Edgar Filing: FIRST COMMONWEALTH FINANCIAL CORP /PA/

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2016



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



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

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

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

(Do not check if a smaller reporting company)

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

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of May 6, 2016, was 88,944,996.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	51

ITEM 4.	Controls and Procedures	51

PART II.	Other Information

ITEM 1.	Legal Proceedings	52

ITEM 1A.	Risk Factors	52

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

ITEM 3.	Defaults Upon Senior Securities	53

ITEM 4.	Mine Safety Disclosures	53

ITEM 5.	Other Information	53

ITEM 6.	Exhibits	54

	Signatures	55

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)



	March 31, 2016			December 31, 2015
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	62,141		$	66,644
Interest-bearing bank deposits	11,024			2,808
Securities available for sale, at fair value	890,198			886,560
Securities held to maturity, at amortized cost (Fair value of $400,964 and $382,341 at March 31, 2016 and December 31, 2015, respectively)	396,444			384,324
Other investments	60,597			62,952
Loans held for sale	5,849			5,763
Loans:
Portfolio loans	4,798,755			4,683,750
Allowance for credit losses	(55,222		)	(50,812		)
Net loans	4,743,533			4,632,938
Premises and equipment, net	63,860			63,454
Other real estate owned	8,636			9,398
Goodwill	164,500			164,500
Amortizing intangibles, net	1,094			1,231
Bank owned life insurance	183,897			182,601
Other assets	107,381			103,717
Total assets	$	6,699,154		$	6,566,890
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,155,795		$	1,116,689
Interest-bearing	3,145,860			3,079,205
Total deposits	4,301,655			4,195,894
Short-term borrowings	1,518,742			1,510,825
Subordinated debentures	72,167			72,167
Other long-term debt	9,175			9,314
Total long-term debt	81,342			81,481
Other liabilities	64,101			59,144
Total liabilities	5,965,840			5,847,344
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at March 31, 2016 and December 31, 2015, and 88,959,315 and 88,961,268 shares outstanding at March 31, 2016 and December 31, 2015, respectively	105,563			105,563
Additional paid-in capital	366,090			365,981
Retained earnings	384,330			378,081
Accumulated other comprehensive income (loss), net	5,278			(2,386		)
Treasury stock (16,604,140 and 16,602,187 shares at March 31, 2016 and December 31, 2015, respectively)	(127,947		)	(127,693		)
Total shareholders’ equity	733,314			719,546
Total liabilities and shareholders’ equity	$	6,699,154		$	6,566,890

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



	For the Three Months Ended
	March 31,
	2016			2015
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	45,034		$	42,601
Interest and dividends on investments:
Taxable interest	7,146			6,817
Interest exempt from federal income taxes	361			175
Dividends	806			1,489
Interest on bank deposits	6			3
Total interest income	53,353			51,085
Interest Expense
Interest on deposits	1,589			2,150
Interest on short-term borrowings	2,235			958
Interest on subordinated debentures	634			569
Interest on other long-term debt	88			236
Total interest expense	4,546			3,913
Net Interest Income	48,807			47,172
Provision for credit losses	6,526			1,159
Net Interest Income after Provision for Credit Losses	42,281			46,013
Noninterest Income
Net securities gains	—			105
Trust income	1,255			1,421
Service charges on deposit accounts	3,708			3,318
Insurance and retail brokerage commissions	1,959			2,195
Income from bank owned life insurance	1,296			1,354
Gain on sale of mortgage loans	683			439
Gain on sale of other loans and assets	195			224
Card-related interchange income	3,557			3,418
Derivatives mark to market expense	(1,014		)	(230		)
Other income	2,076			1,947
Total noninterest income	13,715			14,191
Noninterest Expense
Salaries and employee benefits	21,677			21,892
Net occupancy expense	3,481			3,911
Furniture and equipment expense	2,867			2,680
Data processing expense	1,759			1,438
Pennsylvania shares tax expense	758			794
Intangible amortization	137			156
Collection and repossession expense	569			511
Other professional fees and services	791			930
FDIC insurance	1,038			1,059
Loss on sale or write-down of assets	96			262
Litigation and operational losses	244			1,000
Other operating expenses	4,727			5,221
Total noninterest expense	38,144			39,854
Income Before Income Taxes	17,852			20,350
Income tax provision	5,379			6,129
Net Income	$	12,473		$	14,221
Average Shares Outstanding	88,840,088			90,875,724
Average Shares Outstanding Assuming Dilution	88,845,201			90,889,035
Per Share Data:
Basic Earnings per Share	$	0.14		$	0.16
Diluted Earnings per Share	$	0.14		$	0.16
Cash Dividends Declared per Common Share	$	0.07		$	0.07

