.1~~$12.7 million ~~decline~~increase in salaries and employee benefits ~~primarily~~ due to ~~the retail transformation initiative, which resulted in some staffing reductions as well as a higher than normal level~~an increase of ~~open positions in the second and third quarters of~~187 full-time equivalent employees at September 30, 2017 compared to September 30, 2016. The ~~$0.9 million decrease in Pennsylvania shares tax expense~~higher number of employees is ~~the result of a $0.7 million settlement paid in the third quarter of 2015. Despite the addition of four branch locations as~~primarily a result of the acquisition of ~~First Community Bank~~13 branches from FirstMerit in the fourth quarter of ~~2015,~~2016 and the acquisition of DCB in April 2017. These acquisitions also accounted for all of the $1.8 million increase in net occupancy expense, ~~was $0.7~~$0.6 million ~~lower~~of the $1.2 million increase in furniture and equipment expense and all of the $1.9 million increase in intangible amortization. The most significant items contributing to the $4.0 million increase in other operating expense include an increase of $0.9 million in unfunded commitment reserve expense in 2017 as compared to 2016 and an increase of $0.5 million in audit and accounting expense.

Total noninterest expense increased by $34.1 million, or 30%, for the nine months ended September 30, 2017 compared to the same period in 2016. Contributing to this is an increase of $10.1 million in merger and acquisition expense related to the April 2017 acquisition of DCB. The $0.9 million increase in loss on sale or write-down of assets is the result of write-downs on four OREO properties totaling $1.0 million. During the first nine months of 2016, ~~as compared to the same period in 2015. Contributing to this decline is $0.3 million in lower snow removal costs and efficiencies~~similar write-downs related to the closure of four branch locations during 2015. Offsetting these decreases is an increase of $0.9 million in data processing expense primarily due to the issuance of chip debit cards to our customers during the first nine 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~~ ~~$0.5 million~~ for the nine months ended September 30, 2016. In the first nine months of 2015, operational losses were largely due to fraud losses recognized in conjunction with several merchant debit card breaches. Losses of this type were lower in the first nine months of 2016.totaled $0.2 million.

Income Tax

The provision for income taxes increased $~~0.9~~4.9 million for the nine months ended September 30, ~~2016~~2017, compared to the corresponding period in ~~2015~~2016. The higher provision for income taxes was the result of a $~~2.5~~14.4 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 nine months ended September 30, ~~2016~~2017 and ~~2015~~2016.

We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. ~~The level of~~These tax benefits ~~that reduced our tax rate below the 35% statutory rate~~ produced an annual effective tax rate of ~~29.6%~~30.5% and ~~29.3%~~29.6% for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016, respectively.

As of September 30, 2017, our deferred tax assets totaled $41.7 million. Based on our evaluation, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not

4953

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

~~As of~~ ~~September 30, 2016, our deferred tax assets totaled~~ ~~$27.2 million. Based on our evaluation as of~~ ~~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.~~recorded. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earning levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.

Results of Operations

Three Months Ended September 30, ~~2016~~2017 Compared to Three Months Ended September 30, ~~2015~~2016

Net Income

For the three months ended September 30, ~~2016,~~2017, First Commonwealth had net income of $21.3 million, or $0.22 diluted earnings per share, compared to 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.~~2016. The increase in net income was primarily the result of an in increase in net interest income ~~as well as decreases~~and noninterest income coupled with a decrease in the provision for credit losses, ~~and~~offset by an increase in noninterest expense.

For the three months ended September 30, ~~2016,~~2017, the Company’s return on average equity was ~~9.14%~~9.50% and its return on average assets was ~~1.02%~~1.14%, compared to ~~6.86%~~9.14% and ~~0.78%~~1.02%, respectively, for the three months ended September 30, ~~2015.~~

2016.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was ~~$50.6~~$60.7 million infor the ~~third quarter of 2016,~~three months ended September 30, 2017, compared to ~~$47.6~~$50.6 million for the same period in ~~2015.~~2016. This increase was ~~primarily~~ due to both growth in average interest earning assets of ~~$324.3 million.~~$540.5 million and a 36 basis point increase in the yield on interest earning assets. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income), at ~~74%~~75% and ~~75%~~74% for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

The net interest margin, on a fully taxable equivalent basis, was ~~3.29%~~3.61% and ~~3.25%~~3.29% for the three months ended September 30, ~~2016~~2017 and September 30, ~~2015,~~2016, respectively. The ~~four~~32 basis point increase in the net interest margin is ~~primarily due~~attributable to an increase in the overall yield on interest earning ~~assets.~~assets, primarily loans.

The taxable equivalent yield on interest-earning assets was ~~3.60%~~3.96% for the three months ended September 30, ~~2016,~~2017, an increase of ~~eight~~36 basis points compared to the ~~3.52%~~3.60% yield for the same period in ~~2015.~~2016. This increase is largely due to the ~~investment~~loan portfolio yield, which improved by 838 basis points when compared to the three months ended September 30, ~~2015.~~2016. This change is primarily due to an increase in rates on variable and adjustable rate loans as a result of the Federal Reserve increasing short term interest rates three times during the past year. In addition, the yield on the investment portfolio increased 12 basis points in comparison to the prior year. This increase can be attributed to ~~the~~investment security runoff ~~or sale of lower yielding U.S. Agency securities, which were~~being replaced with higher yielding ~~investment securities.~~investments. Investment portfolio purchases during the three months ended September 30, ~~2016~~2017 have been primarily in mortgage-related assets with approximate durations of 48-60 ~~months and municipal securities with durations of approximately five years.~~months. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities at higher rates if interest rates rise.

The cost of interest-bearing liabilities increased to ~~0.41%~~0.46% for the three months ended September 30, ~~2016,~~2017, from ~~0.34%~~0.41% for the same period in ~~2015,~~2016, primarily due to an increase in the cost of ~~16 basis points~~short-term borrowings. Increases in market interest rates resulted in the cost of short-term borrowings ~~and 8~~increasing 59 basis points in comparison to the ~~cost of savings deposits.~~same period in 2016.

