UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2017
Or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-11138
First Commonwealth Financial Corporation
(Exact name of registrant as specified in its charter)
 
Pennsylvania 25-1428528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
601 Philadelphia Street, Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
724-349-7220
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x    Accelerated filer  ¨    Smaller reporting company  ¨    Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of issuer’s common stock, $1.00 par value, as of MayAugust 8, 2017, was 97,478,60597,479,039.


Table of Contents



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

2

Table of Contents




ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
 March 31,
2017
 December 31,
2016
 
(dollars in thousands,
except share data)
Assets   
Cash and due from banks$75,160
 $91,033
Interest-bearing bank deposits47,944
 24,644
Securities available for sale, at fair value832,754
 778,612
Securities held to maturity, at amortized cost (Fair value of $383,735 and $368,618 at March 31, 2017 and December 31, 2016, respectively)386,954
 372,513
Other investments38,669
 36,498
Loans held for sale9,588
 7,052
Loans:   
Portfolio loans4,907,961
 4,879,347
Allowance for credit losses(48,676) (50,185)
Net loans4,859,285
 4,829,162
Premises and equipment, net66,329
 67,534
Other real estate owned6,910
 6,805
Goodwill186,483
 186,483
Amortizing intangibles, net11,441
 12,013
Bank owned life insurance188,313
 187,021
Other assets99,147
 84,648
Total assets$6,808,977
 $6,684,018
Liabilities   
Deposits (all domestic):   
Noninterest-bearing$1,270,136
 $1,268,786
Interest-bearing3,699,593
 3,678,622
Total deposits4,969,729
 4,947,408
Short-term borrowings961,601
 867,943
Subordinated debentures72,167
 72,167
Other long-term debt8,604
 8,749
Total long-term debt80,771
 80,916
Other liabilities35,881
 37,822
Total liabilities6,047,982
 5,934,089
Shareholders’ Equity   
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
 
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at March 31, 2017 and December 31, 2016, and 89,113,083 and 89,007,077 shares outstanding at March 31, 2017 and December 31, 2016, respectively105,563
 105,563
Additional paid-in capital367,607
 366,426
Retained earnings421,533
 412,764
Accumulated other comprehensive loss, net(6,083) (7,027)
Treasury stock (16,450,372 and 16,556,378 shares at March 31, 2017 and December 31, 2016, respectively)(127,625) (127,797)
Total shareholders’ equity760,995
 749,929
Total liabilities and shareholders’ equity$6,808,977
 $6,684,018

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

Table of Contents



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

2

Table of Contents




ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

 June 30, 2017 December 31, 2016
 
(dollars in thousands,
except share data)
Assets   
Cash and due from banks$103,602
 $91,033
Interest-bearing bank deposits12,310
 24,644
Securities available for sale, at fair value786,246
 778,612
Securities held to maturity, at amortized cost (Fair value of $449,127 and $368,618 at June 30, 2017 and December 31, 2016, respectively)450,886
 372,513
Other investments34,340
 36,498
Loans held for sale9,785
 7,052
Loans:   
Portfolio loans5,374,782
 4,879,347
Allowance for credit losses(48,067) (50,185)
Net loans5,326,715
 4,829,162
Premises and equipment, net79,670
 67,534
Other real estate owned5,964
 6,805
Goodwill255,359
 186,483
Amortizing intangibles, net16,671
 12,013
Bank owned life insurance210,285
 187,021
Other assets91,553
 84,648
Total assets$7,383,386
 $6,684,018
Liabilities   
Deposits (all domestic):   
Noninterest-bearing$1,404,081
 $1,268,786
Interest-bearing4,129,054
 3,678,622
Total deposits5,533,135
 4,947,408
Short-term borrowings846,137
 867,943
Subordinated debentures72,167
 72,167
Other long-term debt8,458
 8,749
Capital lease obligation7,764
 
Total long-term debt88,389
 80,916
Other liabilities36,260
 37,822
Total liabilities6,503,921
 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 June 30, 2017 and December 31, 2016, respectively, and 97,483,067 and 89,007,077 shares outstanding at June 30, 2017 and December 31, 2016, respectively113,915
 105,563
Additional paid-in capital470,123
 366,426
Retained earnings427,748
 412,764
Accumulated other comprehensive loss, net(4,991) (7,027)
Treasury stock (16,431,835 and 16,556,378 shares at June 30, 2017 and December 31, 2016, respectively)(127,330) (127,797)
Total shareholders’ equity879,465
 749,929
Total liabilities and shareholders’ equity$7,383,386
 $6,684,018

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

Table of Contents



ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Three Months EndedFor the Three Months Ended For the Six Months Ended
 March 31,June 30, June 30,
 2017 20162017 2016 2017 2016
(dollars in thousands, except share data)(dollars in thousands, except share data)
Interest Income           
Interest and fees on loans $48,300
 $45,034
$54,913
 $45,698
 $103,213
 $90,732
Interest and dividends on investments:           
Taxable interest 6,994
 7,146
7,364
 7,028
 14,358
 14,174
Interest exempt from federal income taxes 397
 361
405
 371
 802
 732
Dividends 476
 806
383
 748
 859
 1,554
Interest on bank deposits 12
 6
55
 5
 67
 11
Total interest income 56,179
 53,353
63,120
 53,850
 119,299
 107,203
Interest Expense           
Interest on deposits 1,812
 1,589
2,208
 1,928
 4,020
 3,517
Interest on short-term borrowings 1,749
 2,235
2,197
 2,100
 3,946
 4,335
Interest on subordinated debentures 705
 634
738
 644
 1,443
 1,278
Interest on other long-term debt 83
 88
81
 87
 164
 175
Interest on lease obligations79
 
 79
 
Total interest expense 4,349
 4,546
5,303
 4,759
 9,652
 9,305
Net Interest Income 51,830
 48,807
57,817
 49,091
 109,647
 97,898
Provision for credit losses 3,229
 6,526
(1,609) 10,372
 1,620
 16,898
Net Interest Income after Provision for Credit Losses 48,601
 42,281
59,426
 38,719
 108,027
 81,000
Noninterest Income           
Net securities gains 652
 
Net securities (losses) gains(49) 28
 603
 28
Trust income 1,417
 1,255
1,711
 1,320
 3,128
 2,575
Service charges on deposit accounts 4,319
 3,708
4,736
 3,845
 9,055
 7,553
Insurance and retail brokerage commissions 2,082
 1,959
2,442
 1,985
 4,524
 3,944
Income from bank owned life insurance 1,292
 1,296
1,449
 1,311
 2,741
 2,607
Gain on sale of mortgage loans 977
 683
1,315
 932
 2,292
 1,615
Gain on sale of other loans and assets 307
 195
457
 466
 764
 661
Card-related interchange income 4,251
 3,557
4,842
 3,784
 9,093
 7,341
Derivatives mark to market 2
 (1,014)(37) (531) (35) (1,545)
Swap fee (expense) income (73) 460
Swap fee income314
 800
 241
 1,260
Other income 1,706
 1,616
1,724
 1,618
 3,430
 3,234
Total noninterest income 16,932
 13,715
18,904
 15,558
 35,836
 29,273
Noninterest Expense           
Salaries and employee benefits 23,466
 21,677
25,298
 19,888
 48,764
 41,565
Net occupancy expense 3,761
 3,481
4,121
 3,186
 7,882
 6,667
Furniture and equipment expense 3,088
 2,867
3,323
 2,882
 6,411
 5,749
Data processing expense 2,085
 1,759
2,345
 1,788
 4,430
 3,547
Advertising and promotion expense 806
 526
988
 664
 1,794
 1,190
Pennsylvania shares tax expense 816
 758
1,161
 1,092
 1,977
 1,850
Intangible amortization 572
 137
846
 114
 1,418
 251
Collection and repossession expense 497
 569
443
 474
 940
 1,043
Other professional fees and services 959
 791
1,096
 873
 2,055
 1,664
FDIC insurance 793
 1,038
977
 1,062
 1,770
 2,100
Loss on sale or write-down of assets 99
 96
1,220
 345
 1,319
 441
Litigation and operational losses 232
 244
277
 635
 509
 879
Merger and acquisition related 611
 
9,870
 240
 10,481
 240
Other operating expenses 4,980
 4,201
6,298
 4,167
 11,278
 8,368
Total noninterest expense 42,765
 38,144
58,263
 37,410
 101,028
 75,554
Income Before Income Taxes 22,768
 17,852
20,067
 16,867
 42,835
 34,719
Income tax provision 6,880
 5,379
6,054
 4,860
 12,934
 10,239
Net Income $15,888
 $12,473
$14,013
 $12,007
 $29,901
 $24,480
Average Shares Outstanding 88,929,892
 88,840,088
97,183,599
 88,831,758
 93,079,546
 88,835,923
Average Shares Outstanding Assuming Dilution 88,987,671
 88,845,201
97,232,288
 88,838,614
 93,125,939
 88,840,683
Per Share Data:           
Basic Earnings per Share $0.18
 $0.14
$0.14
 $0.14
 $0.32
 $0.28
Diluted Earnings per Share $0.18
 $0.14
$0.14
 $0.14
 $0.32
 $0.28
Cash Dividends Declared per Common Share $0.08
 $0.07
$0.08
 $0.07
 $0.16
 $0.14

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

Table of Contents



ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 For the Three Months EndedFor the Three Months Ended For the Six Months Ended
 March 31,June 30, June 30,
 2017 20162017 2016 2017 2016
(dollars in thousands)(dollars in thousands)
Net Income $15,888
 $12,473
$14,013
 $12,007
 $29,901
 $24,480
Other comprehensive income, before tax expense:           
Unrealized holding gains on securities arising during the period 2,543
 10,070
1,702
 3,802
 4,245
 13,872
Less: reclassification adjustment for gains on securities included in net income (652) 
49
 (28) (603) (28)
Unrealized holding (losses) gains on derivatives arising during the period (516) 1,735
(66) 359
 (582) 2,094
Less: reclassification adjustment for losses (gains) on derivatives included in net income 78
 (15)
Less: reclassification adjustment for (gains) losses on derivatives included in net income(5) (26) 73
 (41)
Total other comprehensive income, before tax expense 1,453
 11,790
1,680
 4,107
 3,133
 15,897
Income tax expense related to items of other comprehensive income (509) (4,126)(588) (1,438) (1,097) (5,564)
Total other comprehensive income 944
 7,664
1,092
 2,669
 2,036
 10,333
Comprehensive Income $16,832
 $20,137
$15,105
 $14,676
 $31,937
 $34,813


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

Table of Contents



ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
net
 
Treasury
Stock
 
Total
Shareholders’
Equity
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
net
 
Treasury
Stock
 
Total
Shareholders’
Equity
(dollars in thousands, except share and per share data)(dollars in thousands, except share and per share data)
Balance at December 31, 201689,007,077
 $105,563
 $366,426
 $412,764
 $(7,027) $(127,797) $749,929
89,007,077
 $105,563
 $366,426
 $412,764
 $(7,027) $(127,797) $749,929
Net income      15,888
     15,888
      29,901
     29,901
Other comprehensive income        944
   944
        2,036
   2,036
Cash dividends declared ($0.08 per share)      (7,119)     (7,119)
Cash dividends declared ($0.16 per share)      (14,917)     (14,917)
Treasury stock acquired(78,632)         (1,102) (1,102)(81,696)         (1,141) (1,141)
Treasury stock reissued158,638
   1,044
 
   1,214
 2,258
181,211
   1,170
 
   1,387
 2,557
Restricted stock26,000
 
 137
 
   60
 197
25,028
 
 138
 
   221
 359
Balance at March 31, 201789,113,083
 $105,563
 $367,607
 $421,533
 $(6,083) $(127,625) $760,995
Common stock issued8,351,447
 8,352
 102,389
       110,741
Balance at June 30, 201797,483,067
 $113,915
 $470,123
 $427,748
 $(4,991) $(127,330) $879,465
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
net
 
Treasury
Stock
 
Total
Shareholders’
Equity
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
net
 
Treasury
Stock
 
Total
Shareholders’
Equity
(dollars in thousands, except share and per share data)(dollars in thousands, except share and per share data)
Balance at December 31, 201588,961,268
 $105,563
 $365,981
 $378,081
 $(2,386) $(127,693) $719,546
88,961,268
 $105,563
 $365,981
 $378,081
 $(2,386) $(127,693) $719,546
Net income      12,473
     12,473
      24,480
     24,480
Other comprehensive income        7,664
   7,664
        10,333
   10,333
Cash dividends declared ($0.07 per share)      (6,224)     (6,224)
Cash dividends declared ($0.14 per share)      (12,451)     (12,451)
Treasury stock acquired(55,301)         (488) (488)(97,769)         (902) (902)
Treasury stock reissued23,148
   39
 
   177
 216
Restricted stock53,348
 
 109
 
   234
 343
63,348
 
 161
 
   403
 564
Balance at March 31, 201688,959,315
 $105,563
 $366,090
 $384,330
 $5,278
 $(127,947) $733,314
Balance at June 30, 201688,949,995
 $105,563
 $366,181
 $390,110
 $7,947
 $(128,015) $741,786


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

Table of Contents



ITEM 1. Financial Statements and Supplementary Data (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months EndedFor the Six Months Ended
March 31,June 30,
2017 20162017 2016
Operating Activities(dollars in thousands)(dollars in thousands)
Net income$15,888
 $12,473
$29,901
 $24,480
Adjustment to reconcile net income to net cash provided by operating activities:      
Provision for credit losses3,229
 6,526
1,620
 16,898
Deferred tax expense2,506
 1,200
3,968
 1,909
Depreciation and amortization2,113
 1,740
4,414
 3,481
Net (gains) losses on securities and other assets(1,718) 218
Net gains on securities and other assets(2,209) (372)
Net amortization of premiums and discounts on securities867
 1,102
1,782
 2,264
Income from increase in cash surrender value of bank owned life insurance(1,292) (1,296)(2,741) (2,607)
Increase in interest receivable(338) (911)
Decrease (increase) in interest receivable242
 (315)
Mortgage loans originated for sale(27,580) (22,269)(70,521) (56,139)
Proceeds from sale of mortgage loans29,829
 22,858
71,464
 55,251
Increase (decrease) in interest payable571
 (26)857
 (84)
Increase in income taxes payable4,354
 2,811
Decrease in income taxes payable(764) (2,534)
Other-net(991) (4,834)3,729
 (4,758)
Net cash provided by operating activities27,438
 19,592
41,742
 37,474
Investing Activities      
Transactions with securities held to maturity:      
Proceeds from maturities and redemptions10,826
 6,924
22,227
 18,601
Purchases(25,140) (19,695)(101,372) (40,161)
Transactions with securities available for sale:      
Proceeds from sales103,618
 55,744
Proceeds from maturities and redemptions33,125
 35,815
66,189
 82,527
Purchases(85,220) (29,930)(85,220) (94,777)
Purchases of FHLB stock(12,883) (10,281)(22,329) (20,324)
Proceeds from the redemption of FHLB stock10,712
 12,636
27,736
 25,189
Proceeds from sale of loans8,501
 213
Proceeds from sale of other assets1,631
 2,101
2,744
 3,621
Restricted cash(21,284) 
Acquisition, net of cash acquired3,188
 
Net increase in loans(37,514) (118,137)(125,791) (173,817)
Purchases of other assets(410) 
(547) (204)
Purchases of premises and equipment(1,531) (2,251)(3,939) (4,201)
Net cash used in investing activities(127,688) (122,818)(104,995) (147,589)
Financing Activities      
Net decrease in federal funds purchased
 (4,000)
 (4,000)
Net increase in other short-term borrowings93,658
 11,917
Net decrease in other short-term borrowings(21,806) (42,138)
Net increase in deposits22,385
 105,873
101,501
 198,838
Repayments of other long-term debt(145) (139)(291) (280)
Repayments of capital lease obligation(86) 
Dividends paid(7,119) (6,224)(14,917) (12,451)
Proceeds from reissuance of treasury stock228
 216
Purchase of treasury stock(1,102) (488)(1,141) (902)
Net cash provided by financing activities107,677
 106,939
63,488
 139,283
Net increase in cash and cash equivalents7,427
 3,713
235
 29,168
Cash and cash equivalents at January 1115,677
 69,452
115,677
 69,452
Cash and cash equivalents at March 31$123,104
 $73,165
Cash and cash equivalents at June 30$115,912
 $98,620

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


ITEM 1. Financial Statements and Supplementary Data
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or the “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of First Commonwealth’s financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity as of and for the periods presented.
The results of operations for the threesix months ended March 31,June 30, 2017 are not necessarily indicative of the results that may be expected for the full year of 2017. These interim financial statements should be read in conjunction with First Commonwealth’s 2016 Annual Report on Form 10-K.
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.
Note 2 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 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.


8

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 equivalents24,420
  
   Investment securities88,986
  
   FHLB stock3,250
  
   Loans383,083
  
   Premises and other equipment12,143
  
   Core deposit intangible5,998
  
   Other real estate68
  
   Bank owned life insurance20,522
  
   Other assets16,436
  
     Total assets acquired554,906
  
    
Fair Value of Liabilities Assumed   
   Deposits484,366
  
   Capital lease obligation7,851
  
  Other liabilities1,182
  
      Total liabilities assumed493,399
  
    
Total Fair Value of Identifiable Net Assets  61,507
    
Goodwill  $70,537
The goodwill of $70.5 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. The Company may obtain additional information to refine the valuation of the acquired assets and liabilities and adjust the recorded fair value, although such adjustments are not expected to be significant. Adjustments recorded to the acquired assets and liabilities will be applied prospectively in accordance with ASU No. 2015-16, “Business Combinations.”
Costs related to the acquisition totaled $10.3 million. These amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the Condensed Consolidated Statements of Income.

9

Table of Contents



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.

