Edgar Filing: FIRST COMMONWEALTH FINANCIAL CORP /PA/

Form 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 September 30, 2010

¨	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.)


22 North Sixth Street, Indiana, PA		15701
(Address of principal executive offices)		(Zip Code)

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

Large accelerated filer x Accelerated filer ¨ Smaller reporting company ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)

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

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of November 2, 2010, was 104,826,534.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX


		PAGE

	PART 1. 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		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity		5
	Condensed Consolidated Statements of Cash Flows		7
	Notes to Condensed Consolidated Financial Statements		8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		62

ITEM 4.	Controls and Procedures		62

	PART II. Other Information

ITEM 1.	Legal Proceedings		63

ITEM 1A.	Risk Factors		63

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63

ITEM 3.	Defaults Upon Senior Securities		63

ITEM 4.	(Removed and Reserved)		63

ITEM 5.	Other Information		63

ITEM 6.	Exhibits		64

	Signatures		65

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	September 30, 2010			December 31, 2009
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	94,567		$	89,232
Interest-bearing bank deposits		40,852			327
Securities available-for-sale, at fair value		927,121			1,133,856
Securities held-to-maturity, at amortized cost, (Fair value $0 at September 30, 2010 and $37,586 at December 31, 2009)		0			36,758
Other investments		51,431			51,431
Loans:
Portfolio loans		4,299,573			4,636,501
Allowance for credit losses		(85,646	)		(81,639	)

Net loans		4,213,927			4,554,862

Premises and equipment, net		68,270			70,742
Other real estate owned		24,555			24,287
Goodwill		159,956			159,956
Other intangibles, net		5,766			7,407
Other assets		325,258			317,435

Total assets	$	5,911,703		$	6,446,293

Liabilities
Deposits (all domestic):
Noninterest-bearing	$	730,939		$	641,231
Interest-bearing		3,996,932			3,894,554

Total deposits		4,727,871			4,535,785
Short-term borrowings		162,020			958,932

Subordinated debentures		105,750			105,750
Other long-term debt		119,475			168,697

Total long-term debt		225,225			274,447

Other liabilities		54,777			38,318

Total liabilities		5,169,893			5,807,482

Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued		0			0
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,515,079 shares issued and 104,823,372 shares outstanding at September 30, 2010; 86,600,431 shares issued and 85,151,875 shares outstanding at December 31, 2009		105,515			86,600
Additional paid-in capital		366,647			301,523
Retained earnings		280,706			278,887
Accumulated other comprehensive income (loss), net		1,009			(6,045	)
Treasury stock (691,707 shares at September 30, 2010 and 1,448,556 shares at December 31, 2009, at cost)		(7,967	)		(16,554	)
Unearned ESOP shares		(4,100	)		(5,600	)

Total shareholders’ equity		741,810			638,811

Total liabilities and shareholders’ equity	$	5,911,703		$	6,446,293

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	56,051		$	57,085		$	170,826		$	173,153
Interest and dividends on investments:
Taxable interest		9,193			12,406			29,324			39,291
Interest exempt from federal income taxes		721			2,540			4,711			8,094
Dividends		13			31			59			183
Interest on bank deposits		4			1			77			3

Total interest income		65,982			72,063			204,997			220,724

Interest Expense
Interest on deposits		12,194			17,014			38,841			54,464
Interest on short-term borrowings		284			947			1,752			3,427
Interest on subordinated debentures		1,429			1,447			4,194			4,772
Interest on other long-term debt		979			1,672			3,420			4,991

Total interest on long-term debt		2,408			3,119			7,614			9,763

Total interest expense		14,886			21,080			48,207			67,654

Net Interest Income		51,096			50,983			156,790			153,070
Provision for credit losses		4,522			23,020			53,552			79,510

Net Interest Income after Provision for Credit Losses		46,574			27,963			103,238			73,560

Noninterest Income
Change in fair value on impaired securities		(5,787	)		(25,473	)		(7,114	)		(68,483	)
Non-credit related (gains) losses on securities not expected to be sold (recognized in other comprehensive income)		1,497			13,570			(2,036	)		37,953

Net impairment losses		(4,290	)		(11,903	)		(9,150	)		(30,530	)
Net securities gains		1,430			44			2,412			124
Trust income		1,486			1,366			4,378			3,604
Service charges on deposit accounts		4,302			4,555			13,057			12,798
Insurance and retail brokerage commissions		1,600			2,068			5,328			5,440
Income from bank owned life insurance		1,377			1,078			3,935			3,250
Card related interchange income		2,689			2,224			7,695			6,258
Other income		2,285			1,569			7,324			9,512

Total noninterest income		10,879			1,001			34,979			10,456

Noninterest Expense
Salaries and employee benefits		20,617			21,405			63,991			64,986
Net occupancy expense		3,317			3,263			10,749			10,791
Furniture and equipment expense		3,084			3,121			9,350			9,073
Data processing expense		1,367			1,136			4,282			3,433
Pennsylvania shares tax expense		1,468			1,310			3,982			3,953
Intangible amortization		408			684			1,641			2,170
Collection and repossession expense		1,209			1,444			2,926			4,095
FDIC insurance		2,014			2,046			5,989			8,430
Other professional fees and services		719			723			2,947			2,633
Loss on sale or write-down of assets		92			49			2,489			161
Other operating expenses		6,636			6,764			19,502			20,903

Total noninterest expense		40,931			41,945			127,848			130,628

Income (Loss) before income taxes		16,522			(12,981	)		10,369			(46,612	)
Income tax provision (benefit)		5,863			(7,120	)		(664	)		(23,819	)

Net Income (Loss)	$	10,659		$	(5,861	)	$	11,033		$	(22,793	)

Average Shares Outstanding		97,199,306			84,594,952			89,380,112			84,558,972
Average Shares Outstanding Assuming Dilution		97,203,753			84,594,952			89,382,588			84,558,972
Per Share Data:
Basic Earnings (Loss) per Share	$	0.11		$	(0.07	)	$	0.12		$	(0.27	)
Diluted Earnings (Loss) per Share		0.11			(0.07	)		0.12			(0.27	)
Cash Dividends Declared per Common Share		0.01			0.03			0.05			0.15

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in thousands)


	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
Balance at December 31, 2009	$	86,600	$	301,523		$	278,887		$	(6,045	)	$	(16,554	)	$	(5,600	)	$	638,811
Comprehensive income
Net income							11,033												11,033
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising during the period										1,319									1,319
Non-credit related gains on securities not expected to be sold										1,323									1,323
Reclassification adjustment for losses on securities included in net income										4,412									4,412

Total other comprehensive income																		$	7,054

Total comprehensive income																		$	18,087
Cash dividends declared							(4,261	)											(4,261	)
Net decrease in unearned ESOP shares																1,500			1,500
ESOP market value adjustment ($772 thousand, net of $270 thousand tax benefit)				(502	)														(502	)
Discount on dividend reinvestment plan purchases				(28	)														(28	)
Treasury stock acquired													(8	)					(8	)
Treasury stock reissued				656			(4,785	)					8,233						4,104
Restricted stock							(168	)					362						194
Common stock issued		18,915		64,998															83,913

Balance at September 30, 2010	$	105,515	$	366,647		$	280,706		$	1,009		$	(7,967	)	$	(4,100	)	$	741,810

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in thousands)

(Continued)


	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
Balance at December 31, 2008	$	86,600	$	303,008		$	309,947		$	(21,269	)	$	(17,907	)	$	(7,600	)	$	652,779
Cumulative effect from adoption of FASB ASC Topic 320-10-65 ($6.5 million, net of $2.3 million tax)							4,223			(4,223	)

Balance at January 1, 2009		86,600		303,008			314,170			(25,492	)		(17,907	)		(7,600	)		652,779
Comprehensive income
Net loss							(22,793	)											(22,793	)
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising during the period										29,610									29,610
Non-credit related losses on securities not expected to be sold										(24,669	)								(24,669	)
Reclassification adjustment for losses on securities included in net loss										19,789									19,789

Total other comprehensive income																		$	24,730

Total comprehensive income																		$	1,937
Cash dividends declared							(12,682	)											(12,682	)
Net decrease in unearned ESOP shares																1,500			1,500
ESOP market value adjustment ($557 thousand, net of $195 thousand tax benefit)				(362	)														(362	)
Discount on dividend reinvestment plan purchases				(369	)														(369	)
Tax benefit of stock options exercised				149															149
Treasury stock reissued				(5	)								66						61
Restricted stock				(3	)								135						132

Balance at September 30, 2009	$	86,600	$	302,418		$	278,695		$	(762	)	$	(17,706	)	$	(6,100	)	$	643,145

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Nine Months Ended September 30,
	2010			2009
	(dollars in thousands)
Operating Activities
Net income (loss)	$	11,033		$	(22,793	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for credit losses		53,552			79,510
Deferred tax benefit		(7,229	)		(27,620	)
Depreciation and amortization		8,142			7,491
Net losses on securities and other assets		6,372			29,911
Net (accretion) amortization of premiums and discounts on securities		24			(216	)
Net amortization of premiums and discounts on long-term debt		(692	)		(1,580	)
Income from increase in cash surrender value of bank owned life insurance		(3,935	)		(3,250	)
Decrease in interest receivable		2,642			2,181
Decrease in interest payable		(1,419	)		(2,790	)
Increase (decrease) in income tax payable		5,022			(726	)
Other-net		9,330			259