For the three months ended September 30, ~~2016,~~2017, changes in interest rates ~~negatively~~positively impacted net interest income by ~~$0.2~~$4.3 million when compared with the same period in ~~2015.~~2016. The higher yield on interest-earning assets positively impacted net interest income by ~~$1.0~~$5.7 million, while the increase in the cost of interest-bearing liabilities had a negative impact of ~~$1.2~~$1.4 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 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~~$5.8 million in the three months ended September 30, ~~2016,~~2017, as compared to the same period in ~~2015.~~2016. Higher levels of ~~interest-~~interest-earning assets resulted in an increase of $5.4 million in interest income, while changes in the volume of interest-bearing liabilities decreased interest expense by $0.4 million, primarily as the result of decreases in the average balance of short-term borrowings. Average earning assets for the three months ended September 30, 2017 increased $540.5 million, or 9%, compared to the same period in 2016. Average loans for the three months ended September 30, 2017 increased $559.6 million, or 12%, compared to the same period in 2016. The growth in interest-earning assets and interest-bearing liabilities was impacted by the acquisition of thirteen FirstMerit branches in December 2016 and the acquisition of DCB in April 2017.

5054

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~~$195.0 million increase in average net free funds at September 30, ~~2016~~2017 as compared to September 30, ~~2015.~~2016. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of ~~$88.7~~$239.1 million, or ~~8.3%~~20.7%, in noninterest-bearing demand deposit average balances. Additionally, there was relatively little increase from September 30, 2016 in higher cost time deposits ~~continue~~as a result of the acquisitions. The acquisitions of the FirstMerit branches and DCB added $43.2 million and $41.9 million in time deposits, respectively. These increases were offset by declines in time deposits and such deposits continued to mature and reprice into lower cost deposits or other funding alternatives. Average time deposits for the three months ended September 30, ~~2016 declined~~2017 decreased by ~~$73.0~~$23.6 million compared to the comparable period in ~~2015.~~2016 and the cost of time deposits decreased by 1 basis point in comparison to the same period in 2016.

The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended September 30:


	2016		2015		2017		2016
	(dollars in thousands)				(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	54,479	$	50,501	$	65,411	$	54,479
Adjustment to fully taxable equivalent basis	951		883		1,104		951
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	55,430		51,384		66,515		55,430
Interest expense	4,861		3,816		5,848		4,861
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	50,569	$	47,568	$	60,667	$	50,569

5155

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:


	2016							2015							2017							2016
	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	$	5,853		$	8	0.54	%	$	3,221		$	2	0.25	%	$	8,520		$	30	1.40	%	$	5,853		$	8	0.54	%
Tax-free investment securities	64,098			585		3.63		41,671			401		3.82		68,191			631		3.67		64,098			585		3.63	%
Taxable investment securities	1,214,542			7,434		2.44		1,203,603			7,155		2.36		1,188,705			7,635		2.55		1,214,542			7,434		2.44
Loans, net of unearned income (b)(c)	4,839,206			47,403		3.90		4,550,882			43,826		3.82		5,398,815			58,219		4.28		4,839,206			47,403		3.90
Total interest-earning assets	6,123,699			55,430		3.60		5,799,377			51,384		3.52		6,664,231			66,515		3.96		6,123,699			55,430		3.60
Noninterest-earning assets:
Cash	71,099							66,685							94,880							71,099
Allowance for credit losses	(61,264		)					(47,152		)					(50,478		)					(61,264		)
Other assets	546,142							524,099							668,740							546,142
Total noninterest-earning assets	555,977							543,632							713,142							555,977
Total Assets	$	6,679,676						$	6,343,009						$	7,377,373						$	6,679,676
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	748,932		$	135	0.07	%	$	656,008		$	66	0.04	%	$	1,156,313		$	482	0.17	%	$	748,932		$	135	0.07	%
Savings deposits (d)	1,903,630			1,034		0.22		1,848,508			647		0.14		2,420,052			1,103		0.18		1,903,630			1,034		0.22
Time deposits	586,470			956		0.65		659,445			1,044		0.63		562,868			906		0.64		586,470			956		0.65
Short-term borrowings	1,391,766			1,987		0.57		1,232,795			1,279		0.41		829,954			2,427		1.16		1,391,766			1,987		0.57
Long-term debt	81,128			749		3.67		111,285			780		2.78		88,256			930		4.18		81,128			749		3.67
Total interest-bearing liabilities	4,711,926			4,861		0.41		4,508,041			3,816		0.34		5,057,443			5,848		0.46		4,711,926			4,861		0.41
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	1,153,945							1,065,204							1,393,024							1,153,945
Other liabilities	65,727							51,586							38,125							65,727
Shareholders’ equity	748,078							718,178							888,781							748,078
Total noninterest-bearing funding sources	1,967,750							1,834,968							2,319,930							1,967,750
Total Liabilities and Shareholders’ Equity	$	6,679,676						$	6,343,009						$	7,377,373						$	6,679,676
Net Interest Income and Net Yield on Interest-Earning Assets				$	50,569	3.29	%				$	47,568	3.25	%				$	60,667	3.61	%				$	50,569	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.

5256

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~~2017 compared with September 30, ~~2015:~~

2016:

Analysis of Year-to-Year Changes in Net Interest Income
Total
Change Change Due To
Volume Change Due To
Rate (a)
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks $ 6
$ 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 )



	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	$	22		$	4		$	18
Tax-free investment securities	46			37			9
Taxable investment securities	201			(158		)	359
Loans	10,816			5,486			5,330
Total interest income (b)	11,085			5,369			5,716
Interest-bearing liabilities:
Interest-bearing demand deposits	347			72			275
Savings deposits	69			286			(217		)
Time deposits	(50		)	(39		)	(11		)
Short-term borrowings	440			(805		)	1,245
Long-term debt	181			66			115
Total interest expense	987			(420		)	1,407
Net interest income	$	10,098		$	5,789		$	4,309


(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 table below provides a breakout of the provision for credit losses by loan category for the three months ended September 30:


	2016					2015					2017					2016
	Dollars			Percentage		Dollars			Percentage		Dollars			Percentage		Dollars			Percentage
	(dollars in thousands)										(dollars in thousands)
Commercial, financial, agricultural and other	$	2,666		78	%	$	3,520		76	%	$	(10,031	)	(826	)%	$	2,666		78	%
Real estate construction	(4		)	—		75			2		200			16		(4		)	—
Residential real estate	(11		)	—		(124		)	(3	)	1,054			87		(11		)	—
Commercial real estate	(288		)	(8	)	703			15		9,985			823		(288		)	(8	)
Loans to individuals	1,045			30		447			10		6			—		1,045			30
Total	$	3,408		100	%	$	4,621		100	%	$	1,214		100	%	$	3,408		100	%

The provision for credit losses for the three months ended September 30, ~~2016~~2017 decreased in comparison to the three months ended September 30, ~~2015~~2016 by ~~$1.2~~$2.2 million. The level of provision expense in the third quarter of 2017 is primarily due to net charge-offs recognized during the quarter. The level of provision expense for the commercial, financial, agricultural and other category was impacted by a decline in outstanding balances, while growth in commercial real estate loans contributed to an increase in provision expense for that loan type. Additionally, the provision expense for both of these categories was impacted by the Company’s periodic assessment of the allowance for loan loss methodology, the current lending environment, and associated risks for each portfolio which resulted in changes to certain qualitative factors, such as collateral recovery rates and vacancy rates.