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 (losses) gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Condensed Consolidated Statements of Income.
For the Three Months Ended March 31,For the Six Months Ended June 30,
2017 20162017 2016
Pretax Amount Tax (Expense) Benefit Net of Tax Amount Pretax Amount Tax (Expense) Benefit Net of Tax AmountPretax Amount Tax (Expense) Benefit Net of Tax Amount Pretax Amount Tax (Expense) Benefit Net of Tax Amount
(dollars in thousands)(dollars in thousands)
Unrealized gains on securities:                      
Unrealized holding gains on securities arising during the period$2,543
 $(890) $1,653
 $10,070
 $(3,524) $6,546
$4,245
 $(1,486) $2,759
 $13,872
 $(4,855) $9,017
Reclassification adjustment for gains on securities included in net income(652) 228
 (424) 
 
 
(603) 211
 (392) (28) 10
 (18)
Total unrealized gains on securities1,891
 (662) 1,229
 10,070
 (3,524) 6,546
3,642
 (1,275) 2,367
 13,844
 (4,845) 8,999
Unrealized (losses) gains on derivatives:                      
Unrealized holding (losses) gains on derivatives arising during the period(516) 181
 (335) 1,735
 (607) 1,128
(582) 204
 (378) 2,094
 (733) 1,361
Reclassification adjustment for losses (gains) on derivatives included in net income78
 (28) 50
 (15) 5
 (10)73
 (26) 47
 (41) 14
 (27)
Total unrealized (losses) gains on derivatives(438) 153
 (285) 1,720
 (602) 1,118
(509) 178
 (331) 2,053
 (719) 1,334
Total other comprehensive income$1,453
 $(509) $944
 $11,790
 $(4,126) $7,664
$3,133
 $(1,097) $2,036
 $15,897
 $(5,564) $10,333

 For the Three Months Ended June 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 on securities:           
Unrealized holding gains on securities arising during the period$1,702
 $(596) $1,106
 $3,802
 $(1,331) $2,471
Reclassification adjustment for losses (gains) on securities included in net income49
 (17) 32
 (28) 10
 (18)
Total unrealized gains on securities1,751
 (613) 1,138
 3,774
 (1,321) 2,453
Unrealized (losses) gains on derivatives:           
Unrealized holding (losses) gains on derivatives arising during the period(66) 23
 (43) 359
 (126) 233
Reclassification adjustment for gains on derivatives included in net income(5) 2
 (3) (26) 9
 (17)
Total unrealized (losses) gains on derivatives(71) 25
 (46) 333
 (117) 216
Total other comprehensive income$1,680
 $(588) $1,092
 $4,107
 $(1,438) $2,669
 

810

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


The following table details the change in components of OCI for the threesix months ended March 31June 30:
2017 20162017 2016
Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss) Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss)Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss) Securities Available for SalePost-Retirement ObligationDerivativesAccumulated Other Comprehensive Income (Loss)
(dollars in thousands)(dollars in thousands)
Balance at December 31$(7,455)$225
$203
$(7,027) $(2,956)$10
$560
$(2,386)$(7,455)$225
$203
$(7,027) $(2,956)$10
$560
$(2,386)
Other comprehensive income before reclassification adjustment1,653

(335)1,318
 6,546

1,128
7,674
2,759

(378)2,381
 9,017

1,361
10,378
Amounts reclassified from accumulated other comprehensive (loss) income(424)
50
(374) 

(10)(10)(392)
47
(345) (18)
(27)(45)
Net other comprehensive income during the period1,229

(285)944
 6,546

1,118
7,664
2,367

(331)2,036
 8,999

1,334
10,333
Balance at March 31$(6,226)$225
$(82)$(6,083) $3,590
$10
$1,678
$5,278
Balance at June 30$(5,088)$225
$(128)$(4,991) $6,043
$10
$1,894
$7,947

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 threesix months ended March 31:June 30:
 2017 2016
 (dollars in thousands)
Cash paid during the period for:   
Interest$3,832
 $4,674
Income taxes1,039
 1,000
Non-cash investing and financing activities:   
Loans transferred to other real estate owned and repossessed assets958
 1,355
Loans transferred from held to maturity to held for sale3,613
 
Gross increase in market value adjustment to securities available for sale1,892
 10,070
Gross (decrease) increase in market value adjustment to securities derivatives(438) 1,720
Investments committed to purchase, not settled498
 600
Noncash treasury stock reissuance2,258
 

Note 4 Earnings per Share
The following table summarizes the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computations:
 For the Three Months Ended March 31,
 2017 2016
Weighted average common shares issued105,563,455
 105,563,455
Average treasury stock shares(16,527,204) (16,623,094)
Average unearned nonvested shares(106,359) (100,273)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share88,929,892
 88,840,088
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share57,779
 5,113
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share88,987,671
 88,845,201
 2017 2016
 (dollars in thousands)
Cash paid during the period for:   
Interest$8,917
 $9,583
Income taxes11,394
 10,500
Non-cash investing and financing activities:   
Loans transferred to other real estate owned and repossessed assets1,519
 2,632
Loans transferred from held to maturity to held for sale9,053
 3,573
Gross increase in market value adjustment to securities available for sale3,642
 13,845
Gross (decrease) increase in market value adjustment to securities derivatives(508) 2,053
Investments committed to purchase, not settled
 1,946
Noncash treasury stock reissuance2,258
 
Net assets acquired through acquisition37,087
 
Proceeds from death benefit on bank-owned life insurance not received
 523

911

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



Note 5 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 June 30, For the Six Months Ended June 30,
 2017 2016 2017 2016
Weighted average common shares issued113,731,354
 105,563,455
 109,669,968
 105,563,455
Average treasury stock shares(16,435,520) (16,620,341) (16,481,109) (16,621,717)
Average unearned nonvested shares(112,235) (111,356) (109,313) (105,815)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share97,183,599
 88,831,758
 93,079,546
 88,835,923
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share48,689
 6,856
 46,393
 4,760
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share97,232,288
 88,838,614
 93,125,939
 88,840,683
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 threesix months ended March 31June 30 because to do so would have been antidilutive.
2017 20162017 2016
  Price Range   Price Range  Price Range   Price Range
Shares From To Shares From ToShares From To Shares From To
Restricted Stock13,750
 $13.96
 $13.96
 88,508
 $7.21
 $9.84
26,022
 $9.26
 $13.96
 81,887
 $7.57
 $9.84
Restricted Stock Units24,375
 $15.09
 $15.09
 
 $
 $
24,375
 $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:
March 31, 2017 December 31, 2016June 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:      
Commitments to extend credit$1,687,588
 $1,733,820
$1,787,811
 $1,733,820
Financial standby letters of credit16,894
 18,108
15,540
 18,108
Performance standby letters of credit27,169
 26,630
25,760
 26,630
Commercial letters of credit1,142
 1,301
871
 1,301
 
The notional amounts outstanding as of March 31,June 30, 2017 include amounts issued in 2017 of $0.7$0.4 million in financial standby letters of credit, $0.10.7 million in performance standby letters of credit and no commercial letters of credit. A liability of $0.10.2 million and $0.2 million has been recorded as of March 31,June 30, 2017 and December 31, 2016, respectively, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

12

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 $3.94.6 million as of March 31,June 30, 2017 and $4.1 million as of December 31, 2016. This liability is reflected in "Other liabilities" in the Condensed Consolidated Statements of Financial Condition. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.
Legal Proceedings
First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of March 31,June 30, 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

10

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


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


13

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:
 March 31, 2017 December 31, 2016
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Estimated
Fair Value
 (dollars in thousands)
Obligations of U.S. Government Agencies:               
Mortgage-Backed Securities – Residential$14,585
 $1,440
 $(7) $16,018
 $15,143
 $1,481
 $(7) $16,617
Obligations of U.S. Government-Sponsored Enterprises:      
       
Mortgage-Backed Securities – Residential726,240
 4,513
 (9,799) 720,954
 683,601
 4,557
 (11,305) 676,853
Mortgage-Backed Securities – Commercial
 
 
 
 1
 
 
 1
Other Government-Sponsored Enterprises16,700
 
 (58) 16,642
 16,700
 
 (69) 16,631
Obligations of States and Political Subdivisions27,077
 283
 
 27,360
 27,075
 195
 (41) 27,229
Corporate Securities15,896
 476
 (3) 16,369
 5,903
 416
 
 6,319
Pooled Trust Preferred Collateralized Debt Obligations40,165
 530
 (6,954) 33,741
 39,989
 427
 (7,124) 33,292
Total Debt Securities840,663
 7,242
 (16,821) 831,084
 788,412
 7,076
 (18,546) 776,942
Equities1,670
 
 
 1,670
 1,670
 
 
 1,670
Total Securities Available for Sale$842,333
 $7,242
 $(16,821) $832,754
 $790,082
 $7,076
 $(18,546) $778,612


11

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

 June 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
 (dollars in thousands)
Obligations of U.S. Government Agencies:               
Mortgage-Backed Securities – Residential$13,839
 $1,352
 $(7) $15,184
 $15,143
 $1,481
 $(7) $16,617
Obligations of U.S. Government-Sponsored Enterprises:      
       
Mortgage-Backed Securities – Residential694,114
 4,638
 (8,063) 690,689
 683,601
 4,557
 (11,305) 676,853
Mortgage-Backed Securities – Commercial
 
 
 
 1
 
 
 1
Other Government-Sponsored Enterprises1,096
 
 
 1,096
 16,700
 
 (69) 16,631
Obligations of States and Political Subdivisions27,079
 476
 
 27,555
 27,075
 195
 (41) 27,229
Corporate Securities15,899
 505
 
 16,404
 5,903
 416
 
 6,319
Pooled Trust Preferred Collateralized Debt Obligations40,378
 463
 (7,193) 33,648
 39,989
 427
 (7,124) 33,292
Total Debt Securities792,405
 7,434
 (15,263) 784,576
 788,412
 7,076
 (18,546) 776,942
Equities1,670
 
 
 1,670
 1,670
 
 
 1,670
Total Securities Available for Sale$794,075
 $7,434
 $(15,263) $786,246
 $790,082
 $7,076
 $(18,546) $778,612

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

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

14

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


The amortized cost and estimated fair value of debt securities available for sale at March 31,June 30, 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$3,300
 $3,294
$996
 $997
Due after 1 but within 5 years27,386
 27,361
14,087
 14,176
Due after 5 but within 10 years27,077
 27,360
27,079
 27,555
Due after 10 years42,075
 36,097
42,290
 35,975
99,838
 94,112
84,452
 78,703
Mortgage-Backed Securities (a)740,825
 736,972
707,953
 705,873
Total Debt Securities$840,663
 $831,084
$792,405
 $784,576
 
(a)
Mortgage-Backed Securities include an amortized cost of $14.613.8 million and a fair value of $16.015.2 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $726.2694.1 million and a fair value of $721.0690.7 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 threesix months ended March 31:June 30:
2017 20162017 2016
(dollars in thousands)(dollars in thousands)
Proceeds from sales$
 $
$103,618
 $55,744
Gross gains (losses) realized:      
Sales Transactions:      
Gross gains$
 $
$
 $304
Gross losses
 
(49) (276)

 
(49) 28
Maturities and impairment      
Gross gains652
 
712
 
Gross losses
 
(60) 
Other-than-temporary impairment
 
652
 
652
 
Net gains and impairment$652
 $
$603
 $28

Proceeds from sales of investments for the six months ended June 30, 2017 included the liquidation of the DCB investment portfolio in April 2017. These securities were sold because of the 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 $438.4517.2 million and $445.8 million were pledged as of March 31,June 30, 2017 and December 31, 2016, respectively, to secure public deposits and for other purposes required or permitted by law.

1215

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


Securities Held to Maturity
Below is an analysis of the amortized cost and fair values of debt securities held to maturity at:
March 31, 2017 December 31, 2016June 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$4,266
 $
 $(19) $4,247
 $4,297
 $
 $(4) $4,293
$4,142
 $
 $(13) $4,129
 $4,297
 $
 $(4) $4,293
Mortgage-Backed Securities- Commercial34,194
 
 (700) 33,494
 34,444
 
 (561) 33,883
58,780
 
 (727) 58,053
 34,444
 
 (561) 33,883
Obligations of U.S. Government-Sponsored Enterprises:                              
Mortgage-Backed Securities – Residential294,624
 83
 (2,224) 292,483
 280,430
 5
 (2,527) 277,908
332,768
 193
 (1,527) 331,434
 280,430
 5
 (2,527) 277,908
Mortgage-Backed Securities – Commercial14,536
 
 (51) 14,485
 14,675
 
 (142) 14,533
14,393
 22
 
 14,415
 14,675
 
 (142) 14,533
Obligations of States and Political Subdivisions39,134
 137
 (443) 38,828
 38,667
 55
 (721) 38,001
40,603
 431
 (138) 40,896
 38,667
 55
 (721) 38,001
Debt Securities Issued by Foreign Governments200
 
 (2) 198
 
 
 
 
200
 
 
 200
 
 
 
 
Total Securities Held to Maturity$386,954
 $220
 $(3,439) $383,735
 $372,513
 $60
 $(3,955) $368,618
$450,886
 $646
 $(2,405) $449,127
 $372,513
 $60
 $(3,955) $368,618
The amortized cost and estimated fair value of debt securities held to maturity at March 31,June 30, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
Amortized
Cost
 Estimated
Fair Value
Amortized
Cost
 Estimated
Fair Value
(dollars in thousands)(dollars in thousands)
Due within 1 year$
 $
$
 $
Due after 1 but within 5 years2,824
 2,831
3,118
 3,142
Due after 5 but within 10 years32,379
 32,173
32,061
 32,354
Due after 10 years4,131
 4,022
5,624
 5,600
39,334
 39,026
40,803
 41,096
Mortgage-Backed Securities (a)347,620
 344,709
410,083
 408,031
Total Debt Securities$386,954
 $383,735
$450,886
 $449,127
(a)Mortgage-Backed Securities include an amortized cost of $38.5$62.9 million and a fair value of $37.7$62.2 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $309.2$347.2 million and a fair value of $307.0$345.8 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
Securities held to maturity with an amortized cost of $217.8$296.3 million and $119.2 million were pledged as of March 31,June 30, 2017 and December 31, 2016, respectively, to secure public deposits and for other purposes required or permitted by law.


1316

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 threesix months ended March 31,June 30, 2017 and 2016, no other-than-temporary impairment charges were recognized.
First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell, or be required to sell, the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security, our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note 10,11, “Fair Values of Assets and Liabilities,” for additional information.
The following table presents the gross unrealized losses and estimated fair values at March 31,June 30, 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 TotalLess Than 12 Months 12 Months or More Total
Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
(dollars in thousands)(dollars in thousands)
Obligations of U.S. Government Agencies:                      
Mortgage-Backed Securities – Residential$6,014
 $(26) $
 $
 $6,014
 $(26)$5,825
 $(20) $
 $
 $5,825
 $(20)
Mortgage-Backed Securities – Commercial33,494
 (700) 
 
 33,494
 (700)58,053
 (727) 
 
 58,053
 (727)
Obligations of U.S. Government-Sponsored Enterprises:                      
Mortgage-Backed Securities – Residential689,399
 (10,015) 66,191
 (2,008) 755,590
 (12,023)634,704
 (7,786) 63,386
 (1,804) 698,090
 (9,590)
Mortgage-Backed Securities – Commercial14,485
 (51) 
 
 14,485
 (51)
Other Government-Sponsored Enterprises16,642
 (58) 
 
 16,642
 (58)100
 
 
 
 100
 
Obligations of States and Political Subdivisions22,180
 (443) 
 
 22,180
 (443)7,786
 (138) 
 
 7,786
 (138)
Debt securities issued by foreign governments198
 (2) 
 
 198
 (2)
Corporate Securities4,986
 (3) 
 
 4,986
 (3)
Pooled Trust Preferred Collateralized Debt Obligations
 
 29,274
 (6,954) 29,274
 (6,954)
 
 29,187
 (7,193) 29,187
 (7,193)
Total Securities$787,398
 $(11,298) $95,465
 $(8,962) $882,863
 $(20,260)$706,468
 $(8,671) $92,573
 $(8,997) $799,041
 $(17,668)

At March 31,June 30, 2017, fixed income securities issued by U.S. Government-sponsored enterprises and U.S. Government agencies comprised 60%54% and 4%, respectively, of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 34%41% of the unrealized losses primarily due to the illiquid market for this investment type. At March 31,June 30, 2017, there are 11687 debt securities in an unrealized loss position.

1417

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


The following table presents the gross unrealized losses and estimated fair values at December 31, 2016 by investment category and time frame for which securities have been in a continuous unrealized loss position:
 Less Than 12 Months 12 Months or More Total
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 Estimated
Fair Value
 Gross
Unrealized
Losses
 (dollars in thousands)
Obligations of U.S. Government Agencies:           
Mortgage-Backed Securities – Residential$4,898
 $(11) $
 $
 $4,898
 $(11)
Mortgage-Backed Securities - Commercial33,883
 (561) 
 
 33,883
 (561)
Obligations of U.S. Government-Sponsored Enterprises:           
Mortgage-Backed Securities – Residential670,708
 (11,630) 56,200
 (2,202) 726,908
 (13,832)
Mortgage-Backed Securities – Commercial14,534
 (142) 
 
 14,534
 (142)
Other Government-Sponsored Enterprises16,632
 (69) 
 
 16,632
 (69)
Obligation of States and Political Subdivisions33,277
 (762) 
 
 33,277
 (762)
Pooled Trust Preferred Collateralized Debt Obligations
 
 28,952
 (7,124) 28,952
 (7,124)
Total Securities$773,932
 $(13,175) $85,152
 $(9,326) $859,084
 $(22,501)
As of March 31,June 30, 2017, our corporate securities had an amortized cost and an estimated fair value of $15.9 million and $16.4 million, respectively. As of December 31, 2016, our corporate securities had an amortized cost and estimated fair value of $5.9 million and $6.3 million, respectively. Corporate securities are comprised of debt for large regional banks. There were $3 thousand in unrealized losses onno corporate securities as of March 31, 2017 and there were no securities in an unrealized loss position as ofJune 30, 2017 and December 31, 2016. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.
As of March 31,June 30, 2017, the book value of our pooled trust preferred collateralized debt obligations totaled $40.240.4 million with an estimated fair value of $33.733.6 million, which includes securities comprised of 257256 banks and other financial institutions. All of our pooled securities are mezzanine tranches, two of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of March 31,June 30, 2017, after taking into account management’s best estimates of future interest deferrals and defaults, two of our securities had no excess subordination in the tranches we own and six of our securities had excess subordination which ranged from 2% to 85%84% of the current performing collateral.
 