Net cash provided by operating activities		82,842			60,377

Investing Activities
Transactions in securities held-to-maturity:
Proceeds from maturities and redemptions		13,063			9,698
Transactions in securities available-for-sale:
Proceeds from sales		26,754			5,615
Proceeds from maturities and redemptions		460,561			302,726
Purchases		(252,794	)		(181,834	)
Proceeds from sales of other assets		5,657			7,263
Net decrease (increase) in loans		281,884			(299,181	)
Purchases of premises and equipment		(4,074	)		(5,852	)

Net cash provided by (used in) investing activities		531,051			(161,565	)

Financing Activities
Net decrease in federal funds purchased		(105,000	)		(59,300	)
Net decrease in other short-term borrowings		(691,912	)		(36,991	)
Net increase in deposits		192,189			216,867
Repayments of other long-term debt		(97,030	)		(3,031	)
Proceeds from issuance of long-term debt		50,000			2,403
Proceeds from issuance of common stock		83,913			0
Discount on dividend reinvestment plan purchases		(28	)		(369	)
Dividends paid		(4,261	)		(27,141	)
Proceeds from reissuance of treasury stock		4,104			61
Purchase of treasury stock		(8	)		0
Stock option tax benefit		0			149

Net cash (used in) provided by financing activities		(568,033	)		92,648

Net increase (decrease) in cash and cash equivalents		45,860			(8,540	)
Cash and cash equivalents at beginning of period		89,559			88,566

Cash and cash equivalents at end of period	$	135,419		$	80,026

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 1 Basis of Presentation

The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or “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, cash flows and changes in shareholders’ equity as of and for the periods presented.

The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full year of 2010. These interim financial statements should be read in conjunction with First Commonwealth’s 2009 Annual Report on Form 10-K which is available on First Commonwealth’s website at http://www.fcbanking.com. First Commonwealth’s website also provides additional information of interest to investors and clients, including other regulatory filings made to the Securities and Exchange Commission (“SEC”), press releases, historical stock prices, dividend declarations, corporate governance information, policies and documents as well as information about products and services offered by First Commonwealth.

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.

Loan type balances presented for December 31, 2009 were reclassified from those previously disclosed in order to more consistently categorize loans based on collateral rather than purpose and to be more consistent with regulatory definitions.

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income in the Condensed Consolidated Statements of Changes in Shareholders’ Equity:


	For the Nine Months Ended September 30, 2010							For the Nine Months Ended September 30, 2009
	Pre-tax Amount		Tax (Expense) Benefit			Net of Tax Amount		Pre-tax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains arising during the period	$	2,029	$	(710	)	$	1,319	$	45,554		$	(15,944	)	$	29,610
Non-credit related gains (losses) on securities not expected to be sold		2,036		(713	)		1,323		(37,953	)		13,284			(24,669	)
Losses realized in net income (loss)		6,788		(2,376	)		4,412		30,445			(10,656	)		19,789

Net unrealized gains		10,853		(3,799	)		7,054		38,046			(13,316	)		24,730

Other comprehensive income	$	10,853	$	(3,799	)	$	7,054	$	38,046		$	(13,316	)	$	24,730

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 2 Supplemental Comprehensive Income Disclosures (Continued)

The following table identifies the related tax effects allocated to each component of other comprehensive income in the Condensed Consolidated Statements of Changes in Shareholders’ Equity:


	For the Three Months Ended September 30, 2010									For the Three Months Ended September 30, 2009
	Pre-tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pre-tax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding (losses) gains arising during the period	$	(7,866	)	$	2,753		$	(5,113	)	$	29,155		$	(10,204	)	$	18,951
Non-credit related gains (losses) on securities not expected to be sold		(1,497	)		524			(973	)		(13,570	)		4,749			(8,821	)
Losses realized in net income (loss)		2,860			(1,001	)		1,859			11,886			(4,160	)		7,726

Net unrealized (losses) gains		(6,503	)		2,276			(4,227	)		27,471			(9,615	)		17,856

Other comprehensive (loss) income	$	(6,503	)	$	2,276		$	(4,227	)	$	27,471		$	(9,615	)	$	17,856

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the year for interest and income taxes as well as detail on non-cash investing and financing activities.


	For the Nine Months Ended September 30,
	2010		2009
	(dollars in thousands)
Cash paid during the year for:
Interest	$	50,421	$	71,837
Income taxes		1,216		3,900
Non-cash investing and financing activities:
ESOP loan reductions	$	1,500	$	1,500
Loans transferred to other real estate owned and repossessed assets		6,061		27,679
Gross increase in market value adjustment to securities available-for-sale		10,853		38,046
Transfer of securities from held-to-maturity to available-for-sale		22,433		0

Note 4 Variable Interest Entities

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) 810-10, “Consolidation.” As defined by ASC 810-10, a Variable Interest Entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Under ASC 810-10, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is deemed to be the primary beneficiary, which generally means it is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 4 Variable Interest Entities (Continued)

FASB Accounting Standards Update (“ASU”) No. 2009-17, “Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” amends the ASC for FASB Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 167.” First Commonwealth adopted the new guidance under FASB ASU No. 2009-17 on January 1, 2010.

As part of its community reinvestment initiatives, First Commonwealth has invested in ten qualified affordable housing projects as a limited partner. First Commonwealth receives federal affordable housing tax credits and rehabilitation tax credits for these limited partnership investments. Management evaluates the limited partnerships for impairment on an annual basis or more frequently as events warrant. In the third quarter of 2010, there was $0.1 million of impairment recognized on one investment. No impairment was recorded in 2009. Based on ASC 810-10, First Commonwealth is not deemed to be the primary beneficiary of these investments. Therefore, First Commonwealth has determined that these investments will not be consolidated, but will continue to be accounted for under the equity method whereby First Commonwealth’s portion of the partnership’s results are recognized as earned. These investments are included in “Other assets” on the Condensed Consolidated Statements of Financial Condition.

First Commonwealth’s maximum potential exposure is equal to its carrying value and is summarized in the table below:


	September 30, 2010		December 31, 2009
	(dollars in thousands)
Low Income Housing Limited Partnership Investments	$	954	$	1,289

Note 5 Commitments and Letters of Credit

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

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


	September 30, 2010		December 31, 2009
	(dollars in thousands)
Commitments to extend credit	$	1,570,531	$	1,598,599
Financial standby letters of credit		65,316		83,630
Performance standby letters of credit		78,760		76,194
Commercial letters of credit		20		1,275

The current notional amounts outstanding as of September 30, 2010 include financial standby letters of credit of $0.7 million and performance standby letters of credit of $5.3 million issued during the first nine months of 2010. A liability of $0.2 million has been recorded as of September 30, 2010, 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. See Note 11, “Fair Value of Assets and Liabilities,” for additional information.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 5 Commitments and Letters of Credit (Continued)

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. An evaluation of the credit risk in these instruments resulted in the recording of a liability of $0.8 million as of September 30, 2010. 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.

Note 6 Investment Securities

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


	September 30, 2010									December 31, 2009
	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	$	38,514	$	3,808	$	0		$	42,322	$	44,357	$	2,995	$	0		$	47,352
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage Backed Securities – Residential		615,460		31,862		0			647,322		749,417		28,665		(289	)		777,793
Mortgage Backed Securities – Commercial		242		1		(2	)		241		281		1		(6	)		276
Other Government- Sponsored Enterprises		134,543		563		0			135,106		75,000		147		(172	)		74,975
Obligations of States and Political Subdivisions		50,886		2,067		0			52,953		170,278		3,476		(897	)		172,857
Corporate Securities		21,232		364		(355	)		21,241		22,545		52		(3,767	)		18,830
Pooled Trust Preferred Collateralized Debt Obligations		59,914		0		(37,081	)		22,833		69,374		0		(39,644	)		29,730

Total Debt Securities		920,791		38,665		(37,438	)		922,018		1,131,252		35,336		(44,775	)		1,121,813
Equity Securities		5,106		1		(4	)		5,103		12,231		218		(406	)		12,043

Total Securities Available-for-sale	$	925,897	$	38,666	$	(37,442	)	$	927,121	$	1,143,483	$	35,554	$	(45,181	)	$	1,133,856

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 6 Investment Securities (Continued)

The amortized cost and estimated fair value of debt securities available-for-sale at September 30, 2010, by contractual maturity, are shown below. 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.


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within one year	$	4,723	$	4,726
Due after one but within five years		134,406		135,171
Due after five but within ten years		7,719		8,205
Due after ten years		119,727		84,031

		266,575		232,133
Mortgage Backed Securities (a)		654,216		689,885

Total Debt Securities	$	920,791	$	922,018

(a)

Mortgage Backed Securities include an amortized cost of $39 million and an estimated fair value of $42 million for Obligations of U.S. Government agencies issued by Ginnie Mae. Obligations of U.S. Government-sponsored enterprises includes obligations issued by Fannie Mae and Freddie Mac which had an amortized cost of $615 million and an estimated fair value of $647 million.