The majority of the 2016 provision expense is ~~primarily due~~attributable to commercial, financial, agricultural and other loans as the result of an increase in historical loss factors, ~~and~~an increase 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 construction 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.

5357

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

decreases in historical loss factors. The provision for loans to individuals is related to charge-offs in the indirect automobile portfolio, as well as changes in qualitative factors that relate to the automobile industry.

Below is an analysis of the consolidated allowance for credit losses for the three months ended September 30, ~~2016~~2017 and ~~2015~~2016 and the year-ended December 31, ~~2015:~~

2016:


	September 30, 2016		September 30, 2015		December 31, 2015		September 30, 2017		September 30, 2016		December 31, 2016
	(dollars in thousands)						(dollars in thousands)
Balance, beginning of period	$	59,821	$	45,344	$	52,051	$	48,067	$	59,821	$	50,812
Loans charged off:
Commercial, financial, agricultural and other	7,163		639		11,429		499		7,163		19,603
Real estate construction	—		—		8		—		—		—
Residential real estate	374		301		1,539		361		374		1,189
Commercial real estate	10		561		1,538		35		10		570
Loans to individuals	1,260		900		4,354		1,024		1,260		4,943
Total loans charged off	8,807		2,401		18,868		1,919		8,807		26,305
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	63		564		1,097		184		63		4,164
Real estate construction	—		—		84		373		—		562
Residential real estate	147		178		587		85		147		481
Commercial real estate	20		33		229		60		20		1,522
Loans to individuals	82		179		684		112		82		469
Total recoveries	312		954		2,681		814		312		7,198
Net credit losses	8,495		1,447		16,187		1,105		8,495		19,107
Provision charged to expense	3,408		4,621		14,948		1,214		3,408		18,480
Balance, end of period	$	54,734	$	48,518	$	50,812	$	48,176	$	54,734	$	50,185

Noninterest Income

The following table presents the components of noninterest income for the three months ended September 30:


	2016		2015			$ Change			% Change		2017			2016		$ Change			% Change
	(dollars in thousands)										(dollars in thousands)
Noninterest Income:
Trust income	$	1,523	$	1,614		$	(91	)	(6	)%	$	2,147		$	1,523	$	624		41	%
Service charges on deposit accounts	3,975		4,081			(106		)	(3	)	4,803			3,975		828			21
Insurance and retail brokerage commissions	2,104		2,163			(59		)	(3	)	2,128			2,104		24			1
Income from bank owned life insurance	1,350		1,357			(7		)	(1	)	1,472			1,350		122			9
Card related interchange income	3,698		3,637			61			2		4,780			3,698		1,082			29
Swap fee income	725		84			641			763		217			725		(508		)	(70	)
Other income	1,527		1,712			(185		)	(11	)	2,244			1,527		717			47
Subtotal	14,902		14,648			254			2		17,791			14,902		2,889			19
Net securities gains	—		—			—			N/A		92			—		92			N/A
Gain on sale of mortgage loans	1,235		832			403			48		1,418			1,235		183			15
Gain on sale of other loans and assets	387		808			(421		)	(52	)	503			387		116			30
Derivatives mark to market	470		(783		)	1,253			(160	)	(14		)	470		(484		)	(103	)
Total noninterest income	$	16,994	$	15,505		$	1,489		10	%	$	19,790		$	16,994	$	2,796		16	%

5458

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~~$2.9 million for the third quarter of ~~2016~~2017 compared to ~~2015. Swap fee~~2016. Service charges on deposit accounts increased $0.8 million, of which $0.6 million can be attributed to deposit accounts acquired from the acquisition of thirteen FirstMerit branches in December 2016 and the acquisition of DCB in April 2017. Card-related interchange income increased $1.1 million, of which $0.8 million can be attributed to the previously noted acquisitions. Trust income increased $0.6 million, of which $0.4 million can be attributed to accounts from DCB. Offsetting these increases was a decrease in swap fee income compared to 2016 of $0.5 million due to ~~an increase~~a decline in the number of interest rate swaps entered into for our commercial loan customers during the ~~current~~third quarter of 2017 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~~2017 increased ~~$1.5~~$2.8 million in comparison to the three months ended September 30, ~~2015.~~2016. The most significant change, other than the changes noted above, includes a ~~$1.3~~$0.5 million ~~increase~~decrease 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~~a realized gain on the swaps, but rather relates to a change in fair value due to ~~decreases~~movements in corporate bond spreads and ~~increases~~swap rates. In addition, the gain on sale of mortgage loans increased $0.2 million due to continued growth in ~~swap rates.~~the mortgage lending area.

Noninterest Expense

The following table presents the components of noninterest expense for the three months ended September 30:


	2016		2015		$ Change			% Change		2017			2016		$ Change			% Change
	(dollars in thousands)									(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	20,647	$	22,446	$	(1,799	)	(8	)%	$	26,169		$	20,647	$	5,522		27	%
Net occupancy expense	3,176		3,291		(115		)	(3	)	3,715			3,176		539			17
Furniture and equipment expense	2,847		2,670		177			7		3,342			2,847		495			17
Data processing expense	1,832		1,558		274			18		2,229			1,832		397			22
Advertising and promotion expense	750		789		(39		)	(5	)	941			750		191			25
Pennsylvania shares tax expense	914		1,713		(799		)	(47	)	1,093			914		179			20
Intangible amortization	67		157		(90		)	(57	)	844			67		777			1,160
Collection and repossession expense	760		801		(41		)	(5	)	402			760		(358		)	(47	)
Other professional fees and services	1,202		1,002		200			20		1,300			1,202		98			8
FDIC insurance	1,105		963		142			15		696			1,105		(409		)	(37	)
Other operating expenses	4,795		4,385		410			9		5,934			4,795		1,139			24
Subtotal	38,095		39,775		(1,680		)	(4	)	46,665			38,095		8,570			22
Loss on sale or write-down of assets	188		140		48			34		167			188		(21		)	(11	)
Merger and acquisition related	118		28		90			321		(69		)	118		(187		)	(158	)
Litigation and operational losses	295		314		(19		)	(6	)	598			295		303			103
Total noninterest expense	$	38,696	$	40,257	$	(1,561	)	(4	)%	$	47,361		$	38,696	$	8,665		22	%