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	For the Three Months Ended
	March 31,
	2016			2015
	(dollars in thousands)
Net Income	$	12,473		$	14,221
Other comprehensive income, before tax expense:
Unrealized holding gains on securities arising during the period	10,070			9,980
Less: reclassification adjustment for gains on securities included in net income	—			(105		)
Unrealized holding gains on derivatives arising during the period	1,735			1,195
Less: reclassification adjustment for (gains) losses on derivatives included in net income	(15		)	5
Total other comprehensive income, before tax expense	11,790			11,075
Income tax expense related to items of other comprehensive income	(4,126		)	(3,874		)
Total other comprehensive income	7,664			7,201
Comprehensive Income	$	20,137		$	21,422

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2015	88,961,268		$	105,563	$	365,981	$	378,081		$	(2,386	)	$	(127,693	)	$	719,546
Net income							12,473									12,473
Other comprehensive income										7,664						7,664
Cash dividends declared ($0.07 per share)							(6,224		)							(6,224		)
Treasury stock acquired	(55,301	)											(488		)	(488		)
Restricted stock	53,348		—		109		—						234			343
Balance at March 31, 2016	88,959,315		$	105,563	$	366,090	$	384,330		$	5,278		$	(127,947	)	$	733,314



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2014	91,723,028		$	105,563	$	365,615	$	353,027		$	(4,499	)	$	(103,561	)	$	716,145
Net income							14,221									14,221
Other comprehensive income										7,201						7,201
Cash dividends declared ($0.07 per share)							(6,407		)							(6,407		)
Treasury stock acquired	(2,201,391	)											(18,874		)	(18,874		)
Restricted stock	134,370		—		259		—						315			574
Balance at March 31, 2015	89,656,007		$	105,563	$	365,874	$	360,841		$	2,702		$	(122,120	)	$	712,860

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	For the Three Months Ended
	March 31,
	2016			2015
Operating Activities	(dollars in thousands)
Net income	$	12,473		$	14,221
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	6,526			1,159
Deferred tax expense	1,200			4,219
Depreciation and amortization	1,740			1,899
Net losses (gains) on securities and other assets	218			(267		)
Net amortization of premiums and discounts on securities	1,102			441
Income from increase in cash surrender value of bank owned life insurance	(1,296		)	(1,354		)
Increase in interest receivable	(911		)	(127		)
Mortgage loans originated for sale	(22,269		)	(15,382		)
Proceeds from sale of mortgage loans	22,858			15,472
Decrease in interest payable	(26		)	(92		)
Increase in income taxes payable	2,811			290
Other-net	(4,834		)	(4,748		)
Net cash provided by operating activities	19,592			15,731
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	6,924			—
Purchases	(19,695		)	(29,616		)
Transactions with securities available for sale:
Proceeds from maturities and redemptions	35,815			50,568
Purchases	(29,930		)	(500		)
Purchases of FHLB stock	(10,281		)	(13,801		)
Proceeds from the redemption of FHLB stock	12,636			11,270
Proceeds from bank owned life insurance	—			291
Proceeds from sale of other assets	2,101			1,008
Net (increase) decrease in loans	(118,137		)	9,540
Purchases of premises and equipment	(2,251		)	(1,665		)
Net cash (used in) provided by investing activities	(122,818		)	27,095
Financing Activities
Net (decrease) increase in federal funds purchased	(4,000		)	6,000
Net increase in other short-term borrowings	11,917			13,644
Net increase (decrease) in deposits	105,873			(21,761		)
Repayments of other long-term debt	(139		)	(25,134		)
Dividends paid	(6,224		)	(6,407		)
Purchase of treasury stock	(488		)	(18,421		)
Net cash provided by (used in) financing activities	106,939			(52,079		)
Net increase (decrease) in cash and cash equivalents	3,713			(9,253		)
Cash and cash equivalents at January 1	69,452			74,538
Cash and cash equivalents at March 31	$	73,165		$	65,285

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

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

The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the full year of 2016. These interim financial statements should be read in conjunction with First Commonwealth’s 2015 Annual Report on Form 10-K.