For the nine months ended September 30, 2010, the Company realized proceeds of $27 million from the sale of available-for-sale securities which included $3.2 million in gross gains and $0.8 million in gross losses. For the nine months ended September 30, 2009, the Company realized proceeds of $6 million from the sale of available-for-sale securities which included $87 thousand in gross gains and $2 thousand in gross losses.

Securities available-for-sale with an estimated fair value of $601 million and $637 million were pledged as of September 30, 2010 and December 31, 2009, respectively, to secure public deposits and for other purposes required or permitted by law.

On June 30, 2010, the Company reclassified its entire held-to-maturity portfolio to the available-for-sale portfolio. At the time of reclassification, the investments had an amortized cost of $22.4 million of which $22.3 million were obligations of states and political subdivisions and $0.1 million were mortgage backed securities. When the securities were transferred two of the obligations of states and political subdivision securities were in an unrealized loss position totaling $45 thousand, the remaining bonds in that category were in an unrealized gain position of $0.8 million and all of the mortgage backed securities were in an unrealized gain position. Other-than-temporary impairment charges of $45 thousand were recognized on the two state and political subdivision securities that were in an unrealized loss position.

The transfer of securities from the held-to-maturity portfolio resulted from the implementation of a strategy to liquidate a portion of the obligations of states and political subdivisions portfolio in order to mitigate future credit risk and improve our tax position.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 6 Investment Securities (Continued)

As of September 30, 2010, there were no securities classified as held-to-maturity. Below is an analysis of the amortized cost and estimated fair values of debt securities held-to-maturity at December 31, 2009:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
			(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential	$	29	$	3	$	0		$	32
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage Backed Securities – Residential		89		7		0			96
Obligations of States and Political Subdivisions		36,640		912		(94	)		37,458

Total Securities Held-to-Maturity	$	36,758	$	922	$	(94	)	$	37,586

For the nine months ended September 30, 2010, net securities gains included $50 thousand in gains and no losses for debt securities held-to-maturity. For the nine months ended September 30, 2009, net securities gains included $39 thousand in gains and no losses for debt securities held-to-maturity.

Securities held-to-maturity with an estimated fair value of $37 million were pledged as of December 31, 2009, to secure public deposits and for other purposes required or permitted by law.

Note 7 Other Investments

As a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. 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 September 30, 2010 and December 31, 2009, our FHLB stock totaled $51.4 million and is included in Other investments on the Condensed Consolidated Statements of Financial Condition.

In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as temporarily discontinued the repurchase of excess stock from members. The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of liquidity and constrained access to the debt markets at attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase of excess capital stock. The FHLB last paid a dividend in the third quarter of 2008. On October 29, 2010, the FHLB resumed the repurchase of excess stock from its members by repurchasing the lessor of 5% of the members total capital stock outstanding or its total excess capital stock. As a result, $2.6 million of the $51.4 million in stock owned by the Company as of September 30, 2010 was repurchased by FHLB. Decisions regarding any future repurchases of excess capital stock will be made by the FHLB on a quarterly basis. Management reviewed the FHLB’s Form 10-Q for the period ended June 30, 2010 filed with the SEC on August 9, 2010.

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. The decision of whether impairment exists is

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 7 Other Investments (Continued)

a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:

•

its operating performance;

•

the severity and duration of declines in the fair value of its net assets related to its capital stock amount;

•

its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;

•

the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of the FHLB; and

•

its liquidity and funding position.

After evaluating all of these considerations, First Commonwealth concluded that the par value of its investment in FHLB stock is recoverable. Accordingly, no impairment charge was recorded on these securities for the nine months ended September 30, 2010. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 8 Impairment of Investment Securities

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 other comprehensive income (“OCI”). In the third quarter of 2010, we recorded $4.3 million in other-than-temporary impairment charges. These charges include $4.0 million in credit related other-than-temporary impairment on five trust preferred collateralized debt obligations and $0.3 million recorded on one equity security. Additionally, for the three months ended September 30, 2010, $1.5 million in non-credit related losses on securities that were determined to be impaired in the current or any previous periods was recorded in OCI on our trust preferred collateralized debt obligations. All of the securities for which other-than-temporary impairment was recorded were classified as available-for-sale securities.

In accordance with FASB ASC Topic 320, at the beginning of 2009, the non-credit related portion of other-than-temporary impairment losses recognized in prior year earnings was reclassified as a cumulative effect adjustment that increased retained earnings and decreased accumulated OCI. In 2008, $13.0 million in other-than-temporary impairment charges were recognized, of which $6.5 million related to non-credit related impairment on debt securities. Therefore, the cumulative effect adjustment to retained earnings totaled $6.5 million, or $4.2 million net of tax on January 1, 2009.

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.

In the Condensed Consolidated Statement of Operations, the “Change in fair value on impaired securities” line represents the change in fair value of securities impaired in the current or previous periods. The change in fair value includes both non-credit and credit related gains or losses. Credit related losses occur when the entire amortized cost of the security will not be recovered. The “Non-credit related (gains) losses on securities not expected to be sold (recognized in other comprehensive income)” line represents the gains and losses on the securities resulting from factors other than credit. The non-credit related gain or loss is disclosed in the

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 8 Impairment of Investment Securities (Continued)

Condensed Consolidated Statement of Operations and recognized through other comprehensive income. The “Net impairment losses” line represents the credit related losses recognized in total noninterest income for the related period.

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 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 determine 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 11, “Fair Values of Assets and Liabilities” for additional information.

The following table presents the gross unrealized losses and estimated fair values at September 30, 2010 for our available-for-sale securities by investment category and time frame for which the loss has been outstanding:


	Less Than 12 Months					12 Months or More					Total
Description of Securities	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-Sponsored Enterprises:
Mortgage Backed Securities – Residential	$	20	$	0		$	0	$	0		$	20	$	0
Mortgage Backed Securities – Commercial		187		(2	)		0		0			187		(2	)
Other Government-Sponsored Enterprises		0		0			0		0			0		0
Corporate Securities		2,837		(42	)		6,819		(313	)		9,656		(355	)
Pooled Trust Preferred Collateralized Debt Obligations		0		0			22,833		(37,081	)		22,833		(37,081	)

Total Debt Securities		3,044		(44	)		29,652		(37,394	)		32,696		(37,438	)
Equity Securities		0		0			46		(4	)		46		(4	)

Total Securities	$	3,044	$	(44	)	$	29,698	$	(37,398	)	$	32,742	$	(37,442	)

At September 30, 2010, pooled trust preferred collateralized debt obligations accounted for 99% of unrealized losses while corporate fixed income comprised 1% of the total unrealized losses. Equity securities accounted for less than 1% of unrealized losses as the result of one issue which has been in a continuous unrealized loss

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 8 Impairment of Investment Securities (Continued)

position for more than twelve months. This issue is not considered impaired based on our analysis of the investment and the amount of the unrealized loss.

Corporate securities had a gross unrealized loss of $0.4 million as of September 30, 2010 and $3.8 million as of December 31, 2009. Included in this category are single issue trust preferred securities and corporate debentures issued primarily by money center and large regional banks. As of September 30, 2010, our single issue trust preferred securities had an amortized cost of $20.0 million and an estimated fair value of $19.9 million, while our corporate debentures had a book value of $1.2 million and an estimated fair value of $1.4 million. As of December 31, 2009, our single issue trust preferred securities had an amortized cost of $21.4 million and an estimated fair value of $17.6 million, while our corporate debentures had a book and fair value of $1.2 million. After a review of each of the issuer’s asset quality, earnings trend and capital position, it was determined that none of these issues were other-than-temporarily impaired. Additionally, all interest payments on these securities are being made as contractually required.

The following table presents the gross unrealized losses and estimated fair values at December 31, 2009 for both available-for-sale and held-to-maturity securities by investment category and time frame for which the loss has been outstanding:


	Less Than 12 Months					12 Months or More					Total
Description of Securities	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-Sponsored Enterprises:
Mortgage Backed Securities – Residential	$	35,202	$	(286	)	$	307	$	(3	)	$	35,509	$	(289	)
Mortgage Backed Securities – Commercial		169		(5	)		43		(1	)		212		(6	)
Other Government-Sponsored Enterprises		49,828		(172	)		0		0			49,828		(172	)
Corporate Securities		5,070		(641	)		12,521		(3,126	)		17,591		(3,767	)
Pooled Trust Preferred Collateralized Debt Obligations		4,985		(3,698	)		24,745		(35,946	)		29,730		(39,644	)
Obligations of States and Political Subdivisions		25,832		(150	)		21,154		(841	)		46,986		(991	)

Total Debt Securities		121,086		(4,952	)		58,770		(39,917	)		179,856		(44,869	)
Equity Securities		1,476		(402	)		46		(4	)		1,522		(406	)

Total Securities	$	122,562	$	(5,354	)	$	58,816	$	(39,921	)	$	181,378	$	(45,275	)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 8 Impairment of Investment Securities (Continued)

The following table provides additional information related to our corporate securities as of September 30, 2010:

Corporate Securities

(Single Issue Trust Preferred Securities and Corporate Debentures)

(dollars in thousands)