Noninterest expense, ~~decreased $1.6~~excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $8.6 million, or 4%22%, for the three months ended September 30, ~~2016~~2017 compared to the same period in ~~2015. This decrease can be attributed~~2016. Contributing to the higher level of expenses in 2017 is a ~~$1.8~~$5.5 million ~~decrease~~increase in salaries and employee benefits, ~~expense~~primarily due to ~~staff reductions and a higher than normal level~~an increase of ~~open positions in 2016~~187 employees at September 30, 2017 compared to ~~2015, as well as a $0.8 million decrease in Pennsylvania shares tax expense due to a $0.7 million settlement~~September 30, 2016. The higher number of ~~a tax dispute in the third quarter of 2015. Despite the addition of four branch locations as~~employees is primarily a result of the acquisition of ~~First Community Bank~~13 branches from FirstMerit in the fourth quarter of ~~2015,~~2016 and the acquisition of DCB in April 2017. These two acquisitions accounted for all of the $0.5 million increase in net occupancy expense, ~~was $0.1~~$0.2 million ~~lower~~of the $0.5 million increase in furniture and equipment expense and all of the ~~third quarter of 2016~~$0.8 million increase in intangible amortization. The $1.1 million increase in other operating expense is primarily due to $0.7 million in additional expenses related to originating loans in 2017 as compared to 2016.

Total noninterest expense increased by $8.7 million, or 22%, for the three months ended September 30, 2017 compared to the same period in ~~2015. Offsetting these decreases is an increase of $0.3 million in data processing expense,~~2016 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.~~previously noted items.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Income Tax

The provision for income taxes increased ~~$2.4~~$2.2 million for the three months ended September 30, ~~2016,~~2017, compared to the corresponding period in ~~2015.~~2016. The higher provision for income taxes was the result of a ~~$7.2~~$6.3 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~~2017 and ~~2015.~~

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

2016.

We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. ~~The level of~~These tax benefits ~~that reduced our tax rate below the 35% statutory rate~~ produced an annual effective tax rate of ~~29.8%~~30.8% and ~~28.3%~~29.8% for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, 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 nine months of ~~2016~~2017, liquidity used by the net decrease in short-term borrowings totaled ~~$180.5~~$62.1 million, while the sales, maturity and redemption of investment securities provided ~~$214.0~~$280.9 million. This liquidity provided funds ~~needed~~ to originate loans, purchase investment securities and fund depositor withdrawals. Additionally, on November 1, 2017, an auction call was successfully completed on Pre TSL XIII, a pooled trust preferred security on which other-than-temporary impairment charges were recognized in 2009 and 2010. Based on the outcome of the auction, it is expected that this security will be called at par in the fourth quarter of 2017. As of September 30, 2017, the security has a par value of $17.5 million and a book value of $13.1 million.

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 September 30, ~~2016~~2017, our maximum borrowing capacity under this program was $~~1.0~~1.1 billion and as of that date there was $~~0.6~~14.8 million ~~outstanding. Also included in this amount is~~outstanding with an average weighted rate of 0.95% and an average original term of 467 days. These deposits are part of a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. ~~As of~~ ~~September 30, 2016, our outstanding certificates of deposits from this program have an average weighted rate of~~ ~~0.77%~~ ~~and an average original term of~~ ~~364 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 September 30, ~~2016~~2017, the borrowing capacity under this program totaled $~~688.7~~781.3 million and there were no amounts outstanding.

As of September 30, ~~2016~~2017, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.6 billion and as of that date amounts used against this capacity included $~~1.2~~0.7 billion in outstanding borrowings and ~~$10.2 million in~~no outstanding letters of credit.

We also have available unused federal funds lines with ~~four~~five correspondent banks. These lines have an aggregate commitment of $195.0 million with ~~a total of $3.0 million~~no outstanding balance as of September 30, ~~2016~~2017. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $506.6 million with no outstanding balance as of September 30, 2017.

First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As of September 30, ~~2016~~,2017, there are no amounts outstanding on this line.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. The following table shows a breakdown of the components of First Commonwealth’s deposits:


	September 30, 2016		December 31, 2015		September 30, 2017		December 31, 2016
	(dollars in thousands)				(dollars in thousands)
Noninterest-bearing demand deposits	$	1,241,627	$	1,116,689	$	1,416,814	$	1,268,786
Interest-bearing demand deposits	87,507		86,365		264,731		114,043
Savings deposits	2,552,754		2,390,607		3,290,978		2,972,747
Time deposits	577,092		602,233		582,534		591,832
Total	$	4,458,980	$	4,195,894	$	5,555,057	$	4,947,408

During the first nine months of ~~2016~~2017, total deposits increased $~~263.1~~607.6 million due to a ~~$163.3~~$468.9 million increase in interest-bearing demand and savings deposits and a ~~$124.9~~$148.0 million increase in noninterest-bearing demand deposits. These increases were offset by a $~~25.1~~9.3 million decrease in time deposits. Deposits acquired as part of the DCB acquisition on April 3, 2017 totaled $484.4 million, including $129.3 million in noninterest-bearing demand deposits, $86.7 million in interest bearing demand deposits, $226.5 million in savings deposits and $41.9 million 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 ~~$22.1 million.~~$23.5 million offset by an increase in CDARs deposits of $14.2 million, which were acquired from DCB.

~~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 ~~0.75~~0.73 and ~~0.71~~0.75 at September 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.

Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below the gap analysis.