The following table provides information related to our pooled trust preferred collateralized debt obligations as of March 31,June 30, 2017:
DealClass Book
Value
 Estimated Fair
Value
 Unrealized
Gain
(Loss)
 Moody’s/
Fitch
Ratings
 Number
of
Banks
 Deferrals
and
Defaults
as a % of
Current
Collateral
 Excess
Subordination
as a % of
Current
Performing
Collateral
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 IVMezzanine $1,827
 $1,366
 $(461) B1/BB 6
 18.05% 61.36%Mezzanine $1,823
 $1,361
 $(462) Ba1/BB 6
 18.05% 60.51%
Pre TSL VIIIMezzanine 1,955
 2,142
 187
 C/C 27
 40.34
 0.00
Mezzanine 1,983
 2,139
 156
 C/C 27
 40.34
 0.00
Pre TSL IXMezzanine 2,421
 1,971
 (450) B1/C 37
 27.83
 10.19
Mezzanine 2,430
 1,965
 (465) B1/C 37
 27.83
 11.71
Pre TSL XMezzanine 1,769
 2,024
 255
 Caa1/C 42
 30.10
 2.11
Mezzanine 1,801
 2,016
 215
 Caa1/C 42
 30.10
 1.97
Pre TSL XIIMezzanine 5,940
 4,903
 (1,037) B3/C 64
 24.09
 0.00
Mezzanine 5,991
 4,913
 (1,078) B3/C 64
 24.13
 0.00
Pre TSL XIIIMezzanine 13,010
 11,009
 (2,001) Ba3/CCC 53
 10.01
 55.04
Mezzanine 13,070
 10,965
 (2,105) Ba1/CCC 52
 8.02
 45.06
Pre TSL XIVMezzanine 13,030
 10,025
 (3,005) Ba2/CCC 52
 12.87
 38.83
Mezzanine 13,066
 9,983
 (3,083) Ba2/CCC 52
 12.87
 40.25
MMCap IMezzanine 213
 301
 88
 Ca/C 8
 58.11
 85.00
Mezzanine 214
 306
 92
 Ca/C 8
 58.11
 83.52
Total $40,165
 $33,741
 $(6,424)       $40,378
 $33,648
 $(6,730)      

1518

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


Lack of liquidity in the market for trust preferred collateralized debt obligations, below investment grade credit ratings and market uncertainties related to the financial industry are factors contributing to the impairment on these securities.
All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies and therefore are not considered covered funds under the Volcker Rule.
On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three and six months ended March 31,June 30, 2017 and 2016, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.
Additional information related to the discounted cash flow analysis follows:
Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at March 31,June 30, 2017. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.
 
Results of a discounted cash flow test are significantly affected by other variables, such as the estimate of future cash flows, credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following provides additional information for each of these variables:
Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions, which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.
Credit Analysis – A quarterly credit evaluation is performed for each of the 257256 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.
Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they will become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of March 31,June 30, 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.

1619

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


In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults that results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security. The results of the stress test allow management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.
Our cash flow analysis as of March 31,June 30, 2017, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the threesix months ended March 31,June 30, 2017. Based upon the analysis performed by management, it is probable that two of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the previous table with 0.00% “Excess Subordination as a Percentage% of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of March 31,June 30, 2017 indicates it is probable that we will collect all contractual principal and interest payments. For five of those securities, PreTSL IX, PreTSL X, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.
During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of March 31,June 30, 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 115%111% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.
The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:
 For the Three Months Ended March 31,For the Three Months Ended June 30, For the Six Months Ended June 30,
 2017 20162017 2016 2017 2016
(dollars in thousands)(dollars in thousands)
Balance, beginning (a) $17,056
 $24,851
$16,828
 $24,590
 $17,056
 $24,851
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized 
 

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

 
 
 
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b) (228) (261)(218) (280) (446) (541)
Reduction for debt securities called during the period 
 

 
 
 
Balance, ending $16,828
 $24,590
$16,610
 $24,310
 $16,610
 $24,310
 
(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 threesix months of 2017 and 2016, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of March 31,June 30, 2017 and 2016, there were no equity securities in an unrealized loss position.
Other Investments
As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of March 31, 2017 and

1720

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 June 30, 2017 and December 31, 2016, our FHLB stock totaled $38.734.3 million and $36.5 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three and six months ended March 31,June 30, 2017.
Note 89 Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types:
 
March 31, 2017 December 31, 2016June 30, 2017 December 31, 2016
Originated Acquired Total Originated Acquired TotalOriginated Acquired Total Originated Acquired Total
(dollars in thousands)(dollars in thousands)
Commercial, financial, agricultural and other$1,140,702
 $7,758
 $1,148,460
 $1,131,148
 $8,399
 $1,139,547
$1,157,542
 $42,258
 $1,199,800
 $1,131,148
 $8,399
 $1,139,547
Real estate construction239,983
 139
 240,122
 217,840
 1,781
 219,621
237,035
 12,220
 249,255
 217,840
 1,781
 219,621
Residential real estate1,157,236
 60,162
 1,217,398
 1,165,851
 63,341
 1,229,192
1,169,217
 247,709
 1,416,926
 1,165,851
 63,341
 1,229,192
Commercial real estate1,736,363
 24,738
 1,761,101
 1,717,043
 25,167
 1,742,210
1,819,590
 143,411
 1,963,001
 1,717,043
 25,167
 1,742,210
Loans to individuals538,991
 1,889
 540,880
 546,589
 2,188
 548,777
535,819
 9,981
 545,800
 546,589
 2,188
 548,777
Total loans$4,813,275
 $94,686
 $4,907,961
 $4,778,471
 $100,876
 $4,879,347
$4,919,203
 $455,579
 $5,374,782
 $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.

1821

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


The following tables represent our credit risk profile by creditworthiness:
March 31, 2017June 30, 2017
Commercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals TotalCommercial, financial, agricultural and other Real estate construction Residential real estate Commercial real estate Loans to individuals Total
(dollars in thousands)(dollars in thousands)
Originated loans                      
Pass$1,049,152
 $239,983
 $1,143,535
 $1,714,061
 $538,765
 $4,685,496
$1,076,627
 $237,035
 $1,155,603
 $1,767,348
 $535,611
 $4,772,224
Non-Pass                      
OAEM31,026
 
 3,373
 5,675
 
 40,074
47,113
 
 3,076
 34,630
 
 84,819
Substandard53,104
 
 10,328
 16,627
 226
 80,285
28,828
 
 10,538
 17,612
 208
 57,186
Doubtful7,420
 
 
 
 
 7,420
4,974
 
 
 
 
 4,974
Total Non-Pass91,550
 
 13,701
 22,302
 226
 127,779
80,915
 
 13,614
 52,242
 208
 146,979
Total$1,140,702
 $239,983
 $1,157,236
 $1,736,363
 $538,991
 $4,813,275
$1,157,542
 $237,035
 $1,169,217
 $1,819,590
 $535,819
 $4,919,203
                      
Acquired loans                      
Pass$6,972
 $139
 $59,864
 $23,623
 $1,889
 $92,487
$40,132
 $12,220
 $245,180
 $134,825
 $9,981
 $442,338
Non-Pass                      
OAEM477
 
 
 
 
 477
1,193
 
 942
 3,518
 
 5,653
Substandard309
 
 298
 1,115
 
 1,722
933
 
 1,587
 5,068
 
 7,588
Doubtful
 
 
 
 
 

 
 
 
 
 
Total Non-Pass786
 
 298
 1,115
 
 2,199
2,126
 
 2,529
 8,586
 
 13,241
Total$7,758
 $139
 $60,162
 $24,738
 $1,889
 $94,686
$42,258
 $12,220
 $247,709
 $143,411
 $9,981
 $455,579
 
 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           
OAEM27,387
 275
 5,923
 7,596
 
 41,181
Substandard64,917
 
 7,417
 18,227
 273
 90,834
Doubtful
 
 
 
 
 
Total Non-Pass92,304
 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           
OAEM486
 
 
 
 
 486
Substandard322
 
 422
 1,124
 3
 1,871
Doubtful
 
 
 
 
 
Total Non-Pass808
 
 422
 1,124
 3
 2,357
Total$8,399
 $1,781
 $63,341
 $25,167
 $2,188
 $100,876

1922

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 March 31,June 30, 2017. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.
Age Analysis of Past Due Loans by Segment
The following tables delineate the aging analysis of the recorded investments in past due loans as of March 31,June 30, 2017 and December 31, 2016. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.
 
March 31, 2017June 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 Total30 - 59
days
past due
 60 - 89
days
past
due
 90 days
and
greater
and still
accruing
 Nonaccrual Total past
due and
nonaccrual
 Current Total
(dollars in thousands)(dollars in thousands)
Originated loans                          
Commercial, financial, agricultural and other$2,973
 $603
 $139
 $21,710
 $25,425
 $1,115,277
 $1,140,702
$1,864
 $88
 $48
 $12,561
 $14,561
 $1,142,981
 $1,157,542
Real estate construction
 
 
 
 
 239,983
 239,983

 
 
 
 
 237,035
 237,035
Residential real estate2,979
 1,187
 617
 5,984
 10,767
 1,146,469
 1,157,236
3,325
 1,189
 1,015
 6,363
 11,892
 1,157,325
 1,169,217
Commercial real estate665
 
 87
 3,899
 4,651
 1,731,712
 1,736,363
863
 166
 5
 3,802
 4,836
 1,814,754
 1,819,590
Loans to individuals1,073
 485
 739
 226
 2,523
 536,468
 538,991
1,487
 615
 712
 208
 3,022
 532,797
 535,819
Total$7,690
 $2,275
 $1,582
 $31,819
 $43,366
 $4,769,909
 $4,813,275
$7,539
 $2,058
 $1,780
 $22,934
 $34,311
 $4,884,892
 $4,919,203
                          
Acquired loans                          
Commercial, financial, agricultural and other$
 $
 $477
 $
 $477
 $7,281
 $7,758
$
 $
 $
 $563
 $563
 $41,695
 $42,258
Real estate construction
 
 
 
 
 139
 139

 
 
 
 
 12,220
 12,220
Residential real estate73
 103
 51
 298
 525
 59,637
 60,162
68
 133
 106
 626
 933
 246,776
 247,709
Commercial real estate
 
 
 162
 162
 24,576
 24,738

 
 
 3,298
 3,298
 140,113
 143,411
Loans to individuals6
 2
 1
 
 9
 1,880
 1,889
65
 27
 12
 
 104
 9,877
 9,981
Total$79
 $105
 $529
 $460
 $1,173
 $93,513
 $94,686
$133
 $160
 $118
 $4,487
 $4,898
 $450,681
 $455,579
 

2023

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


 December 31, 2016
 30 - 59
days
past due
 60 - 89
days
past
due
 90 days
and
greater
and still
accruing
 Nonaccrual Total past
due and
nonaccrual
 Current Total
 (dollars in thousands)
Originated loans             
Commercial, financial, agricultural and other$2,380
 $171
 $75
 $17,928
 $20,554
 $1,110,594
 $1,131,148
Real estate construction183
 
 
 
 183
 217,657
 217,840
Residential real estate4,133
 1,089
 995
 5,792
 12,009
 1,153,842
 1,165,851
Commercial real estate265
 327
 57
 3,443
 4,092
 1,712,951
 1,717,043
Loans to individuals1,640
 776
 970
 273
 3,659
 542,930
 546,589
Total$8,601
 $2,363
 $2,097
 $27,436
 $40,497
 $4,737,974
 $4,778,471
              
Acquired loans             
Commercial, financial, agricultural and other$486
 $
 $
 $
 $486
 $7,913
 $8,399
Real estate construction
 
 
 
 
 1,781
 1,781
Residential real estate148
 39
 34
 422
 643
 62,698
 63,341
Commercial real estate
 
 
 162
 162
 25,005
 25,167
Loans to individuals1
 7
 
 3
 11
 2,177
 2,188
Total$635
 $46
 $34
 $587
 $1,302
 $99,574
 $100,876
Nonaccrual Loans
The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans, which are placed on nonaccrual status at 150 days past due.
When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal becomes current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer in doubt.
Impaired Loans
Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are also considered to be impaired loans.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.

2124

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


At MarchJune 30, 2017 and December 31, 2017, nonaccrual loans held for sale totaled $3.6 million and included loans to one commercial manufacturing borrower. There2016, there were no nonaccrual loans held for sale as of December 31, 2016.sale. In addition, $21 thousand in gains were recognized in income during the second quarter of 2017 as the result of the sale of a nonaccrual loan held for sale at March 31, 2017. There were no gains or losses were recognized in income related to these loans for the periodssix months ended March 31, 2017 andJune 30, 2016.
Significant nonaccrual loans as of March 31,June 30, 2017, include the following:
A $7.4$5.0 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 inDuring the thirdsecond quarter of 2016 incorporated certain estimates obtained2017, a restructuring agreement resulted in the first quarterpayments of 2016.
A $3.6$2.4 million relationship of a commercial industrial loan to a company specializing in commercial business services. This loan was originated 2014 and was placed in nonaccrual status during the first quarter of 2017.on these loans. A collateral valuation was completed duringin the firstsecond quarter of 2017.
A $3.2$2.8 million relationship of commercial industrial loans to a local energy company involved in the drilling and production of natural gas wells. These loans were originated from 2008 to 2011 and were placed in nonaccrual status during the third quarter of 2013. Two of these loans were modified resulting in TDR classification: one loan totaling $1.0$0.6 million was modified in 2012, and the other loan totaling $2.2 million was modified in 2014. Charge-offs totaling $0.4 million were recognized in the first six months of 2017. A valuation of the collateral was updated during the first quarter of 2017.
A $3.0$2.1 million relationship of commercial industrial loansreal estate loan to a gear manufacturer. These loans were originated in 2013 and were placed in nonaccrual status duringproperty manager. This loan was acquired as part of the third quarter of 2015.DCB acquisition. A valuation of the collateral was completed during the firstsecond quarter of 2017.
The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of March 31,June 30, 2017 and December 31, 2016. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on their period-end allowance position.
March 31, 2017 December 31, 2016June 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$12,780
 $20,043
 

 $9,549
 $15,369
 

$8,290
 $14,697
 

 $9,549
 $15,369
 

Real estate construction
 
 

 
 
 


 
 

 
 
 

Residential real estate11,227
 13,237
 

 10,873
 13,004
 

11,128
 12,975
 

 10,873
 13,004
 

Commercial real estate6,028
 7,037
 

 5,765
 6,905
 

6,524
 7,498
 

 5,765
 6,905
 

Loans to individuals365
 429
 

 382
 507
 

341
 391
 

 382
 507
 

Subtotal30,400
 40,746
 

 26,569
 35,785
 

26,283
 35,561
 

 26,569
 35,785
 

With an allowance recorded:                      
Commercial, financial, agricultural and other13,929
 20,124
 $2,466
 13,423
 19,226
 $2,530
8,634
 12,699
 $1,681
 13,423
 19,226
 $2,530
Real estate construction
 
 
 
 
 

 
 
 
 
 
Residential real estate366
 418
 146
 424
 475
 164
342
 459
 31
 424
 475
 164
Commercial real estate1,101
 1,101
 376
 810
 810
 434
428
 427
 259
 810
 810
 434
Loans to individuals
 
 
 
 
 

 
 
 
 
 
Subtotal15,396
 21,643
 2,988
 14,657
 20,511
 3,128
9,404
 13,585
 1,971
 14,657
 20,511
 3,128
Total$45,796
 $62,389
 $2,988
 $41,226
 $56,296
 $3,128
$35,687
 $49,146
 $1,971
 $41,226
 $56,296
 $3,128

2225

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


 
March 31, 2017 December 31, 2016June 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)
Acquired loans                      
With no related allowance recorded:                      
Commercial, financial, agricultural and other$
 $
   $
 $
  $72
 $72
   $
 $
  
Real estate construction
 
   
 
  
 
   
 
  
Residential real estate246
 321
   406
 480
  624
 943
   406
 480
  
Commercial real estate162
 162
   162
 162
  3,140
 4,012
   162
 162
  
Loans to individuals
 
   3
 3
  
 
   3
 3
  
Subtotal408
 483
   571
 645
  3,836
 5,027
   571
 645
  
With an allowance recorded:                      
Commercial, financial, agricultural and other
 
 $
 
 
 $
490
 490
 $110
 
 
 $
Real estate construction
 
 
 
 
 

 
 
 
 
 
Residential real estate65
 65
 29
 16
 16
 16
14
 28
 4
 16
 16
 16
Commercial real estate
 
 
 
 
 
158
 162
 50
 
 
 
Loans to individuals
 
 
 
 
 

 
 
 
 
 
Subtotal65
 65
 29
 16
 16
 16
662
 680
 164
 16
 16
 16
Total$473
 $548
 $29
 $587
 $661
 $16
$4,498
 $5,707
 $164
 $587
 $661
 $16

For the Three Months Ended March 31,For the Six Months Ended June 30,
2017 20162017 2016
Originated Loans Acquired Loans Originated LoansOriginated Loans Acquired Loans Originated Loans
Average
recorded
investment
 Interest
income
recognized
 Average
recorded
investment
 Interest
income
recognized
 Average
recorded
investment
 Interest
income
recognized
Average
recorded
investment
 Interest
income
recognized
 Average
recorded
investment
 Interest
income
recognized
 Average
recorded
investment
 Interest
income
recognized
(dollars in thousands)(dollars in thousands)
With no related allowance recorded:                      
Commercial, financial, agricultural and other$12,034
 $38
 $
 $
 $17,298
 $152
$13,888
 $289
 $36
 $
 $20,116
 $249
Real estate construction
 
 
 
 17
 44

 
 50
 
 9
 44
Residential real estate11,422
 74
 241
 
 10,724
 47
11,434
 185
 465
 7
 11,232
 137
Commercial real estate5,949
 54
 162
 
 7,658
 38
6,586
 88
 1,575
 
 7,136
 67
Loans to individuals338
 2
 
 
 480
 1
341
 11
 
 
 442
 3
Subtotal29,743
 168
 403
 
 36,177
 282
32,249
 573
 2,126
 7
 38,935
 500
With an allowance recorded:                      
Commercial, financial, agricultural and other12,787
 26
 
 
 17,027
 28
9,220
 46
 82
 
 17,939
 91
Real estate construction
 
 
 
 
 

 
 
 
 
 
Residential real estate334
 1
 65
 
 497
 
279
 
 7
 
 347
 
Commercial real estate1,111
 7
 
 
 529
 5
484
 13
 161
 
 861
 11
Loans to individuals
 
 
 
 
 

 
 
 
 
 
Subtotal14,232
 34
 65
 
 18,053
 33
9,983
 59
 250
 
 19,147
 102
Total$43,975
 $202
 $468
 $
 $54,230
 $315
$42,232
 $632
 $2,376
 $7
 $58,082
 $602



2326

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 June 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$12,583
 $251
 $72
 $
 $18,995
 $95
Real estate construction
 
 100
 
 
 
Residential real estate11,339
 110
 623
 7
 11,462
 90
Commercial real estate6,596
 34
 3,151
 
 6,887
 29
Loans to individuals344
 9
 
 
 405
 2
Subtotal30,862
 404
 3,946
 7
 37,749
 216
With an allowance recorded:           
Commercial, financial, agricultural and other8,813
 20
 164
 
 22,788
 65
Real estate construction
 
 
 
 
 
Residential real estate332
 
 14
 
 476
 
Commercial real estate481
 6
 160
 
 921
 6
Loans to individuals
 
 
 
 
 
Subtotal9,626
 26
 338
 
 24,185
 71
Total$40,488
 $430
 $4,284
 $7
 $61,934
 $287
Unfunded commitments related to nonperforming loans were $0.2$1.5 million at March 31,June 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 March 31,June 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:
 March 31, 2017 December 31, 2016
 (dollars in thousands)
Troubled debt restructured loans   
Accrual status$13,990
 $13,790
Nonaccrual status10,482
 11,569
Total$24,472
 $25,359
Commitments   
Letters of credit$60
 $
Unused lines of credit160
 358
Total$220
 $358
The following tables provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings:
 For the Three Months Ended March 31, 2017
   Type of Modification      
 Number
of
Contracts
 Extend
Maturity
 Modify
Rate
 Modify
Payments
 Total
Pre-Modification
Outstanding
Recorded
Investment
 Post-
Modification
Outstanding
Recorded
Investment
 Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other1
 $
 $42
 $
 $42
 $38
 $
Residential real estate7
 129
 101
 306
 536
 504
 
Commercial real estate2
 179
 
 16
 195
 193
 
Loans to individuals3
 
 14
 30
 44
 43
 
Total13
 $308
 $157
 $352
 $817
 $778
 $

 June 30, 2017 December 31, 2016
 (dollars in thousands)
Troubled debt restructured loans   
Accrual status$12,764
 $13,790
Nonaccrual status11,868
 11,569
Total$24,632
 $25,359
Commitments   
Letters of credit$60
 $
Unused lines of credit87
 358
Total$147
 $358

2427

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 Three Months Ended March 31, 2016For the Six Months Ended June 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 other2
 $
 $3,769
 $
 $3,769
 $3,749
 $
4
 $6,768
 $1,786
 $
 $8,554
 $6,422
 $960
Residential real estate8
 
 114
 874
 988
 910
 
12
 129
 187
 413
 729
 683
 4
Commercial real estate3
 65
 
 133
 198
 169
 
3
 179
 
 84
 263
 258
 
Loans to individuals3
 
 18
 5
 23
 16
 
7
 
 17
 48
 65
 56
 
Total16
 $65
 $3,901
 $1,012
 $4,978
 $4,844
 $
26
 $7,076
 $1,990
 $545
 $9,611
 $7,419
 $964

 For the Six Months Ended June 30, 2016
   Type of Modification      
 Number
of
Contracts
 Extend
Maturity
 Modify
Rate
 Modify
Payments
 Total
Pre-Modification
Outstanding
Recorded
Investment
 Post-
Modification
Outstanding
Recorded
Investment
 Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other5
 $92
 $4,009
 $
 $4,101
 $3,708
 $40
Residential real estate26
 
 114
 2,416
 2,530
 2,440
 
Commercial real estate6
 1,264
 
 25
 1,289
 1,227
 74
Loans to individuals5
 
 29
 11
 40
 30
 
Total42
 $1,356
 $4,152
 $2,452
 $7,960
 $7,405
 $114
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 six months ended June 30, 2017 and 2016, $0.2 million and $4.2 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.