Name of Issuer	Name of Issuer’s Parent Company	Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)			Current Moody’s/ Fitch Issuer Ratings (a)
BP Bank America Inst	Bank of America Corp	$	1,023	$	1,010	$	(13	)		Baa3/BBB-
BP MBNA Capital	Bank of America Corp		1,025		1,031		6			Baa3/BBB-
NB Capital Trust II	Bank of America Corp		3,070		3,077		7			Baa3/BBB-
North Fork Cap Trust	Capital One Financial Corp		1,264		1,288		24			Baa3/BBB
Reliance Cap Trust	Capital One Financial Corp		488		420		(68	)		NA
FCB/SC Cap Trust	First Citizens Bancorporation		494		438		(56	)		NA
Fifth Third Cap	Fifth Third Bancorp		250		263		13			NA
PBI Capital Trust	Fulton Financial Corp		248		223		(25	)		NA
KeyCorp Capital II	KeyCorp		1,856		1,827		(29	)		Baa3/BBB
Union State Capital Trust I	KeyCorp		1,030		1,025		(5	)		NA
BSB Cap Trust	M&T Bank Corp		465		473		8			NA
First Empire Cap MTB	M&T Bank Corp		4,873		4,714		(159	)		Baa2/BBB
PNC Capital Trust	PNC Financial Services Group		454		502		48			NA
Susquehanna Cap	Susquehanna Bancshares		500		524		24			NA
First Union Instit Cap I	Wells Fargo Co.		3,000		3,072		72			Baa2/A

Total Single Issue Trust Preferred Securities			20,040		19,887		(153	)

Fulton Financial Corp	Fulton Financial Corp		450		494		44			Baa2/BBB+
Provident Bk MD	M&T Bank Corp		245		273		28			NA/BBB+
PNC Bank NA	PNC Financial Services Group		497		587		90			A2*-/A

Total Corporate Debentures			1,192		1,354		162

Total Corporate Securities		$	21,232	$	21,241	$	9

(a)*-indicates negative watch

As of September 30, 2010, the book value of our pooled trust preferred collateralized debt obligations totaled $59.9 million with an estimated fair value of $22.8 million, which includes securities comprised of 368 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainder are mezzanine tranches. Two of the pooled issues, representing $11.4 million of the $59.9 million book value, remain above investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of September 30, 2010, after taking into account management’s best estimates of future interest deferrals and defaults, eleven of our securities had no excess

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 8 Impairment of Investment Securities (Continued)

subordination in the tranches we own and three of our securities had excess subordination which ranged from 36% to 70% of the current performing collateral. As of September 30, 2010, nine of our pooled trust preferred collateralized obligations with an estimated fair value of $11.0 million are not receiving interest payments and therefore are reflected in the table on page 58 as nonperforming securities.

The following table provides additional information related to our pooled trust preferred collateralized debt obligations as of September 30, 2010:

Pooled Trust Preferred Collateralized Debt Obligations

(dollars in thousands)


Deal	Class	Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings		Current Number of Banks		Actual Deferrals and Defaults as a Percentage of Current Collateral			Excess Subordination as a Percentage of Current Performing Collateral
Pre TSL I	Senior	$	3,132	$	2,985	$	(147	)		A1/BBB		29		36.22	%		67.15	%
Pre TSL IV	Mezzanine		1,830		721		(1,109	)		Ca/CCC		6		27.07	%		36.03	%
Pre TSL V (a)	Mezzanine		394		382		(12	)		Ba3/C		4		65.87	%		0.00	%
Pre TSL VI (a)	Mezzanine		237		143		(94	)		Caa1/CC		5		80.98	%		0.00	%
Pre TSL VII (a)	Mezzanine		4,012		1,396		(2,616	)		Ca/C		19		70.48	%		0.00	%
Pre TSL VIII (a)	Mezzanine		1,619		441		(1,178	)		C/C		36		43.67	%		0.00	%
Pre TSL IX	Mezzanine		2,251		773		(1,478	)		Ca/C		49		29.22	%		0.00	%
Pre TSL X (a)	Mezzanine		1,300		281		(1,019	)		C/C		56		43.49	%		0.00	%
Pre TSL XII (a)	Mezzanine		5,389		1,926		(3,463	)		Ca/C		77		31.12	%		0.00	%
Pre TSL XIII (a)	Mezzanine		11,816		3,080		(8,736	)		Ca/C		65		30.75	%		0.00	%
Pre TSL XIV (a)	Mezzanine		12,523		2,998		(9,525	)		Ca/C		64		28.75	%		0.00	%
MMCap I	Senior		8,260		6,787		(1,473	)		A3/A		29		21.60	%		70.11	%
MMCap I (a)	Mezzanine		841		402		(439	)		Ca/CCC		29		21.60	%		0.00	%
MM Comm IX	Mezzanine		6,310		518		(5,792	)		Caa3/C		33		42.95	%		0.00	%

Total		$	59,914	$	22,833	$	(37,081	)

(a)	nonaccrual securities

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

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. In the first nine months of 2010, $8.7 million in credit related other-than-temporary impairment charges were 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 expected shortfall in future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the estimated fair value of the security and the

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 8 Impairment of Investment Securities (Continued)

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 this analysis follows.

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at September 30, 2010. 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. INTEX is a proprietary cash flow model recognized as the industry standard for analyzing all types of collateralized debt obligations. It includes each deal’s structural features updated with trustee information, including asset-by-asset detail, as it becomes available. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned. Prepayments are incorporated into our estimate of future cash flows only after they have been announced or have actually occurred.

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 368 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. Banks currently in default or deferring interest payments are assigned a 100% probability of default. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators. Cures of interest deferrals are factored into our analysis only after they have been announced or have actually occurred. A 10% projected recovery rate is applied to projected deferrals and a 0% projected recovery rate is applied to defaults. The probability of default is updated quarterly. As of September 30, 2010, 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.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 8 Impairment of Investment Securities (Continued)

default assumptions to the level of defaults which 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 allows 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.

Based upon the analysis performed by management as of September 30, 2010, it is probable that eleven of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges have been recorded related to these securities. These securities are identified in the table on page 18 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” The $4.3 million in credit related other-than-temporary impairment charges recognized in the third quarter of 2010 are primarily the result of additional interest deferrals within these pools. Our analysis as of September 30, 2010 indicates it is probable that we will collect all contractual principal and interest payments on the three remaining pooled trust preferred securities.

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009
	(dollars in thousands)
Balance, beginning (a)	$	40,876	$	18,603	$	36,161	$	2,516
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized		0		3,212		0		23,097
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized		3,974		8,691		8,689		4,893

Balance, ending	$	44,850	$	30,506	$	44,850	$	30,506

(a)

The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized on debt securities in prior periods. For the nine months ended September 30, the beginning balance represents impairment losses taken before January 1 of the respective year. For the three months ended September 30, the beginning balance represents impairment losses taken before July 1 of the respective year.

In the third quarter of 2010, other-than-temporary impairment charges of $0.3 million were recorded on one equity security related to a Pennsylvania-based financial institution. 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. Based on the results of this review, management believes that the one equity security which is in an unrealized loss position as of September 30, 2010 is not other-than-temporarily impaired and will equal or exceed our cost basis within a reasonable period of time.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 9 Loans

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


	September 30, 2010		December 31, 2009
	(dollars in thousands)
Commercial, financial, agricultural and other	$	953,447	$	1,127,320
Real estate-construction		317,491		428,744
Real estate-residential		1,142,583		1,202,386
Real estate-commercial		1,316,142		1,320,715
Loans to individuals		569,910		557,336

Total loans, net of unearned income	$	4,299,573	$	4,636,501

During the first nine months of 2010, outstanding loans decreased $336.9 million or 7% compared to balances outstanding at December 31, 2009. Decreases were experienced in all categories except loans to individuals and can be attributed to both our focus of managing down our large credit exposures as well as weaker loan demand.

The following table identifies impaired loans and information regarding the relationship of impaired loans to the allowance for credit losses:


	September 30, 2010		December 31, 2009
	(dollars in thousands)
Recorded balance of impaired loans at end of period	$	124,234	$	148,556
Allowance for credit losses allocated to loans considered impaired		34,146		33,265
Impaired loans with an allocation in the allowance for credit losses		88,934		108,318
Impaired loans with no allocation in the allowance for credit losses		35,300		40,238

For the nine and twelve months ended:
Average recorded balance of impaired loans	$	146,858	$	83,843
Income recorded on impaired loans recognized on a cash basis		152		521

Impaired loans totaled $124.2 million at September 30, 2010, a decrease of $24.3 million compared to December 31, 2009. As of September 30, 2010, $120.5 million, or 97% of the nonperforming loans were commercial, with $51.6 million related to commercial & industrial loans, $25.8 million to construction loans and $43.1 million to commercial real estate. The remaining $3.7 million of nonperforming loans relate to residential real estate. Loans originated to borrowers in Pennsylvania accounted for $94.1 million or 76% of the nonperforming total while loans outside of Pennsylvania accounted for $30.1 million or 24% of nonperforming loans.