~~The following is the gap analysis as of~~ ~~September 30, 2016~~ ~~and~~ ~~December 31, 2015~~:

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
(dollars in thousands)
Loans $ 2,485,254
$ 165,618
$ 327,440
$ 2,978,312
$ 1,466,263
$ 383,392
Investments 115,805
50,053
103,688
269,546
594,317
378,881
Other interest-earning assets 5,097
—
—
5,097
—
—
Total interest-sensitive assets (ISA) 2,606,156
215,671
431,128
3,252,955
2,060,580
762,273
Certificates of deposit 92,091
86,658
131,660
310,409
262,342
4,341
Other deposits 2,640,261
—
—
2,640,261
—
—
Borrowings 1,402,637
145
293
1,403,075
2,559
5,752
Total interest-sensitive liabilities (ISL) 4,134,989
86,803
131,953
4,353,745
264,901
10,093
Gap $ (1,528,833 ) $ 128,868
$ 299,175
$ (1,100,790 ) $ 1,795,679
$ 752,180
ISA/ISL 0.63
2.48
3.27
0.75
7.78
75.52
Gap/Total assets 22.93 % 1.93 % 4.49 % 16.51 % 26.94 % 11.28 %

5761

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following is the gap analysis as of September 30, 2017 and December 31, 2016:


	December 31, 2015																		September 30, 2017
	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	$	2,371,092		$	184,323		$	315,162		$	2,870,577		$	1,439,199		$	343,538		$	2,683,500		$	208,908		$	376,420		$	3,268,828		$	1,574,057		$	523,592
Investments	115,292			50,950			102,357			268,599			597,263			454,200			84,054			43,716			86,171			213,941			560,635			458,213
Other interest-earning assets	2,808			—			—			2,808			—			—			29,709			—			—			29,709			—			—
Total interest-sensitive assets (ISA)	2,489,192			235,273			417,519			3,141,984			2,036,462			797,738			2,797,263			252,624			462,591			3,512,478			2,134,692			981,805
Certificates of deposit	125,403			89,522			139,133			354,058			244,173			4,000			85,892			125,697			138,189			349,778			229,110			3,647
Other deposits	2,476,973			—			—			2,476,973			—			—			3,555,708			—			—			3,555,708			—			—
Borrowings	1,583,132			140			285			1,583,557			2,487			6,263			878,140			150			305			878,595			2,659			12,725
Total interest-sensitive liabilities (ISL)	4,185,508			89,662			139,418			4,414,588			246,660			10,263			4,519,740			125,847			138,494			4,784,081			231,769			16,372
Gap	$	(1,696,316	)	$	145,611		$	278,101		$	(1,272,604	)	$	1,789,802		$	787,475		$	(1,722,477	)	$	126,777		$	324,097		$	(1,271,603	)	$	1,902,923		$	965,433
ISA/ISL	0.59			2.62			2.99			0.71			8.26			77.73			0.62			2.01			3.34			0.73			9.21			59.97
Gap/Total assets	25.83		%	2.22		%	4.23		%	19.38		%	27.25		%	11.99		%	23.33		%	1.72		%	4.39		%	17.22		%	25.77		%	13.07		%



	December 31, 2016
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years
	(dollars in thousands)
Loans	$	2,510,367		$	184,386		$	315,397		$	3,010,150		$	1,446,035		$	402,282
Investments	85,756			44,417			89,838			220,011			546,056			406,743
Other interest-earning assets	24,644			—			—			24,644			—			—
Total interest-sensitive assets (ISA)	2,620,767			228,803			405,235			3,254,805			1,992,091			809,025
Certificates of deposit	110,584			92,765			115,949			319,298			268,680			3,854
Other deposits	3,086,791			—			—			3,086,791			—			—
Borrowings	940,254			146			296			940,696			2,584			5,579
Total interest-sensitive liabilities (ISL)	4,137,629			92,911			116,245			4,346,785			271,264			9,433
Gap	$	(1,516,862	)	$	135,892		$	288,990		$	(1,091,980	)	$	1,720,827		$	799,592
ISA/ISL	0.63			2.46			3.49			0.75			7.34			85.77
Gap/Total assets	22.69		%	2.03		%	4.32		%	16.34		%	25.75		%	11.96		%

The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in interest rates over a 12 month time frame as compared with net interest income if rates remained unchanged and there are no changes in balance sheet categories.

Net interest income change (12 months)
-200 -100 +100 +200
(dollars in thousands)
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
December 31, 2015 (%) (3.74 )% (1.25 )% 0.47 % 0.97 %



	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
September 30, 2017 ($)	$	(16,299	)	$	(7,141	)	$	5,090		$	9,858
September 30, 2017 (%)	(6.71		)%	(2.94		)%	2.09		%	4.06		%

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table represents the potential sensitivity of our annual net interest income to immediate changes in interest rates versus if rates remained unchanged and there are no changes in balance sheet categories.

Net interest income change (12 months)
-200 -100 +100 +200
(dollars in thousands)
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
December 31, 2015 (%) (5.85 )% (2.63 )% 0.94 % 1.88 %



	Net interest income change (12 months) for basis point movements of:
	-200			-100			+100			+200
	(dollars in thousands)
September 30, 2017 ($)	$	(30,396	)	$	(16,068	)	$	9,307		$	17,556
September 30, 2017 (%)	(12.51		)%	(6.61		)%	3.83		%	7.22		%

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

The analysis and model used to quantify the sensitivity of our net interest income becomes less ~~reliable~~meaningful in a decreasing 200 basis point scenario given the current ~~low~~ interest rate environment. Results of the 100 and 200 basis point interest rate decline scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1%, ~~and therefore cannot decline 100 or 200 basis points, yet our interest-sensitive assets are able to decline by these amounts.~~with an assumed floor of zero in the model. In the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016, the cost of our interest-bearing liabilities averaged ~~0.40%~~0.42% and ~~0.34%~~0.40%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged ~~3.59%~~3.87% and ~~3.55%~~3.59%, respectively.

~~During the first quarter of~~In 2015 and 2014, the Company entered into cash flow interest rate swaps, in which we extended the duration of ~~$100.0~~$150.0 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~~added approximately two basis points of protection to the net interest margin as a hedge against a

~~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,~~12 "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 ~~$4.0~~$4.6 million at September 30, ~~2016~~2017 and is classified in "Other liabilities" on the Condensed Consolidated Statements of Financial Condition.

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

As of September 30, 2016, the Company had a total of $126.4 million in commitments to the Oil and Gas Industry, with $66.1 million in outstanding loan balances against those commitments. Of this total, commitments of $29.4 million with outstanding balances of $6.5 million are for exploration and production, while $96.9 million in commitments, with outstanding balances of $59.6 million, are related to ancillary businesses.

One customer accounts for 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 $2.7 million is categorized as a non-pass accruing credit. One commercial relationship in this category, totaling $2.4 million, has been on non-performing status since before the oil price decline in the third quarter of 2014.