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

Note 2 Supplemental Comprehensive Income Disclosures

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



	For the Three Months Ended March 31,
	2016									2015
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	10,070		$	(3,524	)	$	6,546		$	9,980		$	(3,491	)	$	6,489
Reclassification adjustment for gains on securities included in net income	—			—			—			(105		)	37			(68		)
Total unrealized gains on securities	10,070			(3,524		)	6,546			9,875			(3,454		)	6,421
Unrealized gains on derivatives:
Unrealized holding gains on derivatives arising during the period	1,735			(607		)	1,128			1,195			(418		)	777
Reclassification adjustment for (gains) losses on derivatives included in net income	(15		)	5			(10		)	5			(2		)	3
Total unrealized gains on derivatives	1,720			(602		)	1,118			1,200			(420		)	780
Total other comprehensive income	$	11,790		$	(4,126	)	$	7,664		$	11,075		$	(3,874	)	$	7,201

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	2016											2015
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income			Securities Available for Sale			Post-Retirement Obligation		Derivatives		Accumulated Other Comprehensive Income
	(dollars in thousands)
Balance at December 31	$	(2,956	)	$	10	$	560		$	(2,386	)	$	(4,875	)	$	76	$	300	$	(4,499	)
Other comprehensive income before reclassification adjustment	6,546			—		1,128			7,674			6,489			—		777		7,266
Amounts reclassified from accumulated other comprehensive (loss) income	—			—		(10		)	(10		)	(68		)	—		3		(65		)
Net other comprehensive income during the period	6,546			—		1,118			7,664			6,421			—		780		7,201
Balance at March 31	$	3,590		$	10	$	1,678		$	5,278		$	1,546		$	76	$	1,080	$	2,702

Note 3 Supplemental Cash Flow Disclosures

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



	2016		2015
	(dollars in thousands)
Cash paid during the period for:
Interest	$	4,674	$	4,004
Income taxes	1,000		1,500
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	1,355		797
Loans transferred from held to maturity to held for sale	—		3,011
Gross increase in market value adjustment to securities available for sale	10,070		9,869
Gross increase in market value adjustment to derivatives	1,720		1,200
Investments committed to purchase, not settled	600		637
Unsettled treasury stock repurchases	—		453

Note 4 Earnings per Share

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



	For the Three Months Ended March 31,
	2016		2015
Weighted average common shares issued	105,563,455		105,563,455
Average treasury stock shares	(16,623,094	)	(14,503,976	)
Average unearned nonvested shares	(100,273	)	(183,755	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	88,840,088		90,875,724
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	5,113		13,311
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	88,845,201		90,889,035

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the three months ended March 31 because to do so would have been antidilutive.



	2016			2015
		Price Range			Price Range
	Shares	From	To	Shares	From	To
Restricted Stock	88,508	7.21	9.84	118,390	7.35	9.26

Note 5 Commitments and Contingent Liabilities

Commitments and Letters of Credit

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

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



	March 31, 2016		December 31, 2015
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,643,908	$	1,643,187
Financial standby letters of credit	17,805		17,843
Performance standby letters of credit	27,352		26,497
Commercial letters of credit	1,718		1,672

The notional amounts outstanding as of March 31, 2016 include amounts issued in 2016 of $13 thousand in financial standby letters of credit, $1.3 million in performance standby letters of credit and $0.2 million commercial letters of credit. A liability of $0.1 million and $0.2 million has been recorded as of March 31, 2016 and December 31, 2015, respectively, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

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

Legal Proceedings

First Commonwealth and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of March 31, 2016, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against First Commonwealth or its subsidiaries will be material to First Commonwealth’s consolidated financial position. On at least a quarterly basis, First Commonwealth assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that First Commonwealth will incur losses and the amounts of the losses can be reasonably estimated, First Commonwealth records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. Although not considered probable, the range of reasonably possible losses for such matters in the aggregate, beyond the existing recorded liability (if any), is between $0 and $7 million. Although First Commonwealth does not believe that the outcome of pending litigation will be material to First Commonwealth’s consolidated financial position, it

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

cannot rule out the possibility that such outcomes will be material to the consolidated results of operations and cash flows for a particular reporting period in the future.