During the third quarter of 2010, the most significant changes to impaired loans include the addition of a $10.1 million commercial real estate loan for an office building in western Pennsylvania, the favorable resolution of a $11.9 million participation loan secured by a condominium development in Missouri as the result of a $9.8 million payment and $2.1 million charge-off and the transfer to OREO of a $2.2 million loan secured by a recreational facility.

Significant impaired loans as of September 30, 2010 include the following:

•

A $44.3 million balance on a line of credit to a western Pennsylvania real estate developer. The Bank is negotiating the final terms of a settlement plan with the borrower and three other lenders.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 9 Loans (Continued)

•

A $10.4 million commercial loan to a waste management company in Pennsylvania.

•

A $10.1 million commercial real estate loan for an office building in western Pennsylvania. The borrower is experiencing cash flow problems as the result of two tenants not renewing their lease.

•

An $8.6 million participation construction loan for a Nevada resort development. Developers are abandoning upgrade and expansion plans for the currently operating resort.

•

A $7.2 million participation loan on a recently completed condominium project in North Carolina. Sales of completed units have slowed.

•

$6.4 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. A charge-off of $14.4 million was previously recorded on this loan.

•

$5.4 million, the remaining portion of a $39.6 million construction loan for a Florida condominium project. Continued market deterioration, and questions concerning the developer’s willingness and capacity to complete the project, resulted in a decline in the estimated collateral value from an “as completed” to an “as is” raw land valuation. A $34.2 million charge-off was recorded on this loan in the second quarter of 2010.

Loans past due in excess of 90 days and still accruing increased $0.7 million, or 5%, to $15.8 million at September 30, 2010 compared to December 31, 2009. Compared to September 30, 2009, loans past due in excess of 90 days increased $1.5 million. Loans past due in excess of 90 days and still accruing are primarily 1-4 family residential loans where the collateral value exceeds outstanding loan balances and those loans are in the process of collection.

Note 10 Income Taxes

At September 30, 2010 and December 31, 2009, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. Federal and state tax years 2007 through 2009 were open for examination as of September 30, 2010.

Note 11 Fair Values of Assets and Liabilities

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the Condensed Consolidated Statements of Financial Condition or in the “Other assets” category of the Condensed Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.

FASB ASC Topic 825, “Financial Instruments” permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

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

•

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using quoted market prices.

•

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, certain equity securities, FHLB stock, interest rate derivatives that include interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.

The estimated fair values for Mortgage Backed Securities – Residential and Mortgage Backed Securities – Commercial were based on market data for these types of asset classes including broker quotes and trade and bid prices.

Obligations of States and Political Subdivisions estimated fair value is based on pricing models that incorporated other benchmark quoted securities with similar issuer, credit support, state of issuance and credit rating.

Other Investments is comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 7, “Other investments.”

Interest rate derivatives are reported at estimated fair value utilizing Level 2 inputs and are included in Other assets and Other liabilities. First Commonwealth values its interest rate swap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to three months, Eurodollar futures contracts and swap rates from three years to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 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 estimated 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. To date, we have not realized any losses due to a counterparty’s inability to pay any net uncollateralized position.

The equity investments included in Level 2 are based on broker prices and are included in Level 2 because they are not traded on an active exchange market.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (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 select Obligations of States and Political Subdivisions, corporate securities, pooled trust preferred collateralized debt obligations, non-marketable equity investments and certain impaired loans.

The estimated fair values for the Obligations of States and Political Subdivisions included in Level 3 and corporate securities, which include our single issue trust preferred securities, were obtained from pricing sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks for each issuer. These valuations were classified as Level 3 due to the inactivity in the respective markets.

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities for approximately twenty-four months; therefore it was 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 8, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at September 30, 2010:


	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Securities Available-for-sale
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential	$	0	$	42,322	$	0	$	42,322
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage Backed Securities – Residential		0		647,322		0		647,322
Mortgage Backed Securities – Commercial		0		241		0		241
Other Government-Sponsored Enterprises		0		135,106		0		135,106
Obligations of States and Political Subdivisions		0		52,604		349		52,953
Corporate Securities		0		0		21,241		21,241
Pooled Trust Preferred Collateralized Debt Obligations		0		0		22,833		22,833

Total Debt Securities		0		877,595		44,423		922,018
Equity Securities		1,230		2,303		1,570		5,103

Total Securities Available for Sale		1,230		879,898		45,993		927,121
Other Investments		0		51,431		0		51,431
Other Assets (a)		0		20,993		0		20,993

Total Assets	$	1,230	$	952,322	$	45,993	$	999,545

Other Liabilities (a)	$	0	$	22,694	$	0	$	22,694

Total Liabilities	$	0	$	22,694	$	0	$	22,694

(a)	Non-hedging interest rate derivatives

For the nine months ended September 30, 2010, there were no transfers between fair value Levels 1 and 2.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at December 31, 2009:


	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Securities Available-for-sale
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential	$	0	$	47,352	$	0	$	47,352
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage Backed Securities – Residential		0		777,793		0		777,793
Mortgage Backed Securities – Commercial		0		276		0		276
Other Government-Sponsored Enterprises		0		74,975		0		74,975
Obligations of States and Political Subdivisions		0		169,257		3,600		172,857
Corporate Securities		0		0		18,830		18,830
Pooled Trust Preferred Collateralized Debt Obligations		0		0		29,730		29,730

Total Debt Securities		0		1,069,653		52,160		1,121,813
Equity Securities		3,001		7,472		1,570		12,043

Total Securities Available for Sale		3,001		1,077,125		53,730		1,133,856
Other Investments		0		51,431		0		51,431
Other Assets (a)		0		10,626		0		10,626

Total Assets	$	3,001	$	1,139,182	$	53,730	$	1,195,913

Other Liabilities (a)	$	0	$	11,491	$	0	$	11,491

Total Liabilities	$	0	$	11,491	$	0	$	11,491

(a)	Non-hedging interest rate derivatives

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows at September 30, 2010:


	For the Three Months Ended
	Obligations of States and Political Subdivisions			Corporate Securities		Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Securities Available-for-sale
Balance, beginning of quarter	$	343		$	20,574	$	28,661		$	1,570	$	51,148
Realized credit losses included in earnings		0			0		(3,974	)		0		(3,974	)
Total gains (losses) unrealized in other comprehensive income		6			667		(1,375	)		0		(702	)
Purchases, settlements, pay downs and maturities		0			0		(479	)		0		(479	)
Transfers into Level 3		0			0		0			0		0

Balance, end of quarter	$	349		$	21,241	$	22,833		$	1,570	$	45,993


	For the Nine Months Ended
	Obligations of States and Political Subdivisions			Corporate Securities		Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Securities Available-for-sale
Balance, beginning of period	$	3,600		$	18,830	$	29,730		$	1,570	$	53,730
Realized credit losses included in earnings		0			0		(8,688	)		0		(8,688	)
Total gains (losses) unrealized in other comprehensive income		(2,310	)		2,411		2,452			0		2,553
Purchases, settlements, pay downs and maturities		(941	)		0		(661	)		0		(1,602	)
Transfers into Level 3		0			0		0			0		0

Balance, end of period	$	349		$	21,241	$	22,833		$	1,570	$	45,993

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

For the three and nine month periods ended September 30, 2010, there were no transfers between levels of estimated fair value for available-for-sale securities.

Losses of $4.0 million included in earnings for the three month period and losses of $8.7 million included in earnings for the nine month period are attributable to the change in realized gains (losses) related to assets held at September 30, 2010. These amounts are reported in the lines “Net impairment losses” in the Condensed Consolidated Statements of Operations.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows at September 30, 2009:


	For the Three Months Ended
	Obligations of States and Political Subdivisions		Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Securities Available-for-sale
Balance, beginning of quarter	$	3,451	$	17,478		$	38,270		$	1,570	$	60,769
Realized credit losses included in earnings		0		0			(11,903	)		0		(11,903	)
Total gains unrealized in other comprehensive income		71		2,915			7,284			0		10,270
Purchases, settlements, pay downs, and maturities		0		(250	)		(22	)		0		(272	)
Transfers into Level 3		0		0			0			0		0

Balance, end of quarter	$	3,522	$	20,143		$	33,629		$	1,570	$	58,864


	For the Nine Months Ended
	Obligations of States and Political Subdivisions		Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equity Securities		Total Estimated Fair Value
	(dollars in thousands)
Securities Available-for-sale
Balance, beginning of period	$	0	$	19,780		$	47,080		$	1,570	$	68,430
Realized credit losses included in earnings		0		0			(27,990	)		0		(27,990	)
Total gains unrealized in other comprehensive income		93		613			14,789			0		15,495
Purchases, settlements, pay downs and maturities		0		(250	)		(250	)		0		(500	)
Transfers into Level 3		3,429		0			0			0		3,429

Balance, end of period	$	3,522	$	20,143		$	33,629		$	1,570	$	58,864

For the three months ended September 30, 2009, there were no transfers between levels of estimated fair value for available-for-sale securities. For the nine months ended September 30, 2009, the securities transferred from Level 2 to Level 3 were municipal securities. The primary reason for the transfer into Level 3 was inactivity in the market for these securities which resulted in a lack of observable market activity or comparable trades that could be used to establish a benchmark for valuation.