The ancillary businesses sector consists of well services, transportation, and providing equipment and materials to support the oil and gas industry. Two customers, which account for 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 $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 $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 nine months of ~~2016, 57~~2017, 33 loans totaling ~~$12.2~~$9.8 million were identified as troubled debt restructurings.

The balance of troubled debt restructured loans ~~increased $0.5~~decreased $1.5 million from December 31, ~~2015~~2016 due ~~primarily~~ to ~~the addition~~a $5.4 million payoff of ~~$7.6 million related to~~ two commercial and industrial ~~loans, partially~~loan relationships, as well as normal loan paydowns and charge-offs offset by ~~a $2.7~~the addition of $9.8 million ~~paydown and a $1.3 million charge-off on a $3.8 million loan relationship previously categorized as a~~in newly identified 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.~~loans. Please refer to Note 8,9, “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

5963

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 $4.0~~decreased $3.0 million to ~~$54.8~~$38.8 million at September 30, ~~2016~~2017 compared to ~~$50.8~~$41.8 million at December 31, ~~2015. This increase~~2016. The September 30, 2017 nonaccrual balance includes $4.5 million in loans acquired from DCB in April 2017. Excluding the acquired loans, nonaccrual loans would have decreased $6.6 million compared to December 31, 2016 as a result of payoffs totaling $8.5 million on loans related to four borrowers. Included in nonperforming loans at September 30, 2017, is ~~primarily due~~a $4.7 million loan to ~~the addition of a $11.8 million commercial loan relationship with a steel and~~an aluminum servicing company ~~and~~which is classified as doubtful. This loan was restructured during the second quarter of 2017, resulting in 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.paydown of $2.4 million.

The allowance for credit losses as a percentage of nonperforming loans was ~~99.83%~~124.16% as of September 30, ~~2016~~2017 compared to ~~99.94%~~120.02% at December 31, ~~2015~~2016 and ~~118.84%~~99.83% at September 30, ~~2015~~2016. The amount of specific reserves included in the allowance for nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific reserves of ~~$8.2~~$2.2 million and general reserves of ~~$46.6~~$46.0 million as of September 30, ~~2016~~2017. Specific reserves ~~increased $1.1~~decreased $1.0 million from December 31, ~~2015~~2016, and ~~$3.9~~$6.0 million from September 30, ~~2015. The increase in specific reserves in the first nine months of 2016 is primarily due to specific reserves related to one new impaired loan.~~2016. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at September 30, ~~2016~~2017.

Criticized loans totaled ~~$137.3~~$125.0 million at September 30, ~~2016~~2017 and represented ~~2.8%~~2.3% of the loan portfolio. The level of criticized loans ~~increased~~decreased as of September 30, ~~2016~~2017 when compared to December 31, ~~2015~~,2016, by ~~$3.3~~$9.3 million,, or ~~2.5%~~6.9%. Classified loans totaled ~~$97.3~~$65.9 million at September 30, ~~2016~~2017 compared to ~~$86.4~~$92.7 million at December 31, ~~2015, an increase~~2016, a decrease of ~~$10.8~~$26.8 million, or ~~12.5%~~28.9%. This decline is a result of an upgrade of a $9.3 million loan for one borrower and the payoff of $8.5 million in nonaccrual loans as noted above. Delinquency on accruing loans for the same period decreased $~~1.6~~3.9 million, or ~~12.7%~~28.0%, the majority of which are commercial, financial, agricultural and other loans and residential real estate loans.

The allowance for credit losses was $~~54.7~~48.2 million at September 30, ~~2016~~2017 or ~~1.13%~~0.90% of total loans outstanding, compared to ~~1.08%~~1.03% reported at December 31, ~~2015~~2016 and ~~1.06%~~1.13% at September 30, ~~2015~~2016. General reserves, or the portion of the allowance related to loans that were not specifically evaluated for impairment, as a percentage of non-impaired loans were 0.86% at September 30, 2017 compared to 0.97% at December 31, 2016 and 0.97% at September 30, 2016. General reserves as a percentage of non-impaired originated loans were 0.94% at September 30, 2017 compared to ~~0.94%~~0.99% at December 31, ~~2015~~2016 and ~~0.98%~~0.97% at September 30, ~~2015~~.2016.

6064

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures:


	September 30,								December 31, 2015				September 30,								December 31, 2016
	2016				2015				December 31, 2015				2017				2016				December 31, 2016
	(dollars in thousands)												(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	27,817			$	20,220			$	24,345			$	14,943			$	27,817			$	16,454
Loans held for sale on a nonaccrual basis													—				—				—
Troubled debt restructured loans on nonaccrual basis	12,723				8,583				12,360				11,408				12,723				11,569
Troubled debt restructured loans on accrual basis	14,286				12,024				14,139				12,451				14,286				13,790
Total nonperforming loans	$	54,826			$	40,827			$	50,844			$	38,802			$	54,826			$	41,813
Loans past due 30 to 90 days and still accruing	$	8,942			$	12,482			$	10,476			$	8,580			$	8,942			$	10,964
Loans past due in excess of 90 days and still accruing	$	2,343			$	2,054			$	2,455			$	1,332			$	2,343			$	2,097
Other real estate owned	$	7,686			$	10,542			$	9,398			$	5,701			$	7,686			$	6,805
Loans held for sale at end of period	$	7,855			$	4,986			$	5,763			$	17,100			$	7,855			$	7,052
Loans outstanding at end of period	$	4,860,652			$	4,575,735			$	4,683,750
Portfolio loans outstanding at end of period													$	5,375,847			$	4,860,652			$	4,879,347
Average loans outstanding	$	4,806,061		(a)	$	4,509,628		(a)	$	4,553,634		(b)	$	5,226,320		(a)	$	4,806,061		(a)	$	4,818,759		(b)
Nonperforming loans as a percentage of total loans	1.13		%		0.89		%		1.09		%		0.72		%		1.13		%		0.86		%
Provision for credit losses	$	20,306		(a)	$	8,818		(a)	$	14,948		(b)	$	2,834		(a)	$	20,306		(a)	$	18,480		(b)
Allowance for credit losses	$	54,734			$	48,518			$	50,812			$	48,176			$	54,734			$	50,185
Net charge-offs	$	16,384		(a)	$	12,351		(a)	$	16,187		(b)	$	4,843		(a)	$	16,384		(a)	$	19,107		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.46		%		0.37		%		0.36		%		0.12		%		0.46		%		0.40		%
Provision for credit losses as a percentage of net charge-offs	123.94		%	(a)	71.40		%	(a)	92.35		%	(b)	58.52		%	(a)	123.94		%	(a)	96.72		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding	1.13		%		1.06		%		1.08		%
Allowance for credit losses as a percentage of nonperforming loans (c)	99.83		%		118.84		%		99.94		%
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)													0.90		%		1.13		%		1.03		%
Allowance for credit losses as a percentage of end-of-period originated loans outstanding													0.97		%		1.13		%		1.05		%
Allowance for credit losses as a percentage of nonperforming loans (d)													124.16		%		99.83		%		120.02		%


(a)	For the nine-month period ended.