28

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 June 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 other3
 $6,768
 $1,745
 $
 $8,513
 $6,385
 $960
Residential real estate5
 
 85
 108
 193
 189
 4
Commercial real estate1
 
 
 68
 68
 68
 
Loans to individuals4
 
 3
 17
 20
 17
 
Total13
 $6,768
 $1,833
 $193
 $8,794
 $6,659
 $964

 For the Three Months Ended, June 30, 2016
   Type of Modification      
 Number
of
Contracts
 Extend
Maturity
 Modify
Rate
 Modify
Payments
 Total
Pre-Modification
Outstanding
Recorded
Investment
 Post-
Modification
Outstanding
Recorded
Investment
 Specific
Reserve
 (dollars in thousands)
Commercial, financial, agricultural and other4
 $92
 $240
 $
 $332
 $217
 $40
Residential real estate17
 
 
 1,435
 1,435
 1,428
 
Commercial real estate4
 1,198
 
 
 1,198
 1,173
 74
Loans to individuals2
 
 11
 6
 17
 15
 
Total27
 $1,290
 $251
 $1,441
 $2,982
 $2,833
 $114
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 endedMarch 31,June 30, 2017 and 2016, $0.20.1 million and $3.90.3 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.

29

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


A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to restructured loans that were considered to be in default during the six months ended June 30:
 2017 2016
 Number of
Contracts
 Recorded
Investment
 Number of
Contracts
 Recorded
Investment
 (dollars in thousands)
Residential real estate4
 $103
 
 $
Total4
 $103
 
 $
The following table provides information related to restructured loans that were considered to be in default during the three months ended March 31:June 30:

2017 20162017 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
 $70
4
 $103
 
 $
Total
 $
 2
 $70
4
 $103
 
 $





2530

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


The following tables provide detail related to the allowance for credit losses:
For the Three Months Ended March 31, 2017For the Six Months Ended June 30, 2017
Commercial,
financial,
agricultural
and other
 Real estate
construction
 Residential
real estate
 Commercial
real estate
 Loans to
individuals
 TotalCommercial,
financial,
agricultural
and other
 Real estate
construction
 Residential
real estate
 Commercial
real estate
 Loans to
individuals
 Total
(dollars in thousands)(dollars in thousands)
Allowance for credit losses:                      
Originated loans:                      
Beginning balance$35,974
 $577
 $2,492
 $6,619
 $4,504
 $50,166
$35,974
 $577
 $2,492
 $6,619
 $4,504
 $50,166
Charge-offs(3,825) 
 (465) (31) (1,198) (5,519)(5,277) 
 (610) (60) (2,170) (8,117)
Recoveries368
 54
 122
 117
 128
 789
3,636
 96
 192
 146
 248
 4,318
Provision (credit)2,184
 (17) 265
 (123) 900
 3,209
(961) 95
 42
 602
 1,750
 1,528
Ending balance34,701
 614
 2,414
 6,582
 4,334
 48,645
33,372
 768
 2,116
 7,307
 4,332
 47,895
Acquired loans:                      
Beginning balance
 
 19
 
 
 19

 
 19
 
 
 19
Charge-offs
 
 (8) 
 (7) (15)
 
 (9) 
 (8) (17)
Recoveries


 6
 
 1
 7


1
 27
 4
 46
 78
Provision (credit)
 
 14
 
 6
 20
118
 (1) (33) 46
 (38) 92
Ending balance
 
 31
 
 
 31
118
 
 4
 50
 
 172
Total ending balance$34,701
 $614
 $2,445
 $6,582
 $4,334
 $48,676
$33,490
 $768
 $2,120
 $7,357
 $4,332
 $48,067
Ending balance: individually evaluated for impairment$2,466
 $
 $175
 $376
 $
 $3,017
$1,791
 $
 $35
 $309
 $
 $2,135
Ending balance: collectively evaluated for impairment32,235
 614
 2,270
 6,206
 4,334
 45,659
31,699
 768
 2,085
 7,048
 4,332
 45,932
Loans:                      
Ending balance1,148,460
 240,122
 1,217,398
 1,761,101
 540,880
 4,907,961
1,199,800
 249,255
 1,416,926
 1,963,001
 545,800
 5,374,782
Ending balance: individually evaluated for impairment26,260
 
 6,287
 5,819
 
 38,366
16,917
 
 6,978
 8,697
 
 32,592
Ending balance: collectively evaluated for impairment1,122,200
 240,122
 1,211,111
 1,755,282
 540,880
 4,869,595
1,182,883
 249,255
 1,409,948
 1,954,304
 545,800
 5,342,190

 For the Six Months Ended June 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(6,145) 
 (602) (408) (2,491) (9,646)
Recoveries198
 227
 260
 783
 289
 1,757
Provision (credit)21,269
 (634) 341
 (6,437) 2,359
 16,898
Ending balance$46,357
 $480
 $2,605
 $5,862
 $4,517
 $59,821
Ending balance: individually evaluated for impairment$15,018
 $
 $48
 $464
 $
 $15,530
Ending balance: collectively evaluated for impairment31,339
 480
 2,557
 5,398
 4,517
 44,291
Loans:           
Ending balance1,185,062
 242,132
 1,199,005
 1,648,222
 569,355
 4,843,776
Ending balance: individually evaluated for impairment43,817
 
 5,966
 6,017
 
 55,800
Ending balance: collectively evaluated for impairment1,141,245
 242,132
 1,193,039
 1,642,205
 569,355
 4,787,976



2631

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





For the Three Months Ended March 31, 2016For the Three Months Ended June 30, 2017
Commercial,
financial,
agricultural
and other
 Real estate
construction
 Residential
real estate
 Commercial
real estate
 Loans to
individuals
 TotalCommercial,
financial,
agricultural
and other
 Real estate
construction
 Residential
real estate
 Commercial
real estate
 Loans to
individuals
 Total
(dollars in thousands)(dollars in thousands)
Allowance for credit losses:                      
Originated loans:           
Beginning balance$31,035
 $887
 $2,606
 $11,924
 $4,360
 $50,812
$34,701
 $614
 $2,414
 $6,582
 $4,334
 $48,645
Charge-offs(1,392) 
 (382) (265) (1,469) (3,508)(1,452) 
 (145) (29) (972) (2,598)
Recoveries134
 223
 118
 756
 161
 1,392
3,268
 42
 70
 29
 120
 3,529
Provision (credit)11,944
 (209) 286
 (6,932) 1,437
 6,526
(3,145) 112
 (223) 725
 850
 (1,681)
Ending balance$41,721
 $901
 $2,628
 $5,483
 $4,489
 $55,222
33,372
 768
 2,116
 7,307
 4,332
 47,895
Ending balance: individually evaluated for impairment$12,900
 $
 $75
 $420
 $
 $13,395
Ending balance: collectively evaluated for impairment28,821
 901
 2,553
 5,063
 4,489
 41,827
Loans:           
Acquired loans:           
Beginning balance
 
 31
 
 
 31
Charge-offs
 
 (1) 
 (1) (2)
Recoveries
 1
 21
 4
 45
 71
Provision (credit)118
 (1) (47) 46
 (44) 72
Ending balance1,190,384
 256,856
 1,212,962
 1,552,904
 585,649
 4,798,755
118
 
 4
 50
 
 172
Ending balance: individually evaluated for impairment42,016
 
 6,246
 5,934
 
 54,196
Ending balance: collectively evaluated for impairment1,148,368
 256,856
 1,206,716
 1,546,970
 585,649
 4,744,559
Total ending balance$33,490
 $768
 $2,120
 $7,357
 $4,332
 $48,067

 For the Three Months Ended, June 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$41,721
 $901
 $2,628
 $5,483
 $4,489
 $55,222
Charge-offs(4,753) 
 (220) (143) (1,022) (6,138)
Recoveries64
 4
 142
 27
 128
 365
Provision (credit)9,325
 (425) 55
 495
 922
 10,372
Ending balance$46,357
 $480
 $2,605
 $5,862
 $4,517
 $59,821

Note 910 Income Taxes
At March 31,June 30, 2017 and December 31, 2016, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. Federal and state returns for tax years 2013 and forward remain open for examination as of March 31,June 30, 2017.
During the first quarter of 2017, First Commonwealth adopted ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718)." Adoption of this ASU resulted in a $117 thousand$0.1 million tax benefit.

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.

32

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


FASB ASC Topic 825, “Financial Instruments”, permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.
 
In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

27

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


Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, loans held for sale, interest rate derivatives (including interest rate caps, interest rate swaps and risk participation agreements), certain other real estate owned and certain impaired loans.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
Management validates the market values provided by the third party service by having another recognized pricing service price 100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.
Other investments recorded in the Condensed Consolidated Statements of Financial Condition are comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 7,8, “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 nonaccrual loans related to one commercial relationship. The fair value of these loans is based on a letter of intent with the potential buyer.
Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities, and consist of interest rate swaps where there is no significant deterioration in the counterparties' (loan customers') credit risk since origination of the interest rate swap as well as interest rate caps and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to one year, Eurodollar futures contracts and swap rates from one year to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 11,12, “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, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.
We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2017, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.

33

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.

28

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


Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.
Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the United States. There has been little or no active trading in these securities since 2009; therefore, it is more appropriate to determine estimated fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 7, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.
Management validates the fair value of the pooled trust preferred collateralized debt obligations by monitoring the performance of the underlying collateral, discussing the discount rate, cash flow assumptions and general market trends with a specialized third party and confirming changes in the underlying collateral to the trustee reports. Management’s monitoring of the underlying collateral includes deferrals of interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings or actions and general news related to the underlying collateral. Management also evaluates fair value changes compared to expectations based on changes in the interest rates used in determining the discount rate and general financial markets.
The estimated fair value of the non-marketable equity investments included in Level 3 is based on par value.
The estimated fair value of limited partnership investments included in Level 3 is based on par value.
For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).

34

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


In accordance with ASU 2011-4, the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.
Fair Value (dollars
in thousands)
 Valuation
Technique
 Unobservable Inputs Range /
(weighted average)
Fair Value (dollars
in thousands)
 Valuation
Technique
 Unobservable Inputs Range /
(weighted average)
Pooled Trust Preferred Securities$33,741
 Discounted Cash Flow Probability of default 0% - 100% (10.19%)$33,648
 Discounted Cash Flow Probability of default 0% - 100% (9.56%)
  Prepayment rates 0% - 72.53% (4.15%)  Prepayment rates 0% - 72.4% (4.15%)
  Discount rates 5.25% - 12.00% (a)  Discount rates 5.25% - 12.00% (a)
Equities1,670
 Par Value N/A N/A1,670
 Par Value N/A N/A
Impaired Loans2,237 (b) Reserve study Discount rate 10.00%2,190 (b) Reserve study Discount rate 10.00%
  Gas per MCF $2.07 - $2.79 (c)  Gas per MMBTU $2.87 - $3.61 (c)
  Oil per BBL/d $56.05 - $57.65 (c)  Oil per BBL/d $56.05 - $57.65 (c)
10,845 (b) Discounted Cash Flow Discount Rate 1.90% - 7.00%7,038 (b) Discounted Cash Flow Discount Rate 1.90% - 4.68%
Limited Partnership Investments1,340
 Par Value N/A N/A1,477
 Par Value N/A N/A
 
(a)Incorporates spread over risk free rate related primarily to credit quality and illiquidity of securities.
(b)The remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those loans are based on bankruptcy agreement documentation.
(c)Unobservable inputs are defined as follows: MCFMMBTU - 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

29

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


change in the discount rate. In most cases, increases in the prepayment rate assumptions would result in a higher estimated fair value for these securities while decreases would provide for a lower value. The direction of this change is somewhat dependent on the structure of the investment and the amount of the investment tranches senior to our position.
The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in a higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil and natural gas prices. Increases in these prices would result in an increase in the estimated fair value of the loans, while a decrease in these prices would result in a lower fair value measurement.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:
 March 31, 2017
 Level 1 Level 2 Level 3 Total
 (dollars in thousands)
Obligations of U.S. Government Agencies:       
Mortgage-Backed Securities - Residential$
 $16,018
 $
 $16,018
Obligations of U.S. Government-Sponsored Enterprises:       
Mortgage-Backed Securities - Residential
 720,954
 
 720,954
Mortgage-Backed Securities - Commercial
 
 
 
Other Government-Sponsored Enterprises
 16,642
 
 16,642
Obligations of States and Political Subdivisions
 27,360
 
 27,360
Corporate Securities
 16,369
 
 16,369
Pooled Trust Preferred Collateralized Debt Obligations
 
 33,741
 33,741
Total Debt Securities
 797,343
 33,741
 831,084
Equities
 
 1,670
 1,670
Total Securities Available for Sale
 797,343
 35,411
 832,754
Other Investments
 38,669
 
 38,669
Loans Held for Sale
 9,588
 
 9,588
Other Assets(a)
 4,576
 1,340
 5,916
Total Assets$
 $850,176
 $36,751
 $886,927
Other Liabilities(a)$
 $5,039
 $
 $5,039
Total Liabilities$
 $5,039
 $
 $5,039
(a)Hedging and non-hedging interest rate derivatives and limited partnership investments


3035

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:
 June 30, 2017
 Level 1 Level 2 Level 3 Total
 (dollars in thousands)
Obligations of U.S. Government Agencies:       
Mortgage-Backed Securities - Residential$
 $15,184
 $
 $15,184
Obligations of U.S. Government-Sponsored Enterprises:       
Mortgage-Backed Securities - Residential
 690,689
 
 690,689
Mortgage-Backed Securities - Commercial
 
 
 
Other Government-Sponsored Enterprises
 1,096
 
 1,096
Obligations of States and Political Subdivisions
 27,555
 
 27,555
Corporate Securities
 16,404
 
 16,404
Pooled Trust Preferred Collateralized Debt Obligations
 
 33,648
 33,648
Total Debt Securities
 750,928
 33,648
 784,576
Equities
 
 1,670
 1,670
Total Securities Available for Sale
 750,928
 35,318
 786,246
Other Investments
 34,340
 
 34,340
Loans Held for Sale
 9,785
 
 9,785
Other Assets(a)
 4,396
 1,477
 5,873
Total Assets$
 $799,449
 $36,795
 $836,244
Other Liabilities(a)$
 $5,147
 $
 $5,147
Total Liabilities$
 $5,147
 $
 $5,147
(a)Hedging and non-hedging interest rate derivatives and limited partnership investments

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

For the three months endedMarch 31, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
 2017
 Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
 (dollars in thousands)
Balance, beginning of period$33,292
 $1,670
 $930
 $35,892
Total gains or losses       
Included in earnings
 
 
 
Included in other comprehensive income497
 
 
 497
Purchases, issuances, sales and settlements       
Purchases
 
 410
 410
Issuances
 
 
 
Sales
 
 
 
Settlements(48) 
 
 (48)
Transfers from Level 3
 
 
 
Transfers into Level 3
 
 
 
Balance, end of period$33,741
 $1,670
 $1,340
 $36,751

3136

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


For the six months endedJune 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
20162017
Pooled Trust Preferred Collateralized Debt Obligations Equities TotalPooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
(dollars in thousands)(dollars in thousands)
Balance, beginning of period$35,658
 $2,170
 $37,828
$33,292
 $1,670
 $930
 $35,892
Total gains or losses            
Included in earnings
 
 

 
 
 
Included in other comprehensive income(2,385) 
 (2,385)410
 
 
 410
Purchases, issuances, sales and settlements            
Purchases
 36
 36

 
 547
 547
Issuances
 
 

 
 
 
Sales
 
 

 
 
 
Settlements
 
 
(54) 
 
 (54)
Transfers from Level 3
 
 
 
Transfers into Level 3
 
 

 
 
 
Balance, end of period$33,273
 $2,206
 $35,479
$33,648
 $1,670
 $1,477
 $36,795
 2016
 Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
 (dollars in thousands)
Balance, beginning of period$35,658
 $2,170
 $
 $37,828
Total gains or losses       
Included in earnings
 
 
 
Included in other comprehensive income(1,905) 
 
 (1,905)
Purchases, issuances, sales and settlements       
Purchases
 36
 168
 204
Issuances
 
 
 
Sales
 
 
 
Settlements(30) 
 
 (30)
Transfers from Level 3
 (536) 

 (536)
Transfers into Level 3
 
 536
 536
Balance, end of period$33,723
 $1,670
 $704
 $36,097
During the threesix months ended March 31,June 30, 2017 and 2016,, there were no transfers between fair value Levels 1, 2 or 3. During the six months ended June 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. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at March 31,June 30, 2017 and 2016.