Losses of $11.9 million included in earnings for the three month period and losses of $28.0 million included in earnings for the nine month period ended September 30, 2009, are attributable to the change in realized gains (losses) related to assets held at September 30, 2009. These amounts are reported in the lines “Net impairment losses” in the Condensed Consolidated Statements of Operations.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

The table below presents the balances of assets measured at fair value on a non-recurring basis at September 30, 2010:


	Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Impaired loans	$	0	$	68,328	$	30,998	$	99,326
Other real estate owned		0		24,386		0		24,386

Total Assets	$	0	$	92,714	$	30,998	$	123,712

Impaired loans over $0.1 million are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. The estimated 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.

The estimated fair value for other real estate owned is determined by either an independent market based appraisal less costs to sell or an executed sales agreement and is classified as Level 2. Other real estate owned totaled $24.6 million as of September 30, 2010 and primarily consisted of one property with a carrying value of $18.1 million. This property represents a Pennsylvania based manufacturing plant with related real estate and equipment. In the second quarter of 2010, a $2.2 million write-down was recognized on this property as an agreement for the sale of the plant and equipment was executed. However, as the result of issues with the current tenant of the property, the sales agreement expired in the third quarter without a successful sale of the property. We continually 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 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 non-recurring 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. A goodwill impairment test for First Commonwealth was completed as of September 30, 2010. Based on this analysis, the estimated fair value of First Commonwealth exceeded its book value. Additional information related to this measurement is provided in Note 13, “Goodwill.” There were no other assets or liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 2010.

FASB ASC 825-10-65, 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 non-recurring basis.

The methodologies for estimating the fair value of financial assets and financial liabilities are discussed below.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

Securities: Estimated fair values for securities available-for-sale and securities held-to-maturity are based on quoted market prices, if available. If quoted market prices are not available, estimated 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 estimated 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.”

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 estimated fair value for standby letters of credit was $0.2 million at September 30, 2010. See Note 5, “Commitments and Letters of Credit,” for additional information.

Deposit liabilities: Management estimates that the fair value of deposits is based on a market valuation of similar deposits. 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 estimated 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, securities sold under agreement to repurchase and treasury, tax and loan notes were used to approximate fair value due to the short-term nature of the borrowings.

Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth’s estimated incremental borrowing rate for similar types of borrowing arrangements.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 11 Fair Values of Assets and Liabilities (Continued)

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


	September 30, 2010				December 31, 2009
	Carrying Value (a)		Estimated Fair Value		Carrying Value (a)		Estimated Fair Value
	(dollars in thousands)
Assets
Cash and due from banks	$	94,567	$	94,567	$	89,232	$	89,232
Interest-bearing bank deposits		40,852		40,852		327		327
Securities available-for-sale		927,121		927,121		1,133,856		1,133,856
Securities held-to-maturity		0		0		36,758		37,586
Other investments		51,431		51,431		51,431		51,431
Loans		4,299,573		4,295,400		4,636,501		4,655,167
Liabilities
Deposits	$	4,727,871	$	4,821,383	$	4,535,785	$	4,619,070
Short-term borrowings		162,020		156,496		958,932		950,799
Long-term debt		119,475		122,911		168,697		172,249
Subordinated debt		105,750		79,777		105,750		70,874

(a)	As reported in the Condensed Consolidated Statements of Financial Condition.

Note 12 Derivatives

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 estimated fair value of the swaps offset each other, except for the credit risk of the counterparties, which is calculated by taking into consideration the risk rating, probability of default and loss given default for all counterparties.

We have seven 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. The fee received, less the estimate of the liability for the credit exposure, was recognized in earnings at the time of the transaction.

A liability of $1.7 million was recorded for credit risk on an aggregate notional amount outstanding of $229.9 million for interest rate derivatives and $132.5 million of risk participation agreements at September 30, 2010. The estimated 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.”

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 12 Derivatives (Continued)

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(dollars in thousands)
Non-hedging interest rate derivatives:
(Decrease) increase in other income	$	(542	)	$	(1,036	)	$	(836	)	$	908

Note 13 Goodwill

In accordance with ASC 805, “Business Combinations,” and ASC 350, “Intangibles – Goodwill and Other”, all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value. We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third-party sources, when available. When third-party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes.

Goodwill is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. As of September 30, 2010 and December 31, 2009, goodwill totaled $160.0 million.

First Commonwealth is one reporting unit and goodwill is tested in November of each year for impairment. As a result of the negative impact other-than-temporary impairment charges and credit losses in our loan portfolio have had on our earnings and the resulting decrease in our stock price, we evaluated our goodwill for impairment more frequently, beginning June 30, 2009 and each subsequent quarter end thereafter.

Goodwill is tested for impairment using a two-step process that begins with an estimation of fair value. The first step compares the estimated fair value of First Commonwealth with its carrying amount, including goodwill. If the estimated fair value exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount exceeds its estimated fair value, a second step would be performed that would compare the implied fair value to the carrying amount of goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other variables. Estimated cash flows extend five years into the future and, by their nature, are difficult to estimate over such an extended time-frame. Factors that may significantly affect the estimates include, but are not limited to, balance sheet growth assumptions, credit losses in our investment and loan

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 13 Goodwill (Continued)

portfolios, competitive pressures in our market area, changes in customer base and customer product preferences, changes in revenue growth trends, cost structure, changes in discount rates, conditions in the banking sector and general economic variables.

Our Step 1 test for potential goodwill impairment incorporates both income and market based analyses and as of September 30, 2010 indicated that our fair value was less than 5% below book value. Therefore in accordance with ASC Topic 350-20-35-8, a Step 2 analysis was undertaken.

The Step 2 test follows the purchase price allocation under the purchase method described in ASC 820-10, and fair value estimates as defined and prescribed by ASC 820-10-30. To determine the implied fair value of goodwill, the fair value of all assets other than goodwill, less the fair value of liabilities is subtracted from the fair value of the Company. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the Company. Key valuations used in the analysis were the mark-to-fair-value on the loan portfolio, assessment of core deposit intangibles and the mark-to-fair-value of outstanding debt and deposits.

As a result of the Step 2 analysis, it was determined that the fair value of our goodwill exceeded its carrying value by more than 10% and therefore no impairment charge was required.

As of September 30, 2010, goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance and stock price could result in impairment, which could adversely affect earnings in future periods.

Note 14 Capital

In the third quarter of 2010, the Company completed a public offering of 18,543,750 shares of its common stock at an offering price of $4.65 per share, raising additional capital of $81.9 million. In connection with the stock offering approximately $0.5 million worth of costs were capitalized resulting in net proceeds of $81.4 million.

The Company amended its Dividend Reinvestment Plan (“DRIP”) during the second quarter of 2009 to provide the flexibility to raise capital by selling up to 5,000,000 shares of common stock through the DRIP. These shares may be sold pursuant to routine reinvested dividends, as well as optional cash purchases. During 2010, 1,095,558 shares were issued under this program, 724,660 of which were related to the reissuance of Treasury Shares, raising $6.5 million in capital. During 2009, 97,905 shares were issued under this program, all of which were related to the reissuance of Treasury Shares, raising $0.4 million in capital.

Note 15 New Accounting Pronouncements

FASB ASU No. 2009-16, “Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets” makes several significant amendments to FASB ASC Topic 860, “Transfers and Servicing” including the removal of the concept of a qualifying special-purpose entity. The new guidance also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. The new authoritative accounting guidance became effective for fiscal years beginning after November 15, 2009. First Commonwealth adopted the new guidance under FASB ASU No. 2009-16 on January 1, 2010. The adoption did not have a material impact on First Commonwealth’s financial condition or results of operations.

FASB ASU No. 2009-17, “Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” requires a qualitative rather than a quantitative analysis to determine the

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 15 New Accounting Pronouncements (Continued)

primary beneficiary of a VIE for consolidation purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The new guidance became effective for fiscal years beginning after November 15, 2009. First Commonwealth adopted the new guidance under FASB ASU No. 2009-17 on January 1, 2010. The adoption did not have a material impact on First Commonwealth’s financial condition or results of operations.

In January 2010, FASB issued FASB ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.” The ASU revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. We adopted these new disclosure requirements during the first quarter of 2010, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. With respect to the portions of this ASU that were adopted in the first quarter, the adoption of this standard did not have a material impact on First Commonwealth’s financial condition or results of operations. Management does not believe that the adoption of the remaining portion of the ASU will have a material impact on First Commonwealth’s financial condition or results of operations.

In February 2010, FASB issued FASB ASU No. 2010-09, “Subsequent Events (Topic 805) – Amendments to Certain Recognition and Disclosure Requirements.” The ASU establishes separate subsequent event recognition criteria and disclosure requirements for SEC filers. Effective with the release date, the financial statements of SEC filers will no longer disclose either the date through which subsequent events were reviewed or that subsequent events were evaluated through the date financial statements were issued. The requirement to evaluate subsequent events through the date of issuance is still in place. Only the disclosure is affected. The ASU also removes the requirement to make subsequent events disclosures in financial statements revised for either a correction of an error or a retrospective application of an accounting change.