(b)	For the twelve-month period ended.


(c)	Does not include loans held for sale.


(d)	Does not include nonperforming loans held for sale.

The following tables show the outstanding balances of our loan portfolio and the breakdown of net charge-offs and nonperforming loans, excluding loans held for sale, by loan type as of and for the periods presented:


	September 30, 2016				December 31, 2015				September 30, 2017				December 31, 2016
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)								(dollars in thousands)
Commercial, financial, agricultural and other	$	1,207,447	25	%	$	1,150,906	25	%	$	1,154,225	21	%	$	1,139,547	23	%
Real estate construction	229,375		5		220,736		5		259,129		5		219,621		5
Residential real estate	1,185,759		24		1,224,465		26		1,423,422		27		1,229,192		25
Commercial real estate	1,683,015		35		1,479,000		31		1,990,264		37		1,742,210		36
Loans to individuals	555,056		11		608,643		13		548,807		10		548,777		11
Total loans and leases net of unearned income	$	4,860,652	100	%	$	4,683,750	100	%	$	5,375,847	100	%	$	4,879,347	100	%

During the nine months ended September 30, ~~2016~~2017, loans increased $~~176.9~~496.5 million, or 4%10%, compared to balances outstanding at December 31, ~~2015~~2016. ~~During~~Loan balances acquired on April 3, 2017 as part of the ~~nine months ended September 30, 2016, growth~~DCB acquisition totaled $383.1 million, including $44.8 million in ~~the~~ commercial financial agricultural and other, ~~portfolio and commercial~~$25.2 million in real estate ~~loans can largely be attributed to growth in middle market lending in Pennsylvania and Ohio. The increase in~~ construction, loans is primarily the result of several multifamily and hospitality projects in the Columbus, Cleveland and Pittsburgh markets. Declines in the loans to individuals category is primarily due to a decline in indirect auto loans. The decrease$197.5 million in residential real estate, $109.8 million in commercial real estate and $5.8 million in 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.~~to individuals.

6165

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Excluding the balances acquired from DCB, growth in the commercial real estate and commercial, financial, agricultural and other categories can largely be attributed to growth in middle market lending in Pennsylvania and Ohio. The decrease in residential real estate loans is the result of runoff in our home equity and mortgage portfolios, as many of the loans originated by our mortgage banking area are sold in the secondary market, and loans to individuals declined primarily due to runoff in our indirect auto portfolio.

Net charge-offs for the nine months ended September 30, ~~2016~~2017 totaled $~~16.4~~4.8 million, compared to $~~12.4~~16.4 million for the nine months ended September 30, ~~2015~~2016. The most significant charge-offs during the nine months ended September 30, 2017 included partial charge-offs on loans for two commercial borrowers of $1.9 million and $1.5 million. Offsetting these charge-offs were recoveries of $3.5 million on two commercial and industrial relationships. During the nine months endedSeptember 30, 2016 ~~include a $6.5 million partial charge-off related to a manufacturer of mine safety products,~~, the most significant charge-offs included 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,~~steel and aluminum servicing company, a ~~$1.3~~$1.1 million partial charge-off of two commercial industrial loans related to a local energy company and a $1.1 million charge-off of a loan to a machine manufacturer. ~~During the~~ ~~nine months endedSeptember 30, 2015~~, the most significant charge-offs included a $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 Nine Months Ended September 30, 2016							As of September 30, 2016						For the Nine Months Ended September 30, 2017							As of September 30, 2017
	Net Charge- offs			% of Total Net Charge-offs		Net Charge- offs as a % of Average Loans (annualized)		Nonperforming Loans		% of Total Nonperforming Loans		Nonperforming Loans as a % of Total Loans		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	$	13,047		79.63	%	0.36	%	$	36,186	66.00	%	0.74	%	$	1,956		40.39	%	0.05	%	$	16,428	42.34	%	0.30	%
Real estate construction	(227		)	(1.39	)	(0.01	)	—		—		—		(470		)	(9.70	)	(0.01	)	—		—		—
Residential real estate	569			3.48		0.03		11,681		21.31		0.24		676			13.96		0.01		12,288		31.67		0.23
Commercial real estate	(385		)	(2.35	)	(0.01	)	6,582		12.00		0.14		(115		)	(2.38	)	—		9,712		25.03		0.18
Loans to individuals	3,380			20.63		0.09		377		0.69		0.01		2,796			57.73		0.07		374		0.96		0.01
Total loans, net of unearned income	$	16,384		100.00	%	0.46	%	$	54,826	100.00	%	1.13	%	$	4,843		100.00	%	0.12	%	$	38,802	100.00	%	0.72	%

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 September 30, ~~2016~~.2017. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At September 30, ~~2016~~2017, shareholders’ equity was $~~751.8~~894.3 million, an increase of $~~32.2~~144.4 million from December 31, ~~2015~~2016. The increase was primarily the result of ~~a $41.7~~$110.8 million in stock issued as part of the DCB acquisition, $51.2 million in net income, ~~and~~ an increase of ~~$9.1~~$3.1 million in the fair value of available for sale ~~investments.~~investments and $3.3 million in treasury stock sales. These increases were partially offset by $~~18.7~~22.7 million of dividends paid to shareholders and ~~$0.9~~$1.2 million of common stock repurchases. Cash dividends declared per common share were $~~0.21~~0.24 and $0.21 for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016., respectively.

First Commonwealth and First Commonwealth Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth and First Commonwealth Bank must meet specific capital guidelines that involve quantitative measures of First Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

First Commonwealth maintains capital to absorb unexpected losses. In order to provide assurance that our capital levels are adequate for our risk exposure, we test our capital position under several stress scenarios on an annual basis. This analysis is ~~subject to~~reviewed by our Board of ~~Director review and approval.~~Director's. Our most recent capital stress test was completed in ~~December 2015.~~September 2017.