37

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



For the three months ended March 31, 2016, there were noJune 30, changes in Level 3 Other Assetsassets and liabilities measured at fair value on a recurring basis.basis are summarized as follows:
 2017
 Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
 (dollars in thousands)
Balance, beginning of period$33,741
 $1,670
 $1,340
 $36,751
Total gains or losses       
Included in earnings
 
 
 
Included in other comprehensive income(87) 
 
 (87)
Purchases, issuances, sales and settlements       
Purchases
 
 137
 137
Issuances
 
 
 
Sales
 
 
 
Settlements(6) 
 
 (6)
Transfers from Level 3
 
 
 
Transfers into Level 3
 
 
 
Balance, end of period$33,648
 $1,670
 $1,477
 $36,795
 2016
 Pooled Trust Preferred Collateralized Debt Obligations Equities Other
Assets
 Total
 (dollars in thousands)
Balance, beginning of period$33,273
 $2,206
 $
 35,479
Total gains or losses       
Included in earnings
 
 
 
Included in other comprehensive income480
 
 
 480
Purchases, issuances, sales and settlements       
Purchases
 
 168
 168
Issuances
 
 
 
Sales
 
 
 
Settlements(30) 
 
 (30)
Transfers from Level 3
 (536) 
 (536)
Transfers into Level 3
 
 536
 536
Balance, end of period$33,723
 $1,670
 $704
 $36,097
During the three months ended June 30, 2017, there were no transfers between fair value Levels 1, 2 or 3. During the three months ended June 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. 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 June 30, 2017 and 2016.

38

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


The tables below present the balances of assets measured at fair value on a nonrecurring basis at:
March 31, 2017June 30, 2017
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(dollars in thousands)(dollars in thousands)
Impaired loans$
 $22,010
 $21,242
 $43,252
$
 $21,089
 $16,961
 $38,050
Other real estate owned
 7,427
 
 7,427

 6,281
 
 6,281
Total Assets$
 $29,437
 $21,242
 $50,679
$
 $27,370
 $16,961
 $44,331
 December 31, 2016
 Level 1 Level 2 Level 3 Total
 (dollars in thousands)
Impaired loans$
 $18,679
 $19,990
 $38,669
Other real estate owned
 7,566
 
 7,566
Total Assets$
 $26,245
 $19,990
 $46,235
The following gain (losses) were realized on the assets measured on a nonrecurring basis:
 For the Three Months Ended March 31,For the Three Months Ended June 30, For the Six Months Ended June 30,
 2017 20162017 2016 2017 2016
(dollars in thousands)(dollars in thousands)
Impaired loans $(1,460) $(7,702)$(238) $(6,991) $(1,278) $(14,576)
Other real estate owned (31) (13)(1,094) (245) (1,125) (258)
Total losses $(1,491) $(7,715)$(1,332) $(7,236) $(2,403) $(14,834)
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

32

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


thousand, we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.
The fair value for other real estate owned, determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement, is classified as Level 2. The fair value for other real estate owned determined using an internal valuation is classified as Level 3. Other real estate owned has a current carrying value of $6.96.0 million as of March 31,June 30, 2017 and consists primarily of commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.
Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 12,13, “Goodwill.” There were no other assets or liabilities measured at fair value on a nonrecurring basis during the threesix months ended March 31,June 30, 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.

39

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


Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities available for sale and held to maturity are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock, is considered a reasonable estimate of fair value.
Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans, which is not an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”
Loans held for sale: The estimated fair value of loans held for sale is based on market bids obtained from potential buyers.
Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was $0.1 million and $0.2 million at March 31,June 30, 2017 and December 31, 2016, respectively.. 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 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.
Subordinated debt, long-term debt and capital lease obligation: The fair value 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.

3340

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


Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements or an announced redemption price.
The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:
March 31, 2017June 30, 2017
  Fair Value Measurements Using:  Fair Value Measurements Using:
Carrying
Amount
 Total Level 1 Level 2 Level 3Carrying
Amount
 Total Level 1 Level 2 Level 3
(dollars in thousands)(dollars in thousands)
Financial assets                  
Cash and due from banks$75,160
 $75,160
 $75,160
 $
 $
$103,602
 $103,602
 $103,602
 $
 $
Interest-bearing deposits47,944
 47,944
 47,944
 
 
12,310
 12,310
 12,310
 
 
Securities available for sale832,754
 832,754
 
 797,343
 35,411
786,246
 786,246
 
 750,928
 35,318
Securities held to maturity386,954
 383,735
 
 383,735
 
450,886
 449,127
 
 449,127
 
Other investments38,669
 38,669
 
 38,669
 
34,340
 34,340
 
 34,340
 
Loans held for sale9,588
 9,588
 
 9,588
 
9,785
 9,785
 
 9,785
 
Loans4,907,961
 4,890,426
 
 22,010
 4,868,416
5,374,782
 5,367,138
 
 21,089
 5,346,049
Financial liabilities                  
Deposits4,969,729
 4,971,049
 
 4,971,049
 
5,533,135
 5,535,206
 
 5,535,206
 
Short-term borrowings961,601
 961,449
 
 961,449
 
846,137
 846,026
 
 846,026
 
Subordinated debt72,167
 63,964
 
 
 63,964
72,167
 65,917
 
 
 65,917
Long-term debt8,604
 9,038
 
 9,038
 
8,458
 8,953
 
 8,953
 
Capital lease obligation7,764
 7,764
 
 7,764
 

 December 31, 2016
   Fair Value Measurements Using:
 Carrying
Amount
 Total Level 1 Level 2 Level 3
 (dollars in thousands)
Financial assets         
Cash and due from banks$91,033
 $91,033
 $91,033
 $
 $
Interest-bearing deposits24,644
 24,644
 24,644
 
 
Securities available for sale778,612
 778,612
 
 743,650
 34,962
Securities held to maturity372,513
 368,618
 
 368,618
 
Other investments36,498
 36,498
 
 36,498
 
Loans held for sale7,052
 7,052
 
 7,052
 
Loans4,879,347
 4,878,254
 
 18,679
 4,859,575
Financial liabilities         
Deposits4,947,408
 4,949,714
 
 4,949,714
 
Short-term borrowings867,943
 867,667
 
 867,667
 
Subordinated debt72,167
 65,656
 
 
 65,656
Long-term debt8,749
 9,169
 
 9,169
 



3441

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


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.
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 2528 risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. We have eight risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.
First Commonwealth is also party to interest rate caps that are not designated as hedging instruments. These derivatives relate to contracts that First Commonwealth enters into with loan customers that provide a maximum interest rate on their variable rate loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap contracts are identical.
The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.
Derivatives Designated as Hedging Instruments
The Company has entered into four interest rate swap contracts that were designated as cash flow hedges. The interest rate swaps have a total notional amount of $200.0 million, $85.0 million with an original maturity of three years and $115.0 million with andan original maturity of four years. The Company's risk management objective for these hedges is to reduce its exposure to variability in expected future cash flows related to interest payments on commercial loans benchmarked to the 1-month LIBOR rate. Therefore, the interest rate swaps convert the interest payments on the first $200.0 million of 1-month LIBOR based commercial loans into fixed rate payments.
The periodic net settlement of interest rate swaps is recorded as an adjustment to "Interest and fees on loans" in the Condensed Consolidated Statements of Income. For the three and six months ended March 31,June 30, 2017, there was a $0.2$0.1 million and $0.4 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 March 31,June 30, 2017 and December 31, 2016, and changes in the fair value attributed to hedge ineffectiveness were not material.
The Company also enters into interest rate lock commitments in conjunction with its mortgage origination business. These are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company locks the rate in with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Loans under mandatory rate lock commitments are covered under forward sales contracts of mortgage-backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Condensed Consolidated Statements of Income. The impact to noninterest expense for the threesix months ended March 31,June 30, 2017 totaled $0.1 million.
Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. We determine the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and taking into consideration the probability that the rate lock commitments will close or will be funded. At March 31,June 30, 2017, the underlying funded mortgage loan

3542

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


loan commitments had a carrying value of $5.8$9.3 million and a fair value of $6.0$9.6 million, while the underlying unfunded mortgage loan commitments had a notional amount of $15.3$22.2 million.
In addition, a small amount of interest income on loans is exposed to changes in foreign exchange rates. Several commercial borrowers have a portion of their operations outside of the United States and borrow funds on a short-term basis to fund those operations. In order to reduce the risk related to the translation of foreign denominated transactions into U.S. dollars, the Company enters into foreign exchange forward contracts. These contracts relate principally to the Euro and the Canadian dollar. The contracts are recorded at fair value with changes in fair value recorded in "Other noninterest expense" in the Condensed Consolidated Statements of Income. The impact on other noninterest expense for the threesix months ended March 31,June 30, 2017 totaled $2$1 thousand. At March 31,June 30, 2017 and December 31, 2016, the underlying loans had a carrying value of $6.8$8.2 million and $4.7 million, respectively, and a fair value of $6.8$8.3 million and $4.7 million, respectively.
The following table depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:
March 31, 2017 December 31, 2016June 30, 2017 December 31, 2016
(dollars in thousands)(dollars in thousands)
Derivatives not Designated as Hedging Instruments      
Credit value adjustment$(316) $(317)$(353) $(317)
Notional amount:      
Interest rate derivatives342,898
 345,102
337,020
 345,102
Interest rate caps
 14,762
26,500
 14,762
Risk participation agreements166,748
 174,213
172,634
 174,213
Sold credit protection on risk participation agreements(40,021) (40,281)(39,754) (40,281)
Derivatives Designated as Hedging Instruments      
Interest rate swaps:      
Fair value adjustment73
 (443)(139) (443)
Notional amount200,000
 200,000
200,000
 200,000
Interest rate forwards:      
Fair value adjustment(112) 
95
 
Notional amount17,000
 
29,000
 
Foreign exchange forwards:      
Fair value adjustment38
 (8)(76) (8)
Notional amount6,847
 4,749
8,239
 4,749
 
The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in "Other income" on the Condensed Consolidated Statements of Income:
 For the Three Months Ended March 31,For the Three Months Ended June 30, For the Six Months Ended June 30,
 2017 20162017 2016 2017 2016
(dollars in thousands)(dollars in thousands)
Non-hedging interest rate derivatives           
Increase (decrease) in other income $2
 $(1,014)
Decrease in other income$(37) $(531) $(35) $(1,545)
Hedging interest rate derivatives           
Increase in interest and fees on loans 249
 430
136
 424
 385
 854
Increase in other expense 78
 15
(Decrease) increase in other expense(5) 26
 73
 41
Hedging interest rate forwards           
Increase in other expense 112
 
(Decrease) increase in other expense(17) 
 95
 
Hedging foreign exchange forwards           
Increase in other expense 2
 3
(Decrease) increase in other expense(1) 4
 1
 7

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


3643

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


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.
We consider First Commonwealth to be one reporting unit. The carrying amount of goodwill as of both March 31,June 30, 2017 and December 31, 2016 was $255.4 million and $186.5 million.million, respectively. Goodwill increased $68.9 million during the six months ended June 30, 2017 due to $70.5 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 2017 or 2016.
We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur during a quarter that may affect goodwill.
As of March 31,June 30, 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 expect that ASU No. 2014-09 will require us to change how we recognizeA significant component of the Company’s revenues, net interest income on financial assets and liabilities, is excluded from the scope of the amended guidance. The Company is the process of identifying and evaluating certain recurringnoninterest revenue streams, withinincluding trust and investmentasset management fees, deposit related fees, interchange fees, and insurance commissions and fees; however, we do not expect these changesmerchant income to have a significant impact on our financial statements. We continue to evaluatedetermine the potential impact of ASU No. 2014-9the guidance on other componentsthe 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 non-interest income and expectadoption with no restatement of comparative periods presented. The Company expects additional financial statement disclosures and associated internal controls to be implemented along with the adoption of this ASU.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Entities have the option to use certain relief; full retrospective application is prohibited. We are currently evaluating the potential impact of ASU 2016-02 on our financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss

44

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


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

37

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


Company as of January 1, 2020. Management is currently evaluating the impact of the amended guidance on First Commonwealth’s financial condition or results of operations.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which provides guidance on eight specific cash flow issues: 1. debt prepayment or extinguishment costs; 2. settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates; 3. contingent consideration payments made after a business combination; 4. proceeds from the settlement of insurance claims; 5. proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6. distributions received from equity method investees; 7. beneficial interests in securitizations transactions; and 8. separately identifiable cash flows and application of the predominance principle. This ASU provides additional guidance for these eight issues, reducing current and potential diversity in practice. This standard is effective for the Company as of January 1, 2018. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805), Clarifying the Definition of a Business" which provides a screen to determine when a set of assets and activities (a "set") is not a business. The screen requires, that when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen thereby reduces the number of transactions that need to be further evaluated. If the screen is not met, this ASU 1. requires that to be considered a business, a set must include, at a minimum, an input and substantive process that significantly contributes to the ability to create output and 2. removes the evaluation of whether a market participant could replace the missing elements. The amendment provides a framework to assist entities in evaluating whether both an input and substantive process is present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. This ASU also narrows the definition of the term output so that the term is consistent with how outputs are described in Topic 606. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2017. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
In January 2017, the FASB issued ASU No. 2017-04,"Intangibles-Goodwill "Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment" which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Impairment should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. Income tax effects from any tax deductible goodwill should be taken into consideration of the carrying amount of the reporting unit when measuring for goodwill impairment, if applicable. An entity still has the option to perform the qualitative assessment for the reporting unit to determine if the quantitative impairment test is necessary. This standard is effective for interim and annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This standard is effective for annual periods for fiscal years beginning after December 15, 2019. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

Note 14 Subsequent Events

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

3845

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 six months ended March 31,June 30, 2017 and 2016, and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Forward-Looking Statements
Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute “forward-looking statements” as well. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors, including, but not limited to: (1) local, regional, national and international economic conditions and the impact they may have on First Commonwealth and its customers; (2) volatility and disruption in national and international financial markets; (3) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; (4) inflation, interest rate, commodity price, securities market and monetary fluctuations; (5) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which First Commonwealth or its customers must comply; (6) the soundness of other financial institutions; (7) political instability; (8) impairment of First Commonwealth’s goodwill or other intangible assets; (9) acts of God or of war or terrorism; (10) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (11) changes in consumer spending, borrowings and savings habits; (12) changes in the financial performance and/or condition of First Commonwealth’s borrowers; (13) technological changes; (14) acquisitions and integration of acquired businesses; (15) First Commonwealth’s ability to attract and retain qualified employees; (16) changes in the competitive environment in First Commonwealth’s markets and among banking organizations and other financial service providers; (17) the ability to increase market share and control expenses; (18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (19) the reliability of First Commonwealth’s vendors, internal control systems or information systems; (20) the costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals; and (21) other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Explanation of Use of Non-GAAP Financial Measure
In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe this non-GAAP financial measure provides information useful to investors in understanding our underlying operational performance and our business and performance trends as it facilitates comparison with the performance of others in the financial services industry. Although we believe that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP.
We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Condensed Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on pages 4148 and 55 for the three months ended March 31,June 30, 2017 and 2016, respectively.

3946

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



Selected Financial Data
The following selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the Condensed Consolidated Financial Statements and related notes. 
 For the Three Months Ended March 31,For the Three Months Ended June 30, For the Six Months Ended June 30,
 2017 20162017 2016 2017 2016
(dollars in thousands, except per share data)(dollars in thousands, except per share data)
Net Income $15,888
 $12,473
$14,013
 $12,007
 $29,901
 $24,480
Per Share Data:           
Basic Earnings per Share $0.18
 $0.14
$0.14
 $0.14
 $0.32
 $0.28
Diluted Earnings per Share 0.18
 0.14
0.14
 0.14
 0.32
 0.28
Cash Dividends Declared per Common Share 0.08
 0.07
0.08
 0.07
 0.16
 0.14
Average Balance:           
Total assets $6,708,817
 $6,617,594
$7,381,816
 $6,707,132
 $7,047,176
 $6,662,363
Total equity 757,077
 730,354
872,233
 739,513
 814,973
 734,933
End of Period Balance:           
Net loans (1)
 $4,868,873
 $4,749,382
    $5,336,500
 $4,795,568
Total assets 6,808,977
 6,699,154
    7,383,386
 6,749,821
Total deposits 4,969,729
 4,301,655
    5,533,135
 4,394,520
Total equity 760,995
 733,314
    879,465
 741,786
Key Ratios:           
Return on average assets 0.96% 0.76%0.76% 0.72% 0.86% 0.74%
Return on average equity 8.51% 6.87%6.44% 6.53% 7.40% 6.70%
Dividends payout ratio 44.44% 50.00%57.14% 50.00% 50.00% 50.00%
Average equity to average assets ratio 11.28% 11.04%11.82% 11.03% 11.56% 11.03%
Net interest margin 3.50% 3.29%3.54% 3.27% 3.52% 3.28%
Net loans to deposits ratio 97.97% 110.41%    96.45% 109.13%
(1) Includes loans held for sale.

Results of Operations
ThreeSix Months Ended March 31,June 30, 2017 Compared to ThreeSix Months Ended March 31,June 30, 2016
Net Income
For the threesix months ended March 31,June 30, 2017, First Commonwealth had net income of $15.929.9 million, or $0.180.32 diluted earnings per share, compared to net income of $12.524.5 million, or $0.140.28 diluted earnings per share, in the threesix months ended March 31,June 30, 2016. The increase in net income wasoccurred despite $10.5 million in merger related expenses recognized in the six months ended June 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 the provision for credit losses, offset by an increase in noninterest expense.losses.
For the threesix months ended March 31,June 30, 2017, the Company’s return on average equity was 8.51%7.40% and its return on average assets was 0.96%0.86%, compared to 6.87%6.70% and 0.76%0.74%, respectively, for the threesix months ended March 31,June 30, 2016.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $52.8111.7 million in the first threesix months of 2017, compared to $49.799.8 million for the same period in 2016. This increase was due to both growth in average interest earning assets of $52.3$285.9 million and a 1923 basis point increase in the yield on interest earning assets. Net interest income comprises a majority of our operating revenue (net interest income before provision expense plus noninterest income), at 75% and 78%77% for the threesix months ended March 31,June 30, 2017 and 2016, respectively.
The net interest margin, on a fully taxable equivalent basis, was 3.50% and 3.29% for the three months ended March 31, 2017 and March 31, 2016, respectively. The 21 basis point increase in the net interest margin is attributable to an increase in the overall yield on interest earning assets, primarily loans.