In April 2010, FASB issued ASU No. 2010-18, “Receivables (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset—a consensus of the FASB Emerging Issues Task Force.” The ASU provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30. The ASU addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification. The ASU clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change. The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

(Unaudited) (Continued)

September 30, 2010

Note 15 New Accounting Pronouncements (Continued)

July 15, 2010. The adoption of the ASU did not have a material impact on First Commonwealth’s financial condition or results of operations.

In July 2010, FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Only disclosures are affected. The adoption of the ASU will not have a material impact on First Commonwealth’s financial condition or results of operations.

In August 2010, FASB issued ASU No. 2010-21, “Accounting for Technical Amendments to Various SEC Rules and Schedules – Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies.” This ASU provides guidance on the accounting for noncontrolling interests in subsidiaries as well as the financial reporting required relating to the noncontrolling interests. The requirements described in this update do not require any additional disclosures and are effective for all reporting periods ending subsequent to August 2, 2010. The adoption of the ASU did not have a material impact on First Commonwealth’s financial condition or results of operations.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations

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 nine months ended September 30, 2010 and 2009, 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. 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 include statements relating to our anticipated future financial performance, projected growth and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from developments or events, our business and growth strategies.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements:

•

continued weakness in economic and business conditions, both nationally and in our markets, which could cause deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;

•

further declines in the market value of investment securities that are considered to be other-than-temporary, which would negatively impact our earnings and capital levels;

•

increases in defaults by borrowers and other delinquencies, which could result in increases in our provision for credit losses and related expenses;

•

fluctuations in interest rates and market prices, which could reduce our net interest margin and asset valuations and increase our expenses;

•

further declines in the valuations of real estate, which could negatively affect the creditworthiness of our borrowers and the value of collateral securing our loans;

•

the assumptions used in calculating the appropriate amount to be placed into our allowance for loan and lease losses may prove to be inaccurate;

•

restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;

•

legislative and regulatory changes, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;

•

changes in accounting standards and compliance requirements may have an adverse affect on our operating results and financial condition;

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Forward-Looking Statements (Continued)

•

competitive pressures among depository and other financial institutions, some of whom may have greater financial resources or more attractive product or service offerings, may adversely affect growth or profitability of our products and services; and

•

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.

Business Summary

First Commonwealth is a financial holding company that is headquartered in Indiana, Pennsylvania with assets of approximately $5.9 billion at September 30, 2010, total loans of $4.3 billion, total deposits of $4.7 billion and shareholders’ equity of $741.8 million. First Commonwealth provides a diversified array of consumer and commercial banking services through our bank subsidiary, First Commonwealth Bank, which operates 114 community banking offices throughout western Pennsylvania and three loan production offices in downtown Pittsburgh, State College and Canonsburg, Pennsylvania. The largest concentration of our branch offices are located within the greater Pittsburgh metropolitan area in Allegheny, Butler, Washington and Westmoreland counties, while our remaining offices are located in smaller cities, such as Altoona, Johnstown and Indiana, Pennsylvania, and in towns and villages throughout predominantly rural counties. We also provide trust and wealth management services and offer insurance products through First Commonwealth Bank and our other operating subsidiaries. First Commonwealth’s common stock trades on the NYSE under the symbol “FCF.”

The challenging economic environment and its effects on our commercial loan portfolio have negatively impacted our financial performance in 2010, primarily due to the high level of loan loss provision in the first quarter. Out-of-market loans and large exposures to a relatively small number of commercial borrowers represent a small portion of our total assets, but have had a disproportionate effect on earnings. Management continues to focus on these issues as well as taking necessary steps to mitigate the risks of these exposures.

During 2010, the profile of our balance sheet changed as growth in lower costing transaction and savings deposits, reduced loan volumes and the reduction in our investment portfolio have provided funds to pay down borrowings as the risk/reward for balance sheet leveraging activities has become less attractive in the current rate environment. These changes resulted in a decline in total assets, but are expected to reduce our exposure to liquidity and interest rate risk.

During the third quarter, the Company completed a public offering of 18,543,750 shares of its common stock at an offering price of $4.65 per share, providing additional capital of $81.4 million.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Explanation of Use of Non-GAAP Financial Measure (Continued)

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 Operation is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 38 for the nine month period ended September 30 and on page 46 for the three month period ended September 30.

Result of Operations

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

Net Income

For the nine months ended September 30, 2010, First Commonwealth had net income of $11.0 million, or $0.12 per share, compared to a net loss of $22.8 million or $0.27 per share in the nine months ended September 30, 2009. Net income for both periods was negatively impacted by the level of provision for loan losses and other-than-temporary impairment charges. Results for 2010 reflect improvement in both of these areas as the provision for loan losses in the first nine months of 2010 was $53.6 million, a decrease of $25.9 million or 33% compared to $79.5 million recorded in the comparable period of 2009. Other-than-temporary impairment charges were $9.2 million for the nine months ended September 30, 2010, a decrease of $21.3 million or 70% compared to $30.5 million recorded in the same period in 2009.

Other items affecting results for the nine months ended September 30, 2010 include an increase of 20 basis points or $1.8 million in the net interest margin on a fully taxable equivalent basis and a decrease of $2.8 million in noninterest expense compared to the same period as last year. Noninterest income, excluding net impairment losses and net security gains, increased $0.9 million or 2%, despite a $2.1 million gain from a favorable legal settlement recorded in 2009.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, increased $1.8 million, or 1%, in the first nine months of 2010 as compared to the same period in 2009, despite the negative impact of an $80.8 million increase in the level of average nonperforming loans. The increase in net interest income resulted from a 20 basis point increase in the net interest margin, partially offset by a decline of $238.6 million in average interest-earning assets. Positively affecting net interest income was a $68 million increase in average net free funds during the nine months ended September 30, 2010 as compared to the same period in 2009. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders’ equity over nonearning assets. Net interest margin, on a fully taxable equivalent basis, was 3.89% and 3.69% for the nine month periods ended September 30, 2010 and 2009, respectively. The improved net interest margin can be attributed to a more favorable deposit mix, lower deposit costs, disciplined loan pricing and reduced balance sheet leveraging activities.

Comparing the first nine months of 2010 with the same period in 2009, interest income, on a fully taxable equivalent basis, decreased $17.7 million, or 8%. Lower levels of interest earning assets resulted in $11.2 million

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (Continued)

of the decrease in interest income while lower interest rates contributed $6.5 million of the decrease. Average investment securities decreased $278.6 million as proceeds from maturing securities and sales of municipal securities provided liquidity to decrease average borrowings. Partially offsetting the decrease in average investments is a $39.4 million increase in interest-bearing deposits and a $0.6 million increase in average loans. The taxable equivalent yield on interest-earning assets was 5.03% for the nine months ended September 30, 2010, a decrease of 19 basis points from the 5.22% for the same period in 2009.

Interest expense, in the first nine months of 2010 as compared to the same period in 2009, decreased $19.4 million or 29%, due to a 42 basis point decline on rates paid for interest-bearing liabilities. The cost of interest-bearing liabilities was 1.33% and 1.75% at September 30, 2010 and 2009, respectively. Lower interest rates resulted in a decrease in interest expense of $16.1 million, while a decrease in interest-bearing liabilities provided for a decrease in interest expense of $3.3 million. Interest-bearing liabilities decreased an average of $306.9 million, including, $471.3 million decrease in short term borrowings, $139.7 million decrease in time deposits and $43.7 million decrease in long-term debt, offset by a $347.9 million increase in lower costing transaction and savings deposits.

The following table reconciles interest income in the Condensed Consolidated Statements of Operations to net interest income adjusted to a fully taxable equivalent basis:


	Nine Months Ended September 30,
	2010		2009
	(dollars in thousands)
Interest income per Condensed Consolidated Statement of Operations	$	204,997	$	220,724
Adjustment to fully taxable equivalent basis		7,402		9,328

Interest income adjusted to fully taxable equivalent basis (non-GAAP)		212,399		230,052
Interest expense		48,207		67,654

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	164,192	$	162,398

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (Continued)

The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis, for the nine months ended September 30:


	Average Balance Sheets and Net Interest Income Analysis
	2010								2009
	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	$	40,036		$	77		0.26	%	$	679		$	3		0.60	%
Tax-free investment securities		144,922			7,248		6.69			241,709			12,453		6.89
Taxable investment securities		938,233			29,383		4.19			1,120,002			39,474		4.71
Loans, net of unearned income (b)(c)		4,525,149			175,691		5.19			4,524,567			178,122		5.26

Total interest-earning assets		5,648,340			212,399		5.03			5,886,957			230,052		5.22

Noninterest-earning assets:
Cash		77,027								75,994
Allowance for credit losses		(99,649	)							(59,817	)
Other assets		591,133								548,766

Total noninterest-earning assets		568,511								564,943

Total Assets	$	6,216,851							$	6,451,900

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	620,231		$	591		0.13	%	$	600,229		$	1,367		0.30	%
Savings deposits (d)		1,778,204			9,642		0.72			1,450,336			12,715		1.17
Time deposits		1,626,660			28,608		2.35			1,766,375			40,382		3.06
Short-term borrowings		594,182			1,752		0.39			1,065,530			3,427		0.43
Long-term debt		244,547			7,614		4.16			288,221			9,763		4.53

Total interest-bearing liabilities		4,863,824			48,207		1.33			5,170,691			67,654		1.75

Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)		640,911								582,952
Other liabilities		40,807								41,766
Shareholders’ equity		671,309								656,491

Total noninterest-bearing funding sources		1,353,027								1,281,209

Total Liabilities and Shareholders’ Equity	$	6,216,851							$	6,451,900

Net Interest Income and Net Yield on Interest-Earning Assets				$	164,192		3.89	%				$	162,398		3.69	%

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

(b)	Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.

(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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (Continued)

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the nine months ended September 30:


	Analysis of Changes in Net Interest Income
	Nine Months Ended September 30, 2010 Compared with September 30, 2009
	Total Change			Change Due to Volume			Change Due to Rate (a)
	(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	74		$	177		$	(103	)
Tax-free investment securities		(5,205	)		(4,988	)		(217	)
Taxable investment securities		(10,091	)		(6,403	)		(3,688	)
Loans		(2,431	)		23			(2,454	)

Total interest income (b)		(17,653	)		(11,191	)		(6,462	)

Interest-bearing liabilities:
Interest-bearing demand deposits		(776	)		45			(821	)
Savings deposits		(3,073	)		2,869			(5,942	)
Time deposits		(11,774	)		(3,198	)		(8,576	)
Short-term borrowings		(1,675	)		(1,516	)		(159	)
Long-term debt		(2,149	)		(1,480	)		(669	)

Total interest expense		(19,447	)		(3,280	)		(16,167	)

Net interest income	$	1,794		$	(7,911	)	$	9,705

(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 allowance for credit losses needed to absorb 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 provision for credit losses for the nine months ended September 30, 2010 totaled $53.6 million, a decrease of $25.9 million as compared to the same period in 2009. The 2010 provision resulted primarily from an updated collateral valuation obtained in the first quarter for a commercial real estate construction loan in Florida that was placed in nonperforming status during the third quarter of 2009, an out-of market commercial real estate construction loan that migrated to nonperforming status during the first quarter of 2010, deterioration in a western Pennsylvania commercial loan that was placed in nonperforming status in the fourth quarter of 2009 and a commercial real estate loan for an office building in western Pennsylvania which was placed in nonperforming

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Results of Operations (Continued)

Provision for Credit Losses (Continued)

status during the third quarter of 2010. Offsetting these provisions were three credits which in the second quarter of 2010 provided for the release of $3.6 million in established reserves, including $2.7 million from two loans that provided higher than expected proceeds from bankruptcy sales and the release of $0.9 million of previously established reserves for a troubled loan that paid off.

The table below provides a breakout of the provision for credit losses by loan category for the nine months ended:


	September 30, 2010					September 30, 2009
	Dollars		Percentage			Dollars		Percentage
	(dollars in thousands)
Commercial, financial and agricultural	$	7,057		13	%	$	16,491		21	%
Real estate-construction		37,494		70	%		40,135		50	%
Real estate-residential		2,924		5	%		4,061		5	%
Real estate-commercial		4,099		8	%		16,306		21	%
Loans to individuals		1,978		4	%		2,517		3	%

Total	$	53,552		100	%	$	79,510		100	%

For the first nine months of 2010, the provision related to commercial, financial and agricultural loans was primarily due to $2.3 million allocated for a $3.0 million manufacturing business in Pennsylvania, $1.8 million allocated for a $44.5 million line of credit to a western Pennsylvania real estate developer and $4.4 million provided for the total loan category. Partially offsetting these additional provisions was $2.7 million in recoveries on previously charged off loans or reduction of established specific reserves related to two loans which provided higher than expected proceeds from bankruptcy sales.

The provision for credit losses related to real estate-construction loans was primarily due to $24.3 million related to a $39.6 million construction loan for a Florida condominium project that was placed into nonperforming status in the third quarter of 2009. Continued market deterioration, and questions concerning the developer’s willingness and capacity to complete the project, resulted in a change in the first quarter of 2010 to the estimated collateral value from an “as completed” to an “as is” raw land valuation. A $34.2 million charge-off was recorded on this loan in the second quarter of 2010, resulting in a remaining loan balance of $5.4 million. Additionally, $2.1 million was allocated for a $12.7 million condominium development project in Missouri and $4.6 million was allocated for an $8.6 million participation construction loan for development of a Nevada resort. The Missouri condominium project was placed in nonperforming status in the first quarter of 2010 and was resolved in the third quarter of 2010 with the receipt of a $10.6 million payment and $2.1 million charge-off. Developers for the operating Nevada resort are abandoning expansion plans due to market conditions and this loan was placed into nonperforming status in the first quarter of 2010. The Bank has personal recourse to the developers on all three projects, however, that recourse was not given any consideration in the reserve assessments.

The provision for real estate-commerical loans totaled $4.1 million in the first nine months of 2010, primarily due to $2.9 million allocated for a $10.1 million loan for a western Pennsylvania office building with increased vacancy rates.

Net credit losses were $49.5 million in the first nine months of 2010 compared to $41.8 million for the same period in 2009. Net credit losses in 2010 included $34.2 million for the previously mentioned Florida

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Results of Operations (Continued)

Provision for Credit Losses (Continued)

condominium project, $2.1 million for the previously mentioned Missouri condominium project and $2.8 million for a participation loan secured by real estate in Illinois. The Illinois loan had an original balance of $5 million when placed in nonperforming status in the third quarter of 2009 and the remaining balance of $2.2 million was moved to OREO in the third quarter of 2010. Additionally, net credit losses of $1.0 million were recorded for a participation loan secured by real estate in Ohio. The original loan was $6.2 million and was moved to nonperforming status in the third quarter of 2009. The outstanding balance on this loan is currently $1.3 million.

The allowance for credit losses was $85.6 million or 1.99% of total loans outstanding at September 30, 2010 compared to $81.6 million or 1.76% at December 31, 2009 and $90.5 million or 1.95% at September 30, 2009. The provision is a result of management’s assessment of credit quality statistics and other factors that would have an impact on probable losses in the loan portfolio and the methodology used for determination of the adequacy of the allowance for credit losses. The change in the allowance for credit losses is directionally consistent with the increase in estimated losses within the loan portfolio determined by factors including certain loss events, portfolio migration analysis, historical loss experience, delinquency trends, deterioration in collateral values and volatility in the economy. Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at September 30, 2010.

Below is an analysis of the consolidated allowance for credit losses for the nine months ended September 30:


	2010		2009
	(dollars in thousands)
Balance, beginning of year	$	81,639	$	52,759
Loans charged off:
Commercial, financial and agricultural		2,949		16,805
Loans to individuals		2,695		3,308
Real estate-construction		41,374		14,099
Real estate-commercial		1,824		6,294
Real estate-residential		3,673		2,930

Total loans charged off		52,515		43,436

Recoveries of loans previously charged off:
Commercial, financial and agricultural		2,270		376
Loans to individuals		427		391
Real estate-construction		0		0
Real estate-commercial		119		787
Real estate-residential		154		72
Lease financing receivables		0		7

Total recoveries		2,970		1,633

Net credit losses		49,545		41,803
Provision charged to expense		53,552		79,510

Balance, end of period	$	85,646	$	90,466

Additional information on our loan portfolio is provided in the Credit Risk section of Management’s Discussion and Analysis.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

and Results of Operations (Continued)

Results of Operations (Continued)

Noninterest Income

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


	2010			2009
	(dollars in thousands)
Noninterest Income
Trust income	$	4,378		$	3,604
Service charges on deposit accounts		13,057			12,798
Insurance and retail brokerage commissions		5,328			5,440
Income from bank owned life insurance		3,935			3,250
Card related interchange income		7,695			6,258
Other income		7,324			9,512

Subtotal		41,717			40,862
Net securities gains		2,412			124
Net impairment losses		(9,150	)		(30,530	)

Total noninterest income	$	34,979		$	10,456

Total noninterest income for the nine months ended September 30, 2010 increased $24.5 million, or 235%, compared to the same period in 2009 primarily due to a decline in net impairment losses. Noninterest income, excluding net security gains and net impairment losses, increased $0.9 million, or 2%, despite a $2.1 million gain from a favorable legal settlement recorded in 2009.

Net impairment losses of $9.2 million for the nine months ended September 30, 2010 decreased $21.4 million compared to the nine months ended September 30, 2009. Other-than-temporary impairment charges recorded in the first nine months of 2010 are the result of $8.7 million in credit related other-than-temporary impairment losses on pooled trust preferred collateralized debt obligations and $0.5 million on a bank equity security. In the first nine months of 2009, other-than-temporary impairment charges included $28.0 million on pooled trust preferred collateralized debt obligations and $2.5 million on bank equity securities. The decreased level of impairment charges on pooled trust preferred securities experienced in 2010 can be attributed to a decline in the level of interest deferrals and payment defaults by the underlying banks in these investments.

Service charges on deposit accounts increased $0.3 million, or 2%, due to increased business account analysis fees offset by a decline in overdraft fee income resulting from the implementation of Regulation E. Card-related interchange income includes income on debit, credit and ATM cards that are issued to consumers and/or businesses. Card related interchange income increased $1.4 million, or 23%, due to growth in usage of debit cards, increased demand deposit accounts and larger dollar transact