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

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

~~FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES~~

The Basel III Rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment, which reduces the volatility of regulatory capital levels.

As of September 30, ~~2016~~2017, First Commonwealth and First Commonwealth Bank met all capital adequacy requirements to which they are subject and was considered well-capitalized under the regulatory rules, all on a fully phased-in basis. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital, Tier I leverage ratio and Common equity tier I risk-based capital as set forth in the table below:

Actual Minimum Capital Required - Basel III Phase-In Schedule Minimum Capital Required - Basel III Fully Phased-In Required to be Considered Well
Capitalized
Capital
Amount Ratio Capital
Amount Ratio Capital
Amount Ratio Capital
Amount Ratio
(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $ 708,808
12.64 % $ 483,826
8.625 % $ 589,005
10.50 % $ 560,957
10.00 %
First Commonwealth Bank 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 $ 650,038
11.59 % $ 371,634
6.625 % $ 476,814
8.50 % $ 448,766
8.00 %
First Commonwealth Bank 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 $ 650,038
9.98 % $ 260,588
4.000 % $ 260,588
4.00 % $ 325,735
5.00 %
First Commonwealth Bank 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 $ 580,038
10.34 % $ 287,491
5.125 % $ 392,670
7.00 % $ 364,622
6.50 %
First Commonwealth Bank 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~~ ~~September 30, 2016~~, First Commonwealth had repurchased 45,612 shares at an average price of $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.



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	744,575	12.32	%	$	558,892	9.250	%	$	634,418	10.50	%	$	604,208	10.00	%
First Commonwealth Bank	708,645		11.76		557,168		9.250		632,461		10.50		602,343		10.00
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	691,841	11.45	%	$	438,051	7.250	%	$	513,577	8.50	%	$	483,366	8.00	%
First Commonwealth Bank	655,911		10.89		436,699		7.250		511,992		8.50		481,875		8.00
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	691,841	9.73	%	$	284,341	4.000	%	$	284,341	4.00	%	$	355,427	5.00	%
First Commonwealth Bank	655,911		9.26		283,468		4.000		283,468		4.00		354,336		5.00
Common Equity Tier I to Risk Weighted Assets
First Commonwealth Financial Corporation	$	623,921	10.33	%	$	347,420	5.750	%	$	422,946	7.00	%	$	392,735	6.50	%
First Commonwealth Bank	655,911		10.89		346,347		5.750		421,640		7.00		391,523		6.50

On ~~July 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,~~24, 2017, First Commonwealth Financial Corporation declared a quarterly dividend of ~~$0.07~~$0.08 per share payable on November ~~18, 2016~~17, 2017 to shareholders of record as of November ~~7, 2016.~~6, 2017. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Information appearing in Item 2 of this report under the caption “Market Risk” is incorporated by reference in response to this item.

ITEM 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission.

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

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


ITEM 1.	LEGAL PROCEEDINGS

The information required by this item is set forth in Part I, Item 1, Note 5,6, "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~~2016.


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 third 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*
July 31, 2016 0
$ 0.00
0
�� 2,550,790
August 31, 2016 918
9.88
—
2,410,884
September 30, 2016 0
0.00
0
2,439,556

Total 918
$ 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.
None


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable


ITEM 5.	OTHER INFORMATION

None

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PART II – OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6. EXHIBITS



Exhibit Number	Description	Incorporated by Reference to

~~10.1~~ 31.1	~~Employment Agreement dated September 19, 2016 between First Commonwealth Financial Corporation and Brian G. Karrip~~	~~Filed herewith~~

~~10.2~~	~~Change of Control Agreement dated September 19, 2016 between First Commonwealth Financial Corporation and Brian G. Karrip~~	~~Filed herewith~~

~~10.3~~	~~Restricted 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: November ~~9, 2016~~7, 2017		/s/ T. Michael Price
		T. Michael Price President and Chief Executive Officer

DATED: November ~~9, 2016~~7, 2017		/s/ James R. Reske
		James R. Reske Executive Vice President, Chief Financial Officer and Treasurer

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	September 30, 2016			December 31, 2015
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	76,456		$	66,644
Interest-bearing bank deposits	5,097			2,808
Securities available for sale, at fair value	813,659			886,560
Securities held to maturity, at amortized cost (Fair value of $396,994 and $382,341 at September 30, 2016 and December 31, 2015, respectively)	389,513			384,324
Other investments	54,066			62,952
Loans held for sale	7,855			5,763
Loans:
Portfolio loans	4,860,652			4,683,750
Allowance for credit losses	(54,734		)	(50,812		)
Net loans	4,805,918			4,632,938
Premises and equipment, net	63,356			63,454
Other real estate owned	7,686			9,398
Goodwill	164,437			164,500
Amortizing intangibles, net	912			1,231
Bank owned life insurance	186,034			182,601
Other assets	91,494			103,717
Total assets	$	6,666,483		$	6,566,890
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,241,627		$	1,116,689
Interest-bearing	3,217,353			3,079,205
Total deposits	4,458,980			4,195,894
Short-term borrowings	1,330,327			1,510,825
Subordinated debentures	72,167			72,167
Other long-term debt	8,892			9,314
Total long-term debt	81,059			81,481
Other liabilities	44,330			59,144
Total liabilities	5,914,696			5,847,344
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at September 30, 2016 and December 31, 2015, and 88,992,077 and 88,961,268 shares outstanding at September 30, 2016 and December 31, 2015, respectively	105,563			105,563
Additional paid-in capital	366,291			365,981
Retained earnings	401,079			378,081
Accumulated other comprehensive income (loss), net	6,762			(2,386		)
Treasury stock (16,571,378 and 16,602,187 shares at September 30, 2016 and December 31, 2015, respectively)	(127,908		)	(127,693		)
Total shareholders’ equity	751,787			719,546
Total liabilities and shareholders’ equity	$	6,666,483		$	6,566,890



	Net interest income change (12 months)
	-200			-100			+100			+200
	(dollars in thousands)
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
December 31, 2015 (%)	(3.74		)%	(1.25		)%	0.47		%	0.97		%



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, 2016	0	$	0.00	0	��	2,550,790
August 31, 2016	918	9.88		—		2,410,884
September 30, 2016	0	0.00		0		2,439,556

Total	918	$	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.