4047

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 3.52% and 3.28% for the six months ended June 30, 2017 and June 30, 2016, respectively. The 24 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 3.78%3.82% for the threesix months ended March 31,June 30, 2017, an increase of 1923 basis points compared to the 3.59% yield for the same period in 2016. This increase is largely due to the loan portfolio yield, which improved by 1724 basis points when compared to the threesix months ended March 31,June 30, 2016. This changeContributing to this increase was largely affected by an increase in ratesthe yield on our adjustable and variable rate loans.commercial loan portfolios, which increased 28 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 149 basis points in comparison to the prior year. This increase can be attributed to investment security runoff being replaced with higher yielding investments. Investment portfolio purchases during the threesix months ended March 31,June 30, 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 decreasedincreased to 0.38%0.40% for the threesix months ended March 31,June 30, 2017, from 0.39% for the same period in 2016, primarily due to a decreasean increase in the volumecost of short-term borrowings. The decreaseWhile deposits acquired in our recent acquisitions contributed to a decline in average short-term borrowings of $558.5 million for the six months ended June 30, 2017 compared to the same period in 2016, higher market interest rates resulted in the levelcost of short-term borrowings is directly relatedincreasing 28 basis points in comparison to lower costing deposits obtained from the acquisition of thirteen FirstMerit branches in December 2016.same period last year.
For the threesix months ended March 31,June 30, 2017, changes in interest rates positively impacted net interest income by $1.44.9 million when compared with the same period in 2016. The higher yield on interest-earning assets positively impacted net interest income by $2.06.4 million, while the increase in the cost of interest-bearing liabilities had a negative impact of $0.6 million. We have been able to partially mitigate the impact of low interest rates and the effect onnegatively 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 of lower-yielding investments.$1.5 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $1.77.0 million in the threesix months ended March 31,June 30, 2017, as compared to the same period in 2016. Higher levels of interest-earning assets resulted in an increase of $0.95.9 million in interest income, whileand changes in the volume of interest-bearing liabilities decreased interest expense by $0.81.2 million, primarily as the result of decreases in short-term borrowings. Average earning assets for the threesix months ended March 31,June 30, 2017 increased $52.3$285.9 million, or 1%4.7%, compared to the same period in 2016. Average loans for the three months ended March 31, 2017comparable period increased $171.5$349.3 million, or 4%, compared to the same period in 2016.7.3%.
Net interest income also benefited from a $100.8150.5 million increase in average net free funds at March 31,June 30, 2017 as compared to March 31,June 30, 2016. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $134.2$191.9 million, or 12.2%17.2%, 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 threesix months ended March 31,June 30, 2017 decreased by $22.29.9 million compared to the comparable period in 2016.
 
The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the threesix months ended March 31:June 30:
 
2017201620172016
(dollars in thousands)(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income$56,179
$53,353
$119,299
$107,203
Adjustment to fully taxable equivalent basis988
942
2,067
1,885
Interest income adjusted to fully taxable equivalent basis (non-GAAP)57,167
54,295
121,366
109,088
Interest expense4,349
4,546
9,652
9,305
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)$52,818
$49,749
$111,714
$99,783



4148

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 threesix months endedMarch 31: June 30:
 
2017201620172016
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$6,511
$12
0.75%$4,339
$6
0.56%$15,033
$67
0.90%$5,096
$11
0.43%
Tax-free investment securities65,982
611
3.76
59,987
556
3.73
66,699
1,234
3.73
60,891
1,126
3.72
Taxable investment securities1,139,532
7,470
2.66
1,266,907
7,952
2.52
1,180,966
15,217
2.60
1,260,138
15,728
2.51
Loans, net of unearned income (b)(c)4,916,759
49,074
4.05
4,745,252
45,781
3.88
5,138,643
104,848
4.11
4,789,306
92,223
3.87
Total interest-earning assets6,128,784
57,167
3.78
6,076,485
54,295
3.59
6,401,341
121,366
3.82
6,115,431
109,088
3.59
Noninterest-earning assets:        
Cash82,404
  65,120
  87,629
  67,728
  
Allowance for credit losses(52,550)  (52,714)  (52,009)  (54,701)  
Other assets550,179
  528,703
  610,215
  533,905
  
Total noninterest-earning assets580,033
  541,109
  645,835
  546,932
  
Total Assets$6,708,817
  $6,617,594
  $7,047,176
  $6,662,363
  
Liabilities and Shareholders’ Equity        
Interest-bearing liabilities:        
Interest-bearing demand deposits (d)$891,190
$126
0.06%$701,778
$85
0.05%$988,786
$480
0.10%$728,404
$220
0.06%
Savings deposits (d)2,209,018
815
0.15
1,852,118
590
0.13
2,319,199
1,802
0.16
1,879,011
1,490
0.16
Time deposits572,750
871
0.62
594,929
914
0.62
576,834
1,738
0.61
586,723
1,807
0.62
Short-term borrowings930,998
1,749
0.76
1,503,013
2,235
0.60
916,694
3,946
0.87
1,475,233
4,335
0.59
Long-term debt80,840
788
3.95
81,409
722
3.57
84,616
1,686
4.02
81,339
1,453
3.59
Total interest-bearing liabilities4,684,796
4,349
0.38
4,733,247
4,546
0.39
4,886,129
9,652
0.40
4,750,710
9,305
0.39
Noninterest-bearing liabilities and shareholders’ equity:        
Noninterest-bearing demand deposits (d)1,230,939
  1,096,692
  1,309,019
  1,117,159
  
Other liabilities36,005
  57,301
  37,055
  59,561
  
Shareholders’ equity757,077
  730,354
  814,973
  734,933
  
Total Noninterest-Bearing Funding Sources2,024,021
  1,884,347
  2,161,047
  1,911,653
  
Total Liabilities and Shareholders’ Equity$6,708,817
  $6,617,594
  $7,047,176
  $6,662,363
  
Net Interest Income and Net Yield on Interest-Earning Assets $52,818
3.50% $49,749
3.29% $111,714
3.52% $99,783
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.

 

4249

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 threesix months ended March 31,June 30, 2017 compared with March 31,June 30, 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 $6
 $3
 $3
 $56
 $21
 $35
Tax-free investment securities 55
 56
 (1) 108
 107
 1
Taxable investment securities (482) (798) 316
 (511) (988) 477
Loans 3,293
 1,655
 1,638
 12,625
 6,723
 5,902
Total interest income (b) 2,872
 916
 1,956
 12,278
 5,863
 6,415
Interest-bearing liabilities:            
Interest-bearing demand deposits 41
 24
 17
 260
 78
 182
Savings deposits 225
 115
 110
 312
 350
 (38)
Time deposits (43) (34) (9) (69) (30) (39)
Short-term borrowings (486) (853) 367
 (389) (1,639) 1,250
Long-term debt 66
 (5) 71
 233
 59
 174
Total interest expense (197) (753) 556
 347
 (1,182) 1,529
Net interest income $3,069
 $1,669
 $1,400
 $11,931
 $7,045
 $4,886
 
(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 threesix months ended March 31June 30:
 
2017 20162017 2016
DollarsPercentage DollarsPercentageDollarsPercentage DollarsPercentage
(dollars in thousands)(dollars in thousands)
Commercial, financial, agricultural and other$2,184
68 % $11,944
183 %$(843)(52)% $21,269
126 %
Real estate construction(17)(1) (209)(3)94
6
 (634)(4)
Residential real estate279
9
 286
4
9
1
 341
2
Commercial real estate(123)(4) (6,932)(106)648
40
 (6,437)(38)
Loans to individuals906
28
 1,437
22
1,712
105
 2,359
14
Total$3,229
100 % $6,526
100 %$1,620
100 % $16,898
100 %
The provision for credit losses for the threesix months ended March 31,June 30, 2017 decreased in comparison to the threesix months ended March 31,June 30, 2016 by $3.315.3 million. The level of provision expense in the first threesix months of 2017 is primarily due to charge-offs in the loans to individuals category, with $1.3 million in charge-offs related to the indirect automobile portfolio and $0.5 million in personal line of credit charge-offs. The negative provision expense for commercial, financial, agricultural and other loans asis the result of $3.1 million in recoveries on two commercial loans that had been charged-off in prior periods, as well as decreases in historical loss factors. Also impacting the provision for commercial, financial, agricultural and other loans was $3.4 million in charge-offs recognized on two commercial loan relationships. Of this total, $1.9 million was recognized on a commercial loan that was transferred to held for sale in March 2017 and subsequently sold in April 2017.
The majoritylevel of the 2016 provision expense is attributable to loans to commercial, financial and agricultural loans resulting from an increase in historical loss factors, an increase in qualitative factors related to certain recovery ratesthe residential real estate and specific reserves established for one commercial loan relationship. Provision expense for commercial real estate loans was impactedcategories reflects the impact of growth in these loan categories, offset by decreases in historical loss factors. The provision for loans to individuals is primarily due to charge-offs in the indirect automobile portfolio as well as changes in qualitative factors related to the automobile industry.

4350

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. 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 qualitative factors that relate to the automobile industry.
The allowance for credit losses was $48.748.1 million, or 0.99%0.89%, of total loans outstanding and 0.98% of total originated loans outstanding at March 31,June 30, 2017, compared to $50.2 million, or 1.03%, and 1.05%, respectively, at December 31, 2016 and $55.259.8 million, or 1.15%1.24%, and 1.24%, respectively, at March 31,June 30, 2016. The change compared to December 31, 2016, can be attributed to the aforementioned charge-offs on two commercial loan relationships. Nonperforming loans as a percentage of total loans increasedimproved to 1.01%0.75% at March 31,June 30, 2017 from 0.86% at December 31, 2016 and 1.29%1.33% as of March 31,June 30, 2016. The allowance to nonperforming loan ratio was 105.20%119.61%, 120.02% and 89.33%92.88% as of March 31,June 30, 2017, December 31, 2016 and March 31,June 30, 2016, respectively.
 
Below is an analysis of the consolidated allowance for credit losses for the threesix months ended March 31,June 30, 2017 and 2016 and the year-ended December 31, 2016:
 
 March 31, 2017 March 31, 2016 December 31, 2016 June 30, 2017 June 30, 2016 December 31, 2016
 (dollars in thousands) (dollars in thousands)
Balance, beginning of period $50,185
 $50,812
 $50,812
 $50,185
 $50,812
 $50,812
Loans charged off:            
Commercial, financial, agricultural and other 3,825
 1,392
 19,603
 5,277
 6,145
 19,603
Real estate construction 
��
 
 
 
 
Residential real estate 473
 382
 1,189
 619
 602
 1,189
Commercial real estate 31
 265
 570
 60
 408
 570
Loans to individuals 1,205
 1,469
 4,943
 2,178
 2,491
 4,943
Total loans charged off 5,534
 3,508
 26,305
 8,134
 9,646
 26,305
Recoveries of loans previously charged off:            
Commercial, financial, agricultural and other 368
 134
 4,164
 3,636
 198
 4,164
Real estate construction 54
 223
 562
 97
 227
 562
Residential real estate 128
 118
 481
 219
 260
 481
Commercial real estate 117
 756
 1,522
 150
 783
 1,522
Loans to individuals 129
 161
 469
 294
 289
 469
Total recoveries 796
 1,392
 7,198
 4,396
 1,757
 7,198
Net credit losses 4,738
 2,116
 19,107
 3,738
 7,889
 19,107
Provision charged to expense 3,229
 6,526
 18,480
 1,620
 16,898
 18,480
Balance, end of period $48,676
 $55,222
 $50,185
 $48,067
 $59,821
 $50,185

Noninterest Income
The following table presents the components of noninterest income for the three months endedMarch 31:
  2017 2016 $ Change % Change
  (dollars in thousands)
Noninterest Income:        
Trust income $1,417
 $1,255
 $162
 13 %
Service charges on deposit accounts 4,319
 3,708
 611
 16
Insurance and retail brokerage commissions 2,082
 1,959
 123
 6
Income from bank owned life insurance 1,292
 1,296
 (4) 
Card-related interchange income 4,251
 3,557
 694
 20
Swap fee (expense) income (73) 460
 (533) (116)
Other income 1,706
 1,616
 90
 6
Subtotal 14,994
 13,851
 1,143
 8
Net securities gains 652
 
 652
 N/A
Gain on sale of mortgage loans 977
 683
 294
 43
Gain on sale of other loans and assets 307
 195
 112
 57
Derivatives mark to market 2
 (1,014) 1,016
 (100)
Total noninterest income $16,932
 $13,715
 $3,217
 23 %

4451

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 six months endedJune 30:
  2017 2016 $ Change % Change
  (dollars in thousands)
Noninterest Income:        
Trust income $3,128
 $2,575
 $553
 21 %
Service charges on deposit accounts 9,055
 7,553
 1,502
 20
Insurance and retail brokerage commissions 4,524
 3,944
 580
 15
Income from bank owned life insurance 2,741
 2,607
 134
 5
Card-related interchange income 9,093
 7,341
 1,752
 24
Swap fee income 241
 1,260
 (1,019) (81)
Other income 3,430
 3,234
 196
 6
Subtotal 32,212
 28,514
 3,698
 13
Net securities (losses) gains 603
 28
 575
 2,054
Gain on sale of mortgage loans 2,292
 1,615
 677
 42
Gain on sale of other loans and assets 764
 661
 103
 16
Derivatives mark to market (35) (1,545) 1,510
 (98)
Total noninterest income $35,836
 $29,273
 $6,563
 22 %
 
Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market, increased $1.13.7 million for the first threesix months of 2017 compared to 2016. Service charges on deposit accounts increased $0.6 million and card-related interchange income increased $0.7$1.5 million, of which $0.3$0.8 million and $0.5 million, respectively, 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 $1.8 million during the FirstMerit branches December 2016.first six months of 2017, of which $1.3 million is attributable to the recent acquisitions. Insurance and retail brokerage commissions and trust income also increased $0.1$0.6 million and $0.2 million, respectively, due to higher annuity and mutual fund sales. Trust income increased $0.6 million, of which $0.3 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 $0.5$1.0 million due to a decreasedecline in the number of interest rate swaps entered into for our commercial loan customers during the first threesix months of 2017 compared to the same period in the prior year.
Total noninterest income for the threesix months ended March 31,June 30, 2017 increased $3.2$6.6 million in comparison to the threesix months ended March 31,June 30, 2016. The most significant change includes a $1.0$1.5 million increase related to the mark to market adjustment on interest rate swaps entered into for our commercial loan customers. This adjustment does not reflect a realized gain on the swaps, but rather relates to a change in fair value due to increasesmovements in corporate bond spreads and decreasesswap rates. Gain on sale of mortgage loans increased $0.7 million as a result of continued growth in swap rates.our mortgage lending area. In addition, net securities gains increased $0.7$0.6 million, primarily due to the early redemption of one of our pooled trust preferred securities.

Noninterest Expense
The following table presents the components of noninterest expense for the three months endedMarch 31:
  2017 2016 $ Change % Change
  (dollars in thousands)
Noninterest Expense:        
Salaries and employee benefits $23,466
 $21,677
 $1,789
 8 %
Net occupancy expense 3,761
 3,481
 280
 8
Furniture and equipment expense 3,088
 2,867
 221
 8
Data processing expense 2,085
 1,759
 326
 19
Advertising and promotion expense 806
 526
 280
 53
Pennsylvania shares tax expense 816
 758
 58
 8
Intangible amortization 572
 137
 435
 318
Collection and repossession expense 497
 569
 (72) (13)
Other professional fees and services 959
 791
 168
 21
FDIC insurance 793
 1,038
 (245) (24)
Other operating expenses 4,980
 4,201
 779
 19
Subtotal 41,823
 37,804
 4,019
 11
Loss on sale or write-down of assets 99
 96
 3
 3
Merger and acquisition related 611
 
 611
 N/A
Litigation and operational losses 232
 244
 (12) 5 %
Total noninterest expense $42,765
 $38,144
 $4,621
 12 %

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

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

4552

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 six months endedJune 30:
  2017 2016 $ Change % Change
  (dollars in thousands)
Noninterest Expense:        
Salaries and employee benefits $48,764
 $41,565
 $7,199
 17 %
Net occupancy expense 7,882
 6,667
 1,215
 18
Furniture and equipment expense 6,411
 5,749
 662
 12
Data processing expense 4,430
 3,547
 883
 25
Advertising and promotion expense 1,794
 1,190
 604
 51
Pennsylvania shares tax expense 1,977
 1,850
 127
 7
Intangible amortization 1,418
 251
 1,167
 465
Collection and repossession expense 940
 1,043
 (103) (10)
Other professional fees and services 2,055
 1,664
 391
 23
FDIC insurance 1,770
 2,100
 (330) (16)
Other operating expenses 11,278
 8,368
 2,910
 35
Subtotal 88,719
 73,994
 14,725
 20
Loss on sale or write-down of assets 1,319
 441
 878
 199
Merger and acquisition related 10,481
 240
 10,241
 4,267 %
Litigation and operational losses 509
 879
 (370) (42)%
Total noninterest expense $101,028
 $75,554
 $25,474
 34 %

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $14.7 million, or 20%, for the six months endedJune 30, 2017 compared to the same period in 2016. Contributing to the higher expenses in 2017 is a $7.2 million increase in salaries and employee benefits due to an increase of 258 employees at June 30, 2017 compared to June 30, 2016. The higher number of employees is primarily a result of the acquisition of 13 branches from FirstMerit in the fourth quarter of 2016 and the acquisition of DCB in April 2017. These acquisitions also accounted for $1.1 million of the $1.2 million increase in net occupancy expense, $0.4 million of the $0.7 million increase in furniture and equipment expense and all of the $1.2 million increase in intangible amortization. The $2.9 million increase in other operating expense is primarily due to an increase of $1.4 million in unfunded commitment reserve expense in 2017 as compared to 2016 and an increase of $0.4 million in audit and accounting expense.

Total noninterest expense increased by $25.5 million, or 34%, for the six months ended June 30, 2017 compared to the same period in 2016. Contributing to this is an increase of $10.2 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 six months of 2016, similar write-downs related to OREO properties totaled $0.2 million.
Income Tax
The provision for income taxes increased $1.52.7 million for the threesix months ended March 31,June 30, 2017, compared to the corresponding period in 2016. The higher provision for income taxes was the result of a $4.98.1 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 threesix months ended March 31,June 30, 2017 and 2016.
We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The level of tax benefits that reduced our tax rate below the 35% statutory rate produced an annual effective tax rate of 30.2% and 30.1%29.5% for the threesix months ended March 31,June 30, 2017 and 2016, respectively.
As of March 31,June 30, 2017, our deferred tax assets totaled $30.341.8 million. Based on our evaluation, as of March 31, 2017, we determined that it is more likely than not that all of these assets will be realized. As a result, a valuation allowance against these assets was not needed. In

53

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



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 June 30, 2017 Compared to Three Months Ended June 30, 2016

Net Income
For the three months ended June 30, 2017, First Commonwealth had net income of $14.0 million, or $0.14 diluted earnings per share, compared to net income of $12.0 million, or $0.14 diluted earnings per share, in the three months ended June 30, 2016. The increase in net income was primarily the result of an increase in net interest income and noninterest income coupled with a decrease in the provision for credit losses, offset by an increase in noninterest expense.
For the three months ended June 30, 2017, the Company’s return on average equity was 6.44% and its return on average assets was 0.76%, compared to 6.53% and 0.72%, respectively, for the three months ended June 30, 2016.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $58.9 million for the three months ended June 30, 2017, compared to $50.0 million for the same period in 2016. This increase was due to both growth in average interest earning assets of $516.5 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 75% and 76% for the three months ended June 30, 2017 and 2016, respectively.
The net interest margin, on a fully taxable equivalent basis, was 3.54% and 3.27% for the three months ended June 30, 2017 and June 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 3.86% for the three months ended June 30, 2017, an increase of 28 basis points compared to the 3.58% yield for the same period in 2016. This increase is largely due to the loan portfolio yield, which improved by 32 basis points when compared to the three months ended June 30, 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 5 basis points in comparison to the prior year. This increase can be attributed to investment security runoff being replaced with higher yielding investments. Investment portfolio purchases during the three months ended June 30, 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 0.42% for the three months ended June 30, 2017, from 0.40% for the same period in 2016, primarily due to an increase in the cost of short-term borrowings. Increases in market interest rates resulted in the cost of short-term borrowings increasing 40 basis points in comparison to the same period in 2016.
For the three months ended June 30, 2017, changes in interest rates positively impacted net interest income by $3.5 million when compared with the same period in 2016. The higher yield on interest-earning assets positively impacted net interest income by $4.5 million, while the increase in the cost of interest-bearing liabilities had a negative impact of $1.0 million.
Changes in the volume of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $5.3 million in the three months ended June 30, 2017, as compared to the same period in 2016. Higher levels of interest-earning assets resulted in an increase of $4.9 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 June 30, 2017 increased $516.5 million, or 8%, compared to the same period in 2016. Average loans for the three months ended June 30, 2017 increased $524.7 million, or 11%, compared to the same period in 2016.
Net interest income also benefited from a $199.4 million increase in average net free funds at June 30, 2017 as compared to June 30, 2016. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing

54

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



liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $248.6 million, or 21.9%, in noninterest-bearing demand deposit average balances. Additionally, higher cost time deposits continue to mature and reprice into lower cost deposits or other funding alternatives. Average time deposits for the three months ended June 30, 2017 increased by $2.4 million compared to the comparable period in 2016; however, the cost of time deposits decreased 2 basis points 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 June 30:
 2017 2016
 (dollars in thousands)
Interest income per Condensed Consolidated Statements of Income$63,120
 $53,850
Adjustment to fully taxable equivalent basis1,079
 943
Interest income adjusted to fully taxable equivalent basis (non-GAAP)64,199
 54,793
Interest expense5,303
 4,759
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)$58,896
 $50,034


55

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 June 30:
 20172016
 Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
 (dollars in thousands)
Assets      
Interest-earning assets:      
Interest-bearing deposits with banks$23,461
$55
0.94%$5,852
$5
0.34%
Tax-free investment securities67,446
623
3.70
61,795
570
3.71%
Taxable investment securities1,221,907
7,747
2.54
1,253,371
7,776
2.50
Loans, net of unearned income (b)(c)5,358,089
55,774
4.18
4,833,360
46,442
3.86
Total interest-earning assets6,670,903
64,199
3.86
6,154,378
54,793
3.58
Noninterest-earning assets:      
Cash92,796
  70,336
  
Allowance for credit losses(51,475)  (56,688)  
Other assets669,592
  539,106
  
Total noninterest-earning assets710,913
  552,754
  
Total Assets$7,381,816
  $6,707,132
  
Liabilities and Shareholders’ Equity      
Interest-bearing liabilities:      
Interest-bearing demand deposits (d)$1,085,309
$354
0.13%$755,031
$135
0.07%
Savings deposits (d)2,428,170
987
0.16
1,905,903
900
0.19
Time deposits580,874
867
0.60
578,518
893
0.62
Short-term borrowings902,547
2,197
0.98
1,447,452
2,100
0.58
Long-term debt88,351
898
4.08
81,268
731
3.62
Total interest-bearing liabilities5,085,251
5,303
0.42
4,768,172
4,759
0.40
Noninterest-bearing liabilities and shareholders’ equity:      
Noninterest-bearing demand deposits (d)1,386,240
  1,137,626
  
Other liabilities38,092
  61,821
  
Shareholders’ equity872,233
  739,513
  
Total noninterest-bearing funding sources2,296,565
  1,938,960
  
Total Liabilities and Shareholders’ Equity$7,381,816
  $6,707,132
  
Net Interest Income and Net Yield on Interest-Earning Assets $58,896
3.54% $50,034
3.27%
(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.


56

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 June 30, 2017 compared with June 30, 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 $50
 $15
 $35
Tax-free investment securities 53
 52
 1
Taxable investment securities (29) (196) 167
Loans 9,332
 5,036
 4,296
Total interest income (b) 9,406
 4,907
 4,499
Interest-bearing liabilities:      
Interest-bearing demand deposits 219
 57
 162
Savings deposits 87
 247
 (160)
Time deposits (26) 4
 (30)
Short-term borrowings 97
 (786) 883
Long-term debt 167
 64
 103
Total interest expense 544
 (414) 958
Net interest income $8,862
 $5,321
 $3,541
(a)Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b)Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.

Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of the allowance for credit losses needed for probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance, against which credit losses are charged.
The table below provides a breakout of the provision for credit losses by loan category for the three months ended June 30:
 2017 2016
 DollarsPercentage DollarsPercentage
 (dollars in thousands)
Commercial, financial, agricultural and other$(3,027)188 % $9,325
90 %
Real estate construction111
(7) (425)(4)
Residential real estate(270)17
 55
1
Commercial real estate771
(48) 495
4
Loans to individuals806
(50) 922
9
Total$(1,609)100 % $10,372
100 %
The provision for credit losses for the three months ended June 30, 2017 decreased in comparison to the three months ended June 30, 2016 by $12.0 million. The level of provision expense in the second quarter of 2017 is primarily due to $3.1 million in recoveries recognized on two commercial loans in the commercial, financial, agricultural and other loan category. The provision expense related to loans to individuals is a result of charge-offs of $0.6 million on indirect automobile loans and $0.2 million on personal lines of credit. The provision for commercial real estate loans is primarily due to changes in qualitative risk factors related to commercial real estate. The negative provision for residential real estate is a result of lower historical loss factors.
The majority of the 2016 provision expense is attributable to commercial, financial, agricultural and other loans as the result of an increase in historical loss factors, 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 real estate construction loans 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, as well as changes in qualitative factors that relate to the automobile industry.

57

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




Below is an analysis of the consolidated allowance for credit losses for the three months ended June 30, 2017 and 2016 and the year-ended December 31, 2016:
  June 30, 2017 June 30, 2016 December 31, 2016
  (dollars in thousands)
Balance, beginning of period $48,676
 $55,222
 $50,812
Loans charged off:      
Commercial, financial, agricultural and other 1,452
 4,753
 19,603
Real estate construction 
 
 
Residential real estate 146
 220
 1,189
Commercial real estate 29
 143
 570
Loans to individuals 973
 1,022
 4,943
Total loans charged off 2,600
 6,138
 26,305
Recoveries of loans previously charged off:      
Commercial, financial, agricultural and other 3,268
 64
 4,164
Real estate construction 43
 4
 562
Residential real estate 91
 142
 481
Commercial real estate 33
 27
 1,522
Loans to individuals 165
 128
 469
Total recoveries 3,600
 365
 7,198
Net credit losses (1,000) 5,773
 19,107
Provision charged to expense (1,609) 10,372
 18,480
Balance, end of period $48,067
 $59,821
 $50,185


Noninterest Income
The following table presents the components of noninterest income for the three months ended June 30:
  2017 2016 $ Change % Change
  (dollars in thousands)
Noninterest Income:        
Trust income $1,711
 $1,320
 $391
 30 %
Service charges on deposit accounts 4,736
 3,845
 891
 23
Insurance and retail brokerage commissions 2,442
 1,985
 457
 23
Income from bank owned life insurance 1,449
 1,311
 138
 11
Card related interchange income 4,842
 3,784
 1,058
 28
Swap fee income 314
 800
 (486) (61)
Other income 1,724
 1,618
 106
 7
Subtotal 17,218
 14,663
 2,555
 17
Net securities gains (49) 28
 (77) (275)
Gain on sale of mortgage loans 1,315
 932
 383
 41
Gain on sale of other loans and assets 457
 466
 (9) (2)
Derivatives mark to market (37) (531) 494
 (93)
Total noninterest income $18,904
 $15,558
 $3,346
 22 %

Noninterest income, excluding net securities gains, gain on sale of loans and other assets and the derivatives mark to market, increased $2.6 million for the second quarter of 2017 compared to 2016. Service charges on deposit accounts increased $0.9 million, of which $0.5 million can be attributed to deposit accounts acquired from the acquisition of thirteen FirstMerit

58

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



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. Insurance and retail brokerage commissions increased $0.5 million due to higher annuity and mutual fund sales. Trust income increased $0.4 million, of which $0.3 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 a decline in the number of interest rate swaps entered into for our commercial loan customers during the second quarter of 2017 compared to the same period in the prior year.
Total noninterest income for the three months ended June 30, 2017 increased $3.3 million in comparison to the three months ended June 30, 2016. The most significant change includes a $0.5 million increase related to the mark to market adjustment on interest rate swaps entered into for our commercial loan customers. This adjustment does not reflect a realized gain on the swaps, but rather relates to a change in fair value due to movements in corporate bond spreads and swap rates. In addition, the gain on sale of mortgage loans increased $0.4 million due to continued growth in the mortgage lending area.

Noninterest Expense
The following table presents the components of noninterest expense for the three months ended June 30:
  2017 2016 $ Change % Change
  (dollars in thousands)
Noninterest Expense:        
Salaries and employee benefits $25,298
 $19,888
 $5,410
 27 %
Net occupancy expense 4,121
 3,186
 935
 29
Furniture and equipment expense 3,323
 2,882
 441
 15
Data processing expense 2,345
 1,788
 557
 31
Advertising and promotion expense 988
 664
 324
 49
Pennsylvania shares tax expense 1,161
 1,092
 69
 6
Intangible amortization 846
 114
 732
 642
Collection and repossession expense 443
 474
 (31) (7)
Other professional fees and services 1,096
 873
 223
 26
FDIC insurance 977
 1,062
 (85) (8)
Other operating expenses 6,298
 4,167
 2,131
 51
Subtotal 46,896
 36,190
 10,706
 30
Loss on sale or write-down of assets 1,220
 345
 875
 254
Merger and acquisition related 9,870
 240
 9,630
 4,013
Litigation and operational losses 277
 635
 (358) (56)
Total noninterest expense $58,263
 $37,410
 $20,853
 56 %

Noninterest expense, excluding loss on sale or write-down of assets, litigation and operational losses and merger and acquisition related expenses, increased $10.7 million, or 30%, for the three months ended June 30, 2017 compared to the same period in 2016. Contributing to the higher level of expenses in 2017 is a $5.4 million increase in salaries and employee benefits, primarily due to an increase of 258 employees at June 30, 2017 compared to June 30, 2016. The higher number of employees is primarily a result of the acquisition of 13 branches from FirstMerit in the fourth quarter of 2016 and the acquisition of DCB in April 2017. These two acquisitions accounted for $0.7 million of the $0.9 million increase in net occupancy expense, $0.3 million of the $0.4 million increase in furniture and equipment expense and all of the $0.7 million increase in intangible amortization. The $2.1 million increase in other operating expense is primarily due to an increase of $1.2 million in unfunded commitment reserves expense in 2017 as compared to 2016.

Total noninterest expense increased by $20.9 million, or 56%, for the three months ended June 30, 2017 compared to the same period in 2016. The increase of $9.6 million in merger and acquisition expense is a result of the April 2017 acquisition of DCB. In addition, loss on sale or write-down of assets increased $0.9 million due to the write-down of four OREO properties totaling $1.0 million. During the second quarter of 2016, similar write-downs related to OREO properties totaled $0.2 million.


59

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



Income Tax
The provision for income taxes increased $1.2 million for the three months ended June 30, 2017, compared to the corresponding period in 2016. The higher provision for income taxes was the result of a $3.2 million increase in the level of income before taxes.
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income, for the three months ended June 30, 2017 and 2016.
We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The level of tax benefits that reduced our tax rate below the 35% statutory rate produced an annual effective tax rate of 30.2% and 28.8% for the three months ended June 30, 2017 and 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 threesix months of 2017, liquidity used by the net decrease in short-term borrowings totaled $93.7$21.8 million, while the sales, maturity and redemption of investment securities provided $44.0$192.0 million. This liquidity provided funds needed to pay down borrowings, originate loans, purchase investment securities and fund depositor withdrawals.  We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank of Cleveland (“FRB”) and access to certificates of deposit through brokers.
We participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of March 31,June 30, 2017, our maximum borrowing capacity under this program was $1.01.1 billion and as of that date there was $0.616.2 million outstanding with an average weighted rate of 0.84%0.39% and an average original term of 305444 days. These deposits are part of a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks.
An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program, which enables us to pledge certain loans that are not being used as collateral at the FHLB as collateral for borrowings at the FRB. At March 31,June 30, 2017, the borrowing capacity under this program totaled $769.7772.1 million and there were no amounts outstanding.
As of March 31,June 30, 2017, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.51.4 billion and as of that date amounts used against this capacity included $0.90.7 billion in outstanding borrowings and $10.2 million inno outstanding letters of credit.
We also have available unused federal funds lines with five correspondent banks. These lines have an aggregate commitment of $195.0 million with no outstanding balance as of March 31,June 30, 2017. In addition, we have available unused repo lines with three correspondent banks. These lines have an aggregate commitment of $519.8 million with no outstanding balance as of June 30, 2017.
First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As of March 31,June 30, 2017, there are no amounts outstanding on this line.

4660

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



First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. The following table shows a breakdown of the components of First Commonwealth’s deposits: 
 March 31, 2017 December 31, 2016 June 30, 2017 December 31, 2016
 (dollars in thousands) (dollars in thousands)
Noninterest-bearing demand deposits $1,270,136
 $1,268,786
 $1,404,081
 $1,268,786
Interest-bearing demand deposits 114,526
 114,043
 237,801
 114,043
Savings deposits 3,030,156
 2,972,747
 3,330,351
 2,972,747
Time deposits 554,911
 591,832
 560,902
 591,832
Total $4,969,729
 $4,947,408
 $5,533,135
 $4,947,408
During the first threesix months of 2017, total deposits increased $22.3585.7 million due to a $57.9$481.4 million increase in interest-bearing demand and savings deposits and a $1.4$135.3 million increase in noninterest-bearing demand deposits. These increases were offset by a $36.930.9 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 core certificates.certificates of deposit of $46.5 million offset by an increase in CDARs deposits of $15.6 million, of which $14.7 million was acquired from DCB.

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 0.740.73 and 0.75 at March 31,June 30, 2017 and December 31, 2016, respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.
 
Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below the gap analysis.

The following is the gap analysis as of March 31, 2017 and December 31, 2016:
  March 31, 2017
  0-90 Days 91-180
Days
 181-365
Days
 Cumulative
0-365 Days
 Over 1 Year
Through 5
Years
 Over 5
Years
  (dollars in thousands)
Loans $2,579,871
 $178,796
 $308,650
 $3,067,317
 $1,409,863
 $408,097
Investments 88,905
 47,027
 90,334
 226,266
 572,020
 445,991
Other interest-earning assets 47,944
 
 
 47,944
 
 
Total interest-sensitive assets (ISA) 2,716,720
 225,823
 398,984
 3,341,527
 1,981,883
 854,088
Certificates of deposit 109,614
 74,942
 165,163
 349,719
 201,425
 3,767
Other deposits 3,144,682
 
 
 3,144,682
 
 
Borrowings 1,033,914
 147
 299
 1,034,360
 2,608
 5,404
Total interest-sensitive liabilities (ISL) 4,288,210
 75,089
 165,462
 4,528,761
 204,033
 9,171
Gap $(1,571,490) $150,734
 $233,522
 $(1,187,234) $1,777,850
 $844,917
ISA/ISL 0.63
 3.01
 2.41
 0.74
 9.71
 93.13
Gap/Total assets 23.08% 2.21% 3.43% 17.44% 26.11% 12.41%

4761

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 June 30, 2017 and December 31, 2016:
  June 30, 2017
  0-90 Days 91-180
Days
 181-365
Days
 Cumulative
0-365 Days
 Over 1 Year
Through 5
Years
 Over 5
Years
  (dollars in thousands)
Loans $2,698,471
 $216,032
 $351,440
 $3,265,943
 $1,584,596
 $506,520
Investments 90,948
 49,527
 90,492
 230,967
 577,241
 449,285
Other interest-earning assets 12,310
 
 
 12,310
 
 
Total interest-sensitive assets (ISA) 2,801,729
 265,559
 441,932
 3,509,220
 2,161,837
 955,805
Certificates of deposit 100,293
 71,459
 166,827
 338,579
 218,283
 4,039
Other deposits 3,568,153
 
 
 3,568,153
 
 
Borrowings 918,451
 149
 302
 918,902
 2,634
 12,990
Total interest-sensitive liabilities (ISL) 4,586,897
 71,608
 167,129
 4,825,634
 220,917
 17,029
Gap $(1,785,168) $193,951
 $274,803
 $(1,316,414) $1,940,920
 $938,776
ISA/ISL 0.61
 3.71
 2.64
 0.73
 9.79
 56.13
Gap/Total assets 24.18% 2.63% 3.72% 17.83% 26.29% 12.71%

 
  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) Net interest income change (12 months) for basis point movements of:
 -200 -100 +100 +200 -200 -100 +100 +200
 (dollars in thousands) (dollars in thousands)
March 31, 2017 ($) $(12,839) $(5,638) $5,344
 $10,136
March 31, 2017 (%) (6.01)% (2.64)% 2.50% 4.74%
June 30, 2017 ($) $(17,058) $(8,745) $5,823
 $11,267
June 30, 2017 (%) (7.03)% (3.61)% 2.40% 4.65%
                
December 31, 2016 ($) $(11,180) $(5,495) $4,643
 $9,027
 $(11,180) $(5,495) $4,643
 $9,027
December 31, 2016 (%) (5.41)% (2.66)% 2.25% 4.37% (5.41)% (2.66)% 2.25% 4.37%

62

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) Net interest income change (12 months) for basis point movements of:
 -200 -100 +100 +200 -200 -100 +100 +200
 (dollars in thousands) (dollars in thousands)
March 31, 2017 ($) $(22,066) $(11,211) $8,842
 $16,586
March 31, 2017 (%) (10.32)% (5.25)% 4.14% 7.76%
June 30, 2017 ($) $(28,836) $(17,566) $10,130
 $19,150
June 30, 2017 (%) (11.89)% (7.24)% 4.18% 7.90%
                
December 31, 2016 ($) $(17,526) $(9,132) $8,379
 $16,286
 $(17,526) $(9,132) $8,379
 $16,286
December 31, 2016 (%) (8.48)% (4.42)% 4.06% 7.88% (8.48)% (4.42)% 4.06% 7.88%
The analysis and model used to quantify the sensitivity of our net interest income becomes less meaningful in a decreasing 200 basis point scenario given the current low interest rate environment. Results of the 100 and 200 basis point interest rate decline scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1%, with an assumed floor of zero in the model. In the threesix months ended March 31,June 30, 2017 and 2016, the cost of our interest-bearing liabilities averaged 0.38%0.40% and 0.39%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.78%3.82% and 3.59%, respectively.

48

ITEM 2. Management’s DiscussionIn 2015 and Analysis of Financial Condition and Results of Operations (Continued)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES



During the first quarter of 2015,2014, the Company entered into cash flow interest rate swaps, in which we extended the duration of $100.0$200.0 million of the $1.3 billion LIBOR based loans in our loan portfolio at that time into fixed interest rates for a period of three or four years. These swaps added approximately two basis points of protection to the net interest margin as a hedge against a prolonged low-rate environment. A similar cash flow interest rate swap, with a notional amount of $100.0 million, was entered into in 2014. Please refer to Note 11,12, "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 $3.9$4.6 million at March 31,June 30, 2017 and is classified in "Other liabilities" on the Condensed Consolidated Statements of Financial Condition.
First Commonwealth defines exposure to the Oil and Gas Industry as any borrower who is involved in exploration and production, and any company in the industry supply chain that generates 40% or more of their sales revenue from exploration and production companies.
As of March 31,June 30, 2017, the Company had a total of $116.6$111.7 million in commitments to the Oil and Gas Industry, with $54.3$50.9 million in outstanding loan balances against those commitments. Of this total, commitments of $29.3$29.2 million with outstanding balances of $3.7$3.6 million are for exploration and production, while $87.3$82.4 million in commitments, with outstanding balances of $50.7$47.3 million, are related to ancillary businesses.
One customer accounts for 34.2% of the loansloan commitments related to exploration and production and is a pass-rated credit. This credit facility is primarily used to support letters of credit and has little or no usage. One commercial relationship with a commitment of $15.0 million and no outstanding balance is categorized as a non-pass accruing credit. One commercial relationship in this category, with an oustanding balance of $2.2 million, has been on non-performing status since before the oil price decline in the third quarter of 2014.

63

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



The ancillary businesses sector consists of well services, transportation, and providing equipment and materials to support the oil and gas industry. Two customers, which account for 35.5%37.6% 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$23.3 million, in the ancillary business sector that will see some impact from reduced drilling activity due to lower oil and gas prices. ThreeTwo commercial relationships with $4.1$2.4 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 threesix months of 2017, 1326 loans totaling $0.8$9.6 million were identified as troubled debt restructurings.
The balance of troubled debt restructured loans decreased $0.9$0.7 million from December 31, 2016 due primarily to a $5.4 million payoff of two commercial and industrial loan relationships, as well as normal loan paydowns.paydowns and charge-offs offset by the addition of $9.6 million in newly identified troubled debt restructured 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

49

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



when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the borrower. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed on nonaccrual status at 150 days past due.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses or a specifically assigned allowance for loan losses are recognized where appropriate.
Nonperforming loans, including loans held for sale, increased $8.1decreased $1.6 million to $49.9$40.2 million at March 31,June 30, 2017 compared to $41.8 million at December 31, 2016. This increase is primarily dueThe June 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 $6.1 million compared to the additionDecember 31, 2016 as a result of a $5.5payoffs totaling $8.5 million commercial loan relationship, of which $1.9 million was charged-off,on loans related to a manufacturer of custom store fixtures which is classified as held for sale, a $3.6 million commercial loan to a company specializing in commercial business services and a $3.3 million commercial loan relationship, of which $1.5 million was charged-off, to a manufacturer of fluid containment tanks. Also includedfour borrowers. Included in nonperforming loans at June 30, 2017, is a $7.4$5.0 million loan to an aluminum servicing company which wasis classified as doubtful at March 31, 2017. A charge-offdoubtful. This loan was recognized on this loan in the fourth quarter of 2016 and a restructuring is expected to be completed inrestructured during the second quarter of 2017. At this time, the restructuring is not expected to result2017, resulting in any additional charge-offs on this loan.a paydown of $2.4 million.
The allowance for credit losses as a percentage of nonperforming loans was 105.20%119.61% as of March 31,June 30, 2017 compared to 120.02% at December 31, 2016 and 89.33%92.88% at March 31,June 30, 2016. The amount of specific reserves included in the allowance for nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific reserves of $3.0$2.1 million and general reserves of $45.7$45.9 million as of March 31,June 30, 2017. Specific reserves decreased $0.1$1.0 million from December 31, 2016, and $10.4$13.4 million from March 31,June 30, 2016. The specific reserves in the first three months of 2016 is primarily due to specific reserves related to one new impaired loan. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at March 31,June 30, 2017.
Criticized loans totaled $130.0$160.2 million at March 31,June 30, 2017 and represented 2.6%3.0% of the loan portfolio. The level of criticized loans decreasedincreased as of March 31,June 30, 2017 when compared to December 31, 2016,, by $4.4$25.8 million,, or 3.3%19.2%. This increase can be attributed to the downgrade of a $21.5 million loan to one borrower, who has sufficient liquidity and cash flow, however has experienced a decline in it’s debt service coverage ratio. Classified loans totaled $89.4$69.7 million at March 31,June 30, 2017 compared to $93.2$92.7 million at December 31, 2016, a decrease of $3.8$23.0 million, or 4.0%24.8%. This decline is a result of an upgrade to OAEM of a $9.3 million loan for one borrower and the payoff of $6.1 million in nonaccrual loans as noted above. Delinquency on accruing loans for the same period decreased $1.52.0 million, or 11.0%14.4%, the majority of which are commercial, financial, agricultural and other loans and residential real estate loans.
The allowance for credit losses was $48.748.1 million at March 31,June 30, 2017 or 0.99%0.89% of total loans outstanding, compared to 1.03% reported at December 31, 2016 and 1.15%1.24% at March 31,June 30, 2016. General reserves, or the portion of the allowance related to loans that were not specifically evaluated for impairment, as a percentage of non-impaired loans were 0.94%0.86% at March 31,June 30, 2017 compared to 0.97% at December 31, 2016 and 0.88%0.93% at MarchJune 30, 2016. General reserves as a percentage of non-impaired originated loans were 0.94% at June 30, 2017 compared to 0.99% at December 31, 2016. and 0.93% at June 30, 2016.

5064

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



The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures:
 
 March 31,   December 31, 2016   June 30,   December 31, 2016�� 
 2017   2016    2017   2016   
 (dollars in thousands)   (dollars in thousands)  
Nonperforming Loans:      
Loans on nonaccrual basis $21,797
    $33,470
 
 $16,454
    $15,553
    $38,404
 
 $16,454
   
Loans held for sale on a nonaccrual basis 3,613
    
    
    
    
    
   
Troubled debt restructured loans on nonaccrual basis 10,482
    13,366
    11,569
    11,868
    9,672
    11,569
   
Troubled debt restructured loans on accrual basis 13,990
    14,979
    13,790
    12,764
    16,332
    13,790
   
Total nonperforming loans $49,882
    $61,815
    $41,813
    $40,185
    $64,408
    $41,813
   
Loans past due 30 to 90 days and still accruing $9,965
 $8,866
 $10,964
  $9,890
 $13,082
 $10,964
 
Loans past due in excess of 90 days and still accruing $1,582
    $1,330
    $2,097
    $1,898
    $1,384
    $2,097
   
Other real estate owned $6,910
    $8,636
    $6,805
    $5,964
    $8,604
    $6,805
   
Loans held for sale at end of period $9,588
 $5,849
 $7,052
  $9,785
 $11,613
 $7,052
 
Portfolio loans outstanding at end of period $4,907,961
    $4,798,755
 
 $4,879,347
    $5,374,782
    $4,843,776
 
 $4,879,347
   
Average loans outstanding $4,916,759
 (a)  $4,745,252
 (a)  $4,818,759
 (b)  $5,138,643
 (a)  $4,789,306
 (a)  $4,818,759
 (b) 
Nonperforming loans as a percentage of total loans 1.01% 1.29% 0.86%  0.75% 1.33% 0.86% 
Provision for credit losses $3,229
 (a)  $6,526
 (a)  $18,480
 (b)  $1,620
 (a)  $16,898
 (a)  $18,480
 (b) 
Allowance for credit losses $48,676
    $55,222
    $50,185
    $48,067
    $59,821
    $50,185
   
Net charge-offs $4,738
 (a)  $2,116
 (a)  $19,107
 (b)  $3,738
 (a)  $7,889
 (a)  $19,107
 (b) 
Net charge-offs as a percentage of average loans outstanding (annualized) 0.39% 0.18% 0.40%  0.15% 0.33% 0.40% 
Provision for credit losses as a percentage of net charge-offs 68.15% (a)  308.41% (a)  96.72% (b)  43.34% (a)  214.20% (a)  96.72% (b) 
Allowance for credit losses as a percentage of end-of-period loans outstanding (c) 0.99% 1.15% 1.03%  0.89% 1.24% 1.03% 
Allowance for credit losses as a percentage of end-of-period originated loans outstanding 1.01% 1.15% 1.05%  0.98% 1.24% 1.05% 
Allowance for credit losses as a percentage of nonperforming loans (d) 105.20% 89.33% 120.02%  119.61% 92.88% 120.02% 
 
(a)
For the threesix-month period ended.
(b)For the twelve-month period ended.
(c)Does not include loans held for sale.
(d)Does not include nonperforming loans held for sale.

The following tables show the outstanding balances of our loan portfolio and the breakdown of net charge-offs and nonperforming loans, excluding loans held for sale, by loan type as of and for the periods presented:
 
 March 31, 2017 December 31, 2016 June 30, 2017 December 31, 2016
 Amount % Amount % Amount % Amount %
 (dollars in thousands) (dollars in thousands)
Commercial, financial, agricultural and other $1,148,460
 23% $1,139,547
 23% $1,199,800
 22% $1,139,547
 23%
Real estate construction 240,122
 5
 219,621
 5
 249,255
 5
 219,621
 5
Residential real estate 1,217,398
 25
 1,229,192
 25
 1,416,926
 26
 1,229,192
 25
Commercial real estate 1,761,101
 36
 1,742,210
 36
 1,963,001
 37
 1,742,210
 36
Loans to individuals 540,880
 11
 548,777
 11
 545,800
 10
 548,777
 11
Total loans and leases net of unearned income $4,907,961
 100% $4,879,347
 100% $5,374,782
 100% $4,879,347
 100%
During the threesix months ended March 31,June 30, 2017, loans increased $28.6495.4 million, or 1%10%, compared to balances outstanding at December 31, 2016. DuringLoan balances acquired on April 3, 2017 as part of the three months ended March 31, 2017, growthDCB acquisition totaled $383.1 million, including $44.8 million in commercial financial agricultural and other, portfolio and$25.2 million in real estate construction, $197.5 million in residential real estate, $109.8 million in commercial real estate loans can largely be attributed to growthand $5.8 million 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 autoindividuals.

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



loans.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.market and loans to individuals declined primarily due to runoff in our indirect auto portfolio.
Net charge-offs for the threesix months ended March 31,June 30, 2017 totaled $4.73.7 million, compared to $2.17.9 million for the threesix months ended March 31,June 30, 2016. The most significant charge-offs during the threesix months ended March 31,June 30, 2017 include a $1.9 million partial charge-off on a loan to a custom display manufacturer and a $1.5 million partial charge-off related to a containment tank manufacturer. Offsetting these charge-offs are recoveries of $3.1 million on two commercial and industrial relationships. During the threesix months ended March 31,June 30, 2016, the most significant charge-offs include 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 steel and aluminum servicing company, a $1.1 million partial charge-off of two commercial industrial loans related to a local energy company.company and a $1.1 million charge-off of a loan to a machine manufacturer.
 For the Three Months Ended March 31, 2017 As of March 31, 2017 For the Six Months Ended June 30, 2017 As of June 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 $3,457
 72.96 % 0.29 % $30,322
 60.79% 0.62% $1,641
 43.90 % 0.06% $17,486
 43.51% 0.32%
Real estate construction (54) (1.14) (0.01) 
 
 
 (97) (2.59) 
 
 
 
Residential real estate 345
 7.28
 0.03
 11,904
 23.86
 0.24
 400
 10.70
 0.02
 12,108
 30.13
 0.22
Commercial real estate (86) (1.81) (0.01) 7,291
 14.62
 0.14
 (90) (2.41) 
 10,250
 25.51
 0.20
Loans to individuals 1,076
 22.71
 0.09
 365
 0.73
 0.01
 1,884
 50.40
 0.07
 341
 0.85
 0.01
Total loans, net of unearned income $4,738
 100.00 % 0.39 % $49,882
 100.00% 1.01% $3,738
 100.00 % 0.15% $40,185
 100.00% 0.75%
As the above table illustrates, commercial, financial, agricultural and other, residential real estate and commercial real estate loans represented a significant portion of the nonperforming loans as of March 31,June 30, 2017. See discussions related to the provision for credit losses and loans for more information.
Capital Resources
At March 31,June 30, 2017, shareholders’ equity was $761.0879.5 million, an increase of $11.1129.5 million from December 31, 2016. The increase was primarily the result of a $15.9$110.8 million in stock issued as part of the DCB acquisition, $29.9 million in net income, an increase of $0.9$2.0 million in the fair value of available for sale investments and $2.5$2.9 million in treasury stock sales. These increases were partially offset by $7.114.9 million of dividends paid to shareholders and $1.1 million of common stock repurchases. Cash dividends declared per common share were $0.080.16 and $0.07$0.14 for the threesix months ended March 31,June 30, 2017 and 2016, respectively.
First Commonwealth and First Commonwealth Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth and First Commonwealth Bank must meet specific capital guidelines that involve quantitative measures of First Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
First Commonwealth maintains capital to absorb unexpected losses. In order to provide assurance that our capital levels are adequate for our risk exposure, we test our capital position under several stress scenarios on an annual basis. This analysis is subject toreviewed by our Board of Director review and approval.Director's. Our most recent capital stress test was completed in September 2016.
Effective January 1, 2015, the Company became subject to the new regulatory risk-based capital rules adopted by the federal banking agencies implementing Basel III. The most significant changes include higher minimum capital requirements, as the

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



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.

52

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



The Basel III Rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company elected to retain this treatment, which reduces the volatility of regulatory capital levels.
As of March 31,June 30, 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
Actual Minimum Capital Required - Basel III Phase-In Schedule Minimum Capital Required - Basel III Fully Phased-In Required to be Considered Well
Capitalized
Capital
Amount
 Ratio Capital
Amount
 Ratio Capital
Amount
 Ratio Capital
Amount
 RatioCapital
Amount
 Ratio Capital
Amount
 Ratio Capital
Amount
 Ratio Capital
Amount
 Ratio
(dollars in thousands)(dollars in thousands)
Total Capital to Risk Weighted Assets                              
First Commonwealth Financial Corporation$694,012
 12.25% $524,007
 9.250% $594,818
 10.50% $566,494
 10.00%$738,447
 12.17% $561,273
 9.250% $637,121
 10.50% $606,782
 10.00%
First Commonwealth Bank622,025
 11.06
 520,070
 9.250
 590,350
 10.50
 562,238
 10.00
705,191
 11.66
 559,572
 9.250
 635,190
 10.50
 604,943
 10.00
Tier I Capital to Risk Weighted Assets                              
First Commonwealth Financial Corporation$641,441
 11.32% $410,708
 7.250% $481,520
 8.50% $453,195
 8.00%$685,821
 11.30% $439,917
 7.250% $515,765
 8.50% $485,425
 8.00%
First Commonwealth Bank569,454
 10.13
 407,622
 7.250
 477,902
 8.50
 449,790
 8.00
652,565
 10.79
 438,584
 7.250
 514,201
 8.50
 483,954
 8.00
Tier I Capital to Average Assets                              
First Commonwealth Financial Corporation$641,441
 9.85% $260,527
 4.000% $260,527
 4.00% $325,659
 5.00%$685,821
 9.63% $284,786
 4.000% $284,786
 4.00% $355,982
 5.00%
First Commonwealth Bank569,454
 8.79
 259,048
 4.000
 259,048
 4.00
 323,809
 5.00
652,565
 9.22
 283,258
 4.000
 283,258
 4.00
 354,072
 5.00
Common Equity Tier I to Risk Weighted Assets                              
First Commonwealth Financial Corporation$571,441
 10.09% $325,734
 5.750% $396,546
 7.00% $368,221
 6.50%$615,821
 10.15% $348,900
 5.750% $424,747
 7.00% $394,408
 6.50%
First Commonwealth Bank569,454
 10.13
 323,287
 5.750
 393,567
 7.00
 365,455
 6.50
652,565
 10.79
 347,842
 5.750
 423,460
 7.00
 393,213
 6.50

On April 25,July 26, 2017, First Commonwealth Financial Corporation declared a quarterly dividend of $0.08 per share payable on May 19,August 18, 2017 to shareholders of record as of May 5,August 7, 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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Table of Contents

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.

5468

Table of Contents
PART II – OTHER INFORMATION
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES


 
ITEM 1.
LEGAL PROCEEDINGS
The information required by this item is set forth in Part I, Item 1, Note 5, "Commitments and Contingent Liabilities," which is incorporated herein by reference in response to this item.

ITEM 1A.RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
None


ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4.MINE SAFETY DISCLOSURES
Not applicable

ITEM 5.OTHER INFORMATION
None

5569

Table of Contents
PART II – OTHER INFORMATION
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6.     EXHIBITS
Exhibit
Number
  Description  Incorporated by Reference to
10.12017 Annual Incentive PlanFiled herewith
10.22017-2019 Long-Term Incentive PlanFiled 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: MayAugust 9, 2017 /s/ T. Michael Price
  
T. Michael Price
President and Chief Executive Officer
  
DATED: MayAugust 9, 2017 /s/ James R. Reske
  
James R. Reske
Executive Vice President, Chief Financial Officer and Treasurer


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