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

Note 6 Investment Securities

Securities Available for Sale

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



	March 31, 2016									December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	19,380	$	2,320	$	—		$	21,700	$	20,034	$	2,071	$	(13	)	$	22,092
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	768,405		12,917		(1,697		)	779,625		778,476		7,983		(8,882		)	777,577
Mortgage-Backed Securities – Commercial	23		—		—			23		28		—		—			28
Other Government-Sponsored Enterprises	19,201		7		(5		)	19,203		19,201		2		(85		)	19,118
Obligations of States and Political Subdivisions	27,068		764		—			27,832		27,066		532		—			27,598
Corporate Securities	5,896		440		—			6,336		1,897		422		—			2,319
Pooled Trust Preferred Collateralized Debt Obligations	42,500		476		(9,703		)	33,273		42,239		916		(7,497		)	35,658
Total Debt Securities	882,473		16,924		(11,405		)	887,992		888,941		11,926		(16,477		)	884,390
Equities	2,206		—		—			2,206		2,170		—		—			2,170
Total Securities Available for Sale	$	884,679	$	16,924	$	(11,405	)	$	890,198	$	891,111	$	11,926	$	(16,477	)	$	886,560

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

The amortized cost and estimated fair value of debt securities available for sale at March 31, 2016, by contractual maturity, are shown below.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	2,601	$	2,601
Due after 1 but within 5 years	20,596		20,640
Due after 5 but within 10 years	27,068		27,832
Due after 10 years	44,400		35,571
	94,665		86,644
Mortgage-Backed Securities (a)	787,808		801,348
Total Debt Securities	$	882,473	$	887,992


(a)	Mortgage Backed Securities include an amortized cost of $19.4 million and a fair value of $21.7 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $768.4 million and a fair value of $779.6 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the three months ended March 31:



	2016		2015
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	—	$	—
Gross losses	—		—
	—		—
Maturities and impairment
Gross gains	—		105
Gross losses	—		—
Other-than-temporary impairment	—		—
	—		105
Net gains and impairment	$	—	$	105

Securities available for sale with an estimated fair value of $478.2 million and $416.1 million were pledged as of March 31, 2016 and December 31, 2015, respectively, to secure public deposits and for other purposes required or permitted by law.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Securities Held to Maturity

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



	March 31, 2016									December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	4,743	$	99	$	—		$	4,842	$	4,775	$	—	$	(7	)	$	4,768
Mortgage-Backed Securities- Commercial	16,767		—		(3		)	16,764		16,843		—		(247		)	16,596
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	325,974		3,526		—			329,500		315,609		30		(1,824		)	313,815
Mortgage-Backed Securities – Commercial	15,067		273		—			15,340		15,187		—		(178		)	15,009
Obligations of States and Political Subdivisions	33,893		627		(2		)	34,518		31,910		301		(58		)	32,153
Total Securities Held to Maturity	$	396,444	$	4,525	$	(5	)	$	400,964	$	384,324	$	331	$	(2,314	)	$	382,341

The amortized cost and estimated fair value of debt securities held to maturity at March 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	—	$	—
Due after 1 but within 5 years	107		108
Due after 5 but within 10 years	27,839		28,412
Due after 10 years	5,947		5,998
	33,893		34,518
Mortgage-Backed Securities (a)	362,551		366,446
Total Debt Securities	$	396,444	$	400,964


(a)	Mortgage Backed Securities include an amortized cost of $21.5 million and a fair value of $21.6 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $341.0 million and a fair value of $344.8 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 $58.3 million and $45.7 million were pledged as of March 31, 2016 and December 31, 2015, respectively, to secure public deposits and for other purposes required or permitted by law.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit-related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the three months ended March 31, 2016 and 2015, no other-than-temporary impairment charges were recognized.

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

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

The following table presents the gross unrealized losses and estimated fair values at March 31, 2016 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Commercial	$	16,764	$	(3	)	$	—	$	—		$	16,764	$	(3	)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	26,650		(14		)	212,200		(1,683		)	238,850		(1,697		)
Other Government-Sponsored Enterprises	5,596		(5		)	—		—			5,596		(5		)
Obligations of States and Political Subdivisions	543		(2		)	—		—			543		(2		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			27,923		(9,703		)	27,923		(9,703		)
Total Securities	$	49,553	$	(24	)	$	240,123	$	(11,386	)	$	289,676	$	(11,410	)

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at December 31, 2015 by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	6,798	$	(20	)	$	—	$	—		$	6,798	$	(20	)
Mortgage-Backed Securities - Commercial	16,596		(247		)	—		—			16,596		(247		)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	436,011		(3,293		)	263,119		(7,413		)	699,130		(10,706		)
Mortgage-Backed Securities – Commercial	15,009		(178		)	—		—			15,009		(178		)
Other Government-Sponsored Enterprises	12,316		(85		)	—		—			12,316		(85		)
Obligation of States and Political Subdivisions	7,208		(58		)	—		—			7,208		(58		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,957		(7,497		)	29,957		(7,497		)
Total Securities	$	493,938	$	(3,881	)	$	293,076	$	(14,910	)	$	787,014	$	(18,791	)

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

As of March 31, 2016, the book value of our pooled trust preferred collateralized debt obligations totaled $42.5 million with an estimated fair value of $33.3 million, which includes securities comprised of 274 banks and other financial institutions. All of our pooled securities are mezzanine tranches, three of which have no senior class remaining in the issue. The credit ratings on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of March 31, 2016, after taking into account management’s best estimates of future interest deferrals and defaults, four of our securities had no excess subordination in the tranches we own and five of our securities had excess subordination which ranged from 10% to 83% of the current performing collateral.

The following table provides information related to our pooled trust preferred collateralized debt obligations as of March 31, 2016:



Deal	Class	Book Value		Estimated Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks	Deferrals and Defaults as a % of Current Collateral		Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL IV	Mezzanine	$	1,830	$	1,291	$	(539	)	B1/BB	6	18.05	%	59.28	%
Pre TSL VII	Mezzanine	3,020		3,272		252			Ca/-	14	49.68		—
Pre TSL VIII	Mezzanine	2,020		1,705		(315		)	C/C	28	53.00		—
Pre TSL IX	Mezzanine	2,385		1,778		(607		)	B1/C	38	29.80		9.82
Pre TSL X	Mezzanine	1,644		1,779		135			Caa1/C	43	30.66		—
Pre TSL XII	Mezzanine	5,735		4,324		(1,411		)	B3/C	66	22.03		—
Pre TSL XIII	Mezzanine	12,767		9,856		(2,911		)	Ba3/C	56	12.11		42.17
Pre TSL XIV	Mezzanine	12,889		8,969		(3,920		)	B1/CC	56	19.72		49.72
MMCap I	Mezzanine	210		299		89			Ca/C	8	58.11		83.30
Total		$	42,500	$	33,273	$	(9,227	)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three months ended March 31, 2016 and 2015, there were no credit-related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit-related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at March 31, 2016. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

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

•

Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions, which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon 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 274 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, 2016, default probabilities for performing collateral ranged from 0.33% to 75%.

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

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, 2016, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the three months ended March 31, 2016. Based upon the analysis performed by management, it is probable that four of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the table on page 15 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of March 31, 2016 indicates it is probable that we will collect all contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of March 31, 2016, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities' current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from 20% to 129% 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,
	2016			2015
	(dollars in thousands)
Balance, beginning (a)	$	24,851		$	26,246
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—			—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—			—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	(261		)	(321		)
Reduction for debt securities called during the period	—			(218		)
Balance, ending	$	24,590		$	25,707


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


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

In the first three months of 2016 and 2015, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of March 31, 2016 and 2015, there were no equity securities in an unrealized loss position.

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of March 31, 2016 and

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015, our FHLB stock totaled $60.6 million and $63.0 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the three months ended March 31, 2016.

Note 8 Loans and Allowance for Credit Losses

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



	March 31, 2016		December 31, 2015
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,190,384	$	1,150,906
Real estate construction	256,856		220,736
Residential real estate	1,212,962		1,224,465
Commercial real estate	1,552,904		1,479,000
Loans to individuals	585,649		608,643
Total loans	$	4,798,755	$	4,683,750

Credit Quality Information

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



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



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



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



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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables represent our credit risk profile by creditworthiness:



	March 31, 2016
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,085,770	$	256,423	$	1,198,103	$	1,530,565	$	585,269	$	4,656,130
Non-Pass
OAEM	18,522		433		5,178		7,676		—		31,809
Substandard	86,092		—		9,681		14,663		380		110,816
Doubtful	—		—		—		—		—		—
Total Non-Pass	104,614		433		14,859		22,339		380		142,625
Total	$	1,190,384	$	256,856	$	1,212,962	$	1,552,904	$	585,649	$	4,798,755



	December 31, 2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,074,858	$	220,267	$	1,209,606	$	1,436,714	$	608,342	$	4,549,787
Non-Pass
OAEM	11,825		442		5,244		30,012		—		47,523
Substandard	64,223		27		9,615		12,274		301		86,440
Doubtful	—		—		—		—		—		—
Total Non-Pass	76,048		469		14,859		42,286		301		133,963
Total	$	1,150,906	$	220,736	$	1,224,465	$	1,479,000	$	608,643	$	4,683,750

Portfolio Risks

The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital, regulatory agency relationships, investment community reputation and shareholder returns. First Commonwealth devotes a substantial amount of resources managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting activities. Credit administration is independent of lending departments and oversight is provided by the credit committee of the First Commonwealth Board of Directors.

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of March 31, 2016. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Age Analysis of Past Due Loans by Segment

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



	March 31, 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)
Commercial, financial, agricultural and other	$	277	$	92	$	130	$	34,851	$	35,350	$	1,155,034	$	1,190,384
Real estate construction	—		—		86		—		86		256,770		256,856
Residential real estate	3,639		1,308		205		6,642		11,794		1,201,168		1,212,962
Commercial real estate	1,270		—		—		4,963		6,233		1,546,671		1,552,904
Loans to individuals	1,732		548		909		380		3,569		582,080		585,649
Total	$	6,918	$	1,948	$	1,330	$	46,836	$	57,032	$	4,741,723	$	4,798,755



	December 31, 2015
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	364	$	49	$	129	$	23,653	$	24,195	$	1,126,711	$	1,150,906
Real estate construction	280		—		—		28		308		220,428		220,736
Residential real estate	4,175		1,055		1,315		6,500		13,045		1,211,420		1,224,465
Commercial real estate	781		—		65		6,223		7,069		1,471,931		1,479,000
Loans to individuals	2,998		774		946		301		5,019		603,624		608,643
Total	$	8,598	$	1,878	$	2,455	$	36,705	$	49,636	$	4,634,114	$	4,683,750

Nonaccrual Loans

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

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

Impaired Loans

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are also considered to be impaired loans.

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

Significant nonaccrual loans as of March 31, 2016, include the following:


•	$11.5 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. A valuation of the collateral was completed during the first quarter of 2016.


•	$6.8 million relationship of commercial industrial loans to an oil and gas well services company. These loans were originated in 2014 and were placed in nonaccrual status during the fourth quarter of 2015. All collateral valuations were completed in June or November 2015 or March 2016.


•	$3.8 million relationship of commercial industrial loans to a manufacturer of sporting goods. These loans were originated from 2012 to 2015 and were placed in nonaccrual status during the fourth quarter of 2015. All collateral valuations were completed in December 2015 or March 2016.

•

$3.8 million relationship of commercial industrial loans to a local energy company. These loans were originated from 2008 to 2011 and were placed in nonaccrual status during the third quarter of 2013. Two of these loans were modified resulting in TDR classification: one loan totaling $1.3 million was modified in 2012, and the other loan totaling $2.5 million was modified in 2014. During the three months ended March 31, 2016, charge-offs of $1.1 million related to this relationship were recorded. A valuation of the collateral was updated during the first quarter of 2016.


•	$3.7 million relationship of commercial industrial loans to an industrial manufacturer. These loans were originated in 2013 and were placed in nonaccrual status during the third quarter of 2015. A valuation of the collateral was completed during the fourth quarter of 2015.

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



	March 31, 2016					December 31, 2015
	Recorded investment		Unpaid principal balance		Related allowance	Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	18,120	$	23,975		$	11,344	$	15,673
Real estate construction	—		—			28		117
Residential real estate	10,848		12,893			9,952		11,819
Commercial real estate	6,805		8,474			7,562		9,449
Loans to individuals	498