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, 2012

¨	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 ¨ Accelerated filer x 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 5, 2012, was 102,614,177.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX


		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		43

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		68

ITEM 4.	Controls and Procedures		68

PART II.	Other Information

ITEM 1.	Legal Proceedings		69

ITEM 1A.	Risk Factors		69

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		70

ITEM 3.	Defaults Upon Senior Securities		70

ITEM 4.	Mine Safety Disclosures		70

ITEM 5.	Other Information		70

ITEM 6.	Exhibits		71

	Signatures		72

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)


	September 30, 2012			December 31, 2011
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	85,183		$	74,967
Interest-bearing bank deposits		3,881			3,511
Securities available for sale, at fair value		1,130,822			1,142,776
Other investments		32,479			39,796
Loans held for sale		0			13,412
Loans:
Portfolio loans		4,214,299			4,043,643
Allowance for credit losses		(64,114	)		(61,234	)

Net loans		4,150,185			3,982,409

Premises and equipment, net		67,229			66,755
Other real estate owned		16,016			30,035
Goodwill		159,956			159,956
Amortizing intangibles, net		2,734			3,843
Other assets		315,153			323,662

Total assets	$	5,963,638		$	5,841,122

Liabilities
Deposits (all domestic):
Noninterest-bearing	$	858,003		$	780,377
Interest-bearing		3,636,431			3,724,307

Total deposits		4,494,434			4,504,684
Short-term borrowings		461,770			312,777

Subordinated debentures		105,750			105,750
Other long-term debt		74,721			101,664

Total long-term debt		180,471			207,414
Other liabilities		53,072			57,704

Total liabilities		5,189,747			5,082,579

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; 105,563,455 shares issued at September 30, 2012 and December 31, 2011 and 103,890,029 and 104,916,994 shares outstanding at September 30, 2012 and December 31, 2011, respectively		105,563			105,563
Additional paid-in capital		365,394			365,868
Retained earnings		312,049			294,056
Accumulated other comprehensive income, net		4,967			2,001
Treasury stock (1,673,426 and 646,461 shares at September 30, 2012 and December 31, 2011, respectively)		(13,982	)		(7,345	)
Unearned ESOP shares		(100	)		(1,600	)

Total shareholders’ equity		773,891			758,543

Total liabilities and shareholders’ equity	$	5,963,638		$	5,841,122

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For the Three-Months Ended September 30,						For the Nine-Months Ended September 30,
	2012			2011			2012			2011
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	46,339		$	49,109		$	140,787		$	149,371
Interest and dividends on investments:
Taxable interest		7,520			8,444			24,348			25,376
Interest exempt from federal income taxes		1			9			11			208
Dividends		18			11			58			40
Interest on bank deposits		2			27			4			63

Total interest income		53,880			57,600			165,208			175,058
Interest Expense
Interest on deposits		5,054			8,097			16,944			26,726
Interest on short-term borrowings		311			188			817			551

Interest on subordinated debentures		1,424			1,387			4,279			4,156
Interest on other long-term debt		441			448			1,430			1,391

Total interest on long-term debt		1,865			1,835			5,709			5,547

Total interest expense		7,230			10,120			23,470			32,824

Net Interest Income		46,650			47,480			141,738			142,234
Provision for credit losses		6,754			6,975			14,838			29,904

Net Interest Income after Provision for Credit Losses		39,896			40,505			126,900			112,330
Noninterest Income
Changes in fair value on impaired securities		1,374			(2,535	)		1,549			(218	)
Non-credit related (gains) losses on securities not expected to be sold (recognized in other comprehensive income)		(1,374	)		2,535			(1,549	)		218

Net impairment losses		0			0			0			0
Net securities gains		163			0			163			2,185
Trust income		1,631			1,603			4,780			5,085
Service charges on deposit accounts		3,736			3,836			10,975			11,010
Insurance and retail brokerage commissions		1,844			1,698			4,938			4,876
Income from bank owned life insurance		1,465			1,411			4,369			4,158
Gain on sale of assets		757			790			4,316			2,272
Card related interchange income		3,260			3,053			9,659			8,895
Joint venture termination fee		1,909			0			1,909			0
Other income		3,090			(1,592	)		10,222			3,710

Total noninterest income		17,855			10,799			51,331			42,191
Noninterest Expense
Salaries and employee benefits		21,280			20,418			65,401			63,092
Net occupancy expense		3,235			3,506			9,942			10,733
Furniture and equipment expense		3,118			3,092			9,326			9,407
Data processing expense		1,987			1,533			5,346			4,482
Pennsylvania shares tax expense		1,510			1,434			4,203			4,046
Intangible amortization		367			384			1,109			1,163
Collection and repossession expense		1,281			1,961			4,650			5,003
Other professional fees and services		1,028			1,706			3,167			3,930
FDIC insurance		1,258			1,177			3,757			4,260
Loss on sale or write-down of assets		426			159			4,215			4,674
Operational losses		3,657			186			4,033			408
Other operating expenses		5,618			5,565			18,216			17,052

Total noninterest expense		44,765			41,121			133,365			128,250

Income Before Income Taxes		12,986			10,183			44,866			26,271
Income tax provision		3,139			1,857			11,647			5,280

Net Income	$	9,847		$	8,326		$	33,219		$	20,991

Average Shares Outstanding		104,080,025			104,728,915			104,593,125			104,678,233
Average Shares Outstanding Assuming Dilution		104,098,383			104,728,915			104,595,396			104,678,436
Per Share Data:
Basic Earnings per Share	$	0.09		$	0.08		$	0.32		$	0.20
Diluted Earnings per Share	$	0.09		$	0.08		$	0.32		$	0.20
Cash Dividends Declared per Common Share	$	0.05		$	0.03		$	0.13		$	0.09

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For the Three-Months Ended September 30,						For the Nine-Months Ended September 30,
	2012			2011			2012			2011
	(dollars in thousands)
Net Income	$	9,847		$	8,326		$	33,219		$	20,991
Other comprehensive income, before tax expense:
Unrealized holding gains on securities arising during the period		2,068			4,696			3,165			12,205
Non-credit related gains (losses) on securities not expected to be sold		1,374			(2,535	)		1,549			(218	)
Less: reclassification adjustment for gains on securities included in net income		(163	)		0			(163	)		(2,185	)

Total other comprehensive income, before tax expense		3,279			2,161			4,551			9,802
Income tax expense related to items of other comprehensive income		1,146			757			1,585			3,431

Comprehensive Income	$	11,980		$	9,730		$	36,185		$	27,362

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

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


	Shares Outstanding			Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
	(dollars in thousands, except per share data)
Balance at December 31, 2011		104,916,994		$	105,563	$	365,868		$	294,056		$	2,001		$	(7,345	)	$	(1,600	)	$	758,543
Net income										33,219												33,219
Other comprehensive income													2,966									2,966
Cash dividends declared ($0.13 per share)										(13,633	)											(13,633	)
Net decrease in unearned ESOP shares																			1,500			1,500
ESOP market value adjustment ($685, net of $240 tax benefit)							(445	)														(445	)
Discount on dividend reinvestment plan purchases							(67	)														(67	)
Tax benefit of stock options exercised							1															1
Treasury stock acquired		(1,342,517	)													(9,112	)					(9,112	)
Treasury stock reissued		95,552					0			(329	)					946						617
Restricted stock		220,000					37			(1,264	)					1,529						302

Balance at September 30, 2012		103,890,029		$	105,563	$	365,394		$	312,049		$	4,967		$	(13,982	)	$	(100	)	$	773,891


	Shares Outstanding			Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
	(dollars in thousands, except per share data)
Balance at December 31, 2010		104,846,194		$	105,515	$	366,488		$	291,492		$	(2,458	)	$	(7,660	)	$	(3,600	)	$	749,777
Net income										20,991												20,991
Other comprehensive income													6,371									6,371
Cash dividends declared ($0.09 per share)										(9,418	)											(9,418	)
Net decrease in unearned ESOP shares																			1,500			1,500
ESOP market value adjustment ($762, net of $267 tax benefit)							(495	)														(495	)
Discount on dividend reinvestment plan purchases							(48	)														(48	)
Tax benefit of stock options exercised							6															6
Treasury stock acquired		(1,336	)													(9	)					(9	)
Treasury stock reissued		13,760								(83	)					155						72
Restricted stock		25,000			25		(2	)		0						78						101
Common stock issuance		23,376			23		121									0						144

Balance at September 30, 2011		104,906,994		$	105,563	$	366,070		$	302,982		$	3,913		$	(7,436	)	$	(2,100	)	$	768,992

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For the Nine-Months Ended September 30,
	2012			2011
	(dollars in thousands)
Operating Activities
Net income	$	33,219		$	20,991
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses		14,838			29,904
Deferred tax expense		2,507			1,387
Depreciation and amortization		5,736			7,058
Net (gains) losses on securities and other assets		(1,392	)		5,861
Net amortization of premiums and discounts on securities		1,075			794
Net accretion of premiums and discounts on long-term debt		(84	)		(96	)
Income from increase in cash surrender value of bank owned life insurance		(4,369	)		(4,158	)
Decrease in interest receivable		1,426			1,063
Decrease in interest payable		(2,087	)		(1,921	)
Increase (decrease) in income taxes payable		6,294			(718	)
Other-net		(2,567	)		(1,222	)

Net cash provided by operating activities		54,596			58,943
Investing Activities
Transactions with securities available for sale:
Proceeds from sales		0			75,074
Proceeds from maturities and redemptions		410,909			358,875
Purchases		(395,337	)		(489,963	)
Proceeds from the redemption of FHLB stock		7,317			6,969
Proceeds from bank owned life insurance		2,071			88
Proceeds from sale of loans		15,981			5,763
Proceeds from sales of other assets		15,301			7,037
Net (increase) decrease in loans		(185,018	)		184,440
Purchases of premises and equipment		(6,468	)		(6,542	)

Net cash (used in) provided by investing activities		(135,244	)		141,741
Financing Activities
Net decrease in federal funds purchased		(54,800	)		(800	)
Net increase (decrease) in other short-term borrowings		203,792			(13,281	)
Net decrease in deposits		(10,206	)		(132,912	)
Repayments of other long-term debt		(25,358	)		(24,444	)
Proceeds from issuance of common stock		0			144
Discount on dividend reinvestment plan purchases		(67	)		(48	)
Dividends paid		(13,633	)		(9,418	)
Proceeds from reissuance of treasury stock		617			72
Purchase of treasury stock		(9,112	)		(9	)
Stock option tax benefit		1			0

Net cash provided by (used in) financing activities		91,234			(180,696	)

Net increase in cash and cash equivalents		10,586			19,988
Cash and cash equivalents at January 1		78,478			69,858

Cash and cash equivalents at September 30	$	89,064		$	89,846

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or “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, 2012 are not necessarily indicative of the results that may be expected for the full year of 2012. These interim financial statements should be read in conjunction with First Commonwealth’s 2011 Annual Report on Form 10-K which is available on First Commonwealth’s website at http://www.fcbanking.com.

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

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income:


	For the Nine-Months Ended September 30,
	2012									2011
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	3,165		$	(1,100	)	$	2,065		$	12,205		$	(4,272	)	$	7,933
Non-credit related gains (losses) on securities not expected to be sold		1,549			(542	)		1,007			(218	)		76			(142	)
Reclassification adjustment for gains on securities included in net income		(163	)		57			(106	)		(2,185	)		765			(1,420	)

Total other comprehensive income	$	4,551		$	(1,585	)	$	2,966		$	9,802		$	(3,431	)	$	6,371


	For the Three-Months Ended September 30,
	2012									2011
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	2,068		$	(722	)	$	1,346		$	4,696		$	(1,644	)	$	3,052
Non-credit related gains (losses) on securities not expected to be sold		1,374			(481	)		893			(2,535	)		887			(1,648	)
Reclassification adjustment for gains on securities included in net income		(163	)		57			(106	)		0			0			0

Total other comprehensive income	$	3,279		$	(1,146	)	$	2,133		$	2,161		$	(757	)	$	1,404

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 3 Supplemental Cash Flow Disclosures

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


	2012		2011
	(dollars in thousands)
Cash paid during the period for:
Interest	$	25,685	$	34,904
Income taxes		8,900		4,400
Non-cash investing and financing activities:
ESOP loan reductions	$	1,500	$	1,500
Loans transferred to other real estate owned and repossessed assets		4,053		25,883
Other real estate owned sold and settled out of period		80		7,260
Loans transferred from held to maturity to available for sale		0		823
Gross increase in market value adjustment to securities available for sale		4,529		9,792

Note 4 Earnings per Share

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


	For the Three-Months Ended September 30,						For the Nine-Months Ended September 30,
	2012			2011			2012			2011
Weighted average common shares issued		105,563,455			105,563,455			105,563,455			105,545,880
Average treasury shares		(1,258,029	)		(656,461	)		(738,769	)		(658,944	)
Averaged unearned ESOP shares		(17,575	)		(148,871	)		(50,790	)		(181,633	)
Average unearned nonvested shares		(207,826	)		(29,208	)		(180,771	)		(27,070	)

Weighted average common shares and common stock equivalents used to calculate basic earnings per share		104,080,025			104,728,915			104,593,125			104,678,233
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share		16,874			0			2,224			0
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		1,484			0			47			203

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		104,098,383			104,728,915			104,595,396			104,678,436

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


	2012						2011
			Price Range						Price Range
	Shares		From		To		Shares		From		To
Stock Options		293,777	$	6.90	$	14.55		513,210	$	6.36	$	14.55
Restricted Stock		93,565		5.96		6.82		20,101		5.70		6.82

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 5 Variable Interest Entities

As defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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’s VIEs are evaluated under the guidance included in FASB Accounting Standards Update (“ASU”) 2009-17. These VIEs include qualified affordable housing projects that First Commonwealth has invested in as part of its community reinvestment initiatives. We periodically assess whether or not our variable interests in the VIE, based on qualitative analysis, provide us with a controlling interest in the VIE. The analysis includes an assessment of the characteristics of the VIE. We do not have a controlling financial interest in the VIE, which would require consolidation of the VIE, as we do not have the following characteristics: (1) the power to direct the activities that most significantly impact the VIE’s economic performance; and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

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


	September 30,		December 31,
	2012		2011
	(dollars in thousands)
Low Income Housing Limited Partnership Investments	$	465	$	667

Note 6 Commitments and Contingent Liabilities

Commitments and letters of credit

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

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


	September 30,		December 31,
	2012		2011
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,515,221	$	1,495,009
Financial standby letters of credit		48,864		53,689
Performance standby letters of credit		77,795		76,371
Commercial letters of credit		1,047		1,297

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 6 Commitments and Contingent Liabilities (Continued)

Commitments and letters of credit (Continued)

The current notional amounts outstanding as of September 30, 2012 include financial standby letters of credit of $0.3 million, performance standby letters of credit of $19.5 million, and commercial letters of credit $0.4 million issued during the first nine months of 2012. A liability of $0.2 million and $0.1 million has been recorded as of September 30, 2012 and December 31, 2011, respectively, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk in these commitments resulted in the recording of a liability of $2.1 million as of September 30, 2012 and $1.5 million as of December 31, 2011. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal proceedings

McGrogan v. First Commonwealth Bank is a class action that was filed on January 12, 2009, in the Court of Common Pleas of Allegheny County, Pennsylvania. The action alleges that First Commonwealth Bank (the “Bank”) promised class members a minimum interest rate of 8% on its IRA Market Rate Savings Account for as long as the class members kept their money on deposit in the IRA account. The class asserts that the Bank committed fraud, breached its modified contract with the class members, and violated the Pennsylvania Unfair Trade Practice and Consumer Protection Law when it resigned as custodian of the IRA Market Rate Savings Accounts in 2008 and offered the class members a roll-over IRA account with a 3.5% interest rate. At that time, there were 237 account holders with an average age of 64, and the aggregate balances in the IRA Market Rate Savings accounts totaled approximately $11.5 million. Plaintiffs seek monetary damages for the alleged breach of contract, punitive damages for the alleged fraud and Unfair Trade Practice and Consumer Protection Law violations and attorney’s fees. On July 27, 2011, the court granted class certification as to the breach of modified contract claim and denied class certification as to the fraud and Pennsylvania Unfair Trade Practice and Consumer Protection Law claims. The breach of contract claim is predicated upon a letter sent to customers in 1998 which reversed an earlier decision by the Bank to reduce the rate paid on the accounts. The letter stated, in relevant part, “This letter will serve as notification that a decision has been made to re-establish the rate on your account to eight percent (8%). This rate will be retroactive to your most recent maturity date and will continue going forward on deposits presently in the account and on annual additions.” On August 30, 2012, the Court entered an order granting the Bank’s motion for summary judgment and dismissing the class action claims. The Court found that the Bank retained the right to resign as custodian of the accounts and that the act of resigning as custodian and closing the accounts did not breach the terms of the underlying IRA contract. The Plaintiffs have filed an appeal with the Pennsylvania Superior Court.

Other matters

There are no other material legal proceedings to which First Commonwealth or its subsidiaries are a party, or of which their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of First Commonwealth or its subsidiaries.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 7 Investment Securities

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


	September 30, 2012									December 31, 2011
	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	$	29,214	$	4,141	$	0		$	33,355	$	32,139	$	4,061	$	(6	)	$	36,194
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential		786,945		31,333		0			818,278		771,196		29,835		0			801,031
Mortgage-Backed Securities – Commercial		164		2		0			166		193		1		(1	)		193
Other Government-Sponsored Enterprises		241,996		887		(2	)		242,881		267,807		973		(132	)		268,648
Obligations of States and Political Subdivisions		82		5		0			87		444		15		0			459
Corporate Securities		10,771		373		0			11,144		11,811		162		(562	)		11,411
Pooled Trust Preferred Collateralized Debt Obligations		52,696		2		(29,647	)		23,051		54,762		3		(31,785	)		22,980

Total Debt Securities		1,121,868		36,743		(29,649	)		1,128,962		1,138,352		35,050		(32,486	)		1,140,916
Equities		1,860		0		0			1,860		1,860		0		0			1,860

Total Securities Available for Sale	$	1,123,728	$	36,743	$	(29,649	)	$	1,130,822	$	1,140,212	$	35,050	$	(32,486	)	$	1,142,776

The amortized cost and estimated fair value of debt securities available for sale at September 30, 2012, 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 1 year	$	7,001	$	7,007
Due after 1 but within 5 years		235,077		235,961
Due after 5 but within 10 years		0		0
Due after 10 years		63,467		34,195

		305,545		277,163
Mortgage-Backed Securities (a)		816,323		851,799

Total Debt Securities	$	1,121,868	$	1,128,962

(a)

Mortgage Backed Securities include an amortized cost of $29.2 million and a fair value of $33.4 million for Obligations of U.S. Government agencies issued by Ginnie Mae and Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac which had an amortized cost of $787.1 million and a fair value of $818.4 million.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 7 Investment Securities (Continued)

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


	2012		2011
	(dollars in thousands)
Proceeds from sale	$	0	$	75,074

Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	0	$	2,368
Gross losses		0		(258	)

		0		2,110
Maturities and impairment
Gross gains		163		75
Gross losses		0		0
Other-than-temporary impairment		0		0

		163		75

Net gains and impairment	$	163	$	2,185

Securities available for sale with a fair value of $599.6 million and $668.8 million were pledged as of September 30, 2012 and December 31, 2011, respectively, to secure public deposits and for other purposes required or permitted by law.

Note 8 Other Investments

As a member of the Federal Home Loan Bank (“FHLB”), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. 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, 2012 and December 31, 2011, our FHLB stock totaled $32.5 million and $39.8 million, respectively and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

During 2012 and 2011, the FHLB repurchased 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, during the nine-months ended September 30, 2012 and 2011, stock repurchases occurred in the amounts of $7.3 million and $7.0 million, respectively. The FHLB repurchased stock and paid dividends in each quarter of 2012, however, decisions regarding any future repurchase of excess capital stock and dividend payments will be made by the FHLB on a quarterly basis. Management reviewed the FHLB’s Form 10-Q for the period ended June 30, 2012 filed with the SEC on August 8, 2012.

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 (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 8 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 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 will be recovered. Accordingly, no impairment charge was recorded on these securities for the nine-months ended September 30, 2012. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 9 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 OCI. During the nine-months ended September 30, 2012 and 2011, no other-than-temporary impairment charges were recognized. For the nine-months ended September 30, 2012, $1.5 million in non-credit related gains on our trust preferred collateralized debt obligations that were determined to be impaired in previous periods was recorded in OCI. For the same period in 2011, $0.2 million in non-credit related losses for the same pool of securities was recorded in OCI. All of the securities for which other-than-temporary impairment was recorded were classified as available for sale securities.

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 Statements of Income, the “Changes 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 Condensed Consolidated Statements of Income 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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

than not to sell debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note 12, “Fair Values of Assets and Liabilities,” for additional information.

The following table presents the gross unrealized losses and estimated fair values at September 30, 2012 by investment category and time frame for which securities have been in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	0	$	0		$	14	$	0	(a)	$	14	$	0
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential		26		0	(a)		0		0			26		0
Other Government-Sponsored Enterprises		2,398		(2	)		0		0			2,398		(2	)
Pooled Trust Preferred Collateralized Debt Obligations		0		0			22,996		(29,647	)		22,996		(29,647	)

Total Debt Securities		2,424		(2	)		23,010		(29,647	)		25,434		(29,649	)
Equities		0		0			0		0			0		0

Total Securities Available for Sale	$	2,424	$	(2	)	$	23,010	$	(29,647	)	$	25,434	$	(29,649	)

(a)	Gross unrealized losses related to these types of securities are less than $1 thousand.

At September 30, 2012, pooled trust preferred collateralized debt obligations accounted for almost all of the unrealized losses, while fixed income securities issued by U.S. Government-sponsored enterprises comprised less than one percent of total unrealized losses. There were no equity securities in an unrealized loss position at September 30, 2012.

As of September 30, 2012, our corporate securities had an amortized cost and an estimated fair value of $10.8 million and $11.1 million, respectively, and were comprised of single issue trust preferred securities issued primarily by money center and large regional banks. As of December 31, 2011, the same portion of the portfolio had an amortized cost of $11.8 million and an estimated fair value of $11.4 million. There were no corporate securities in an unrealized loss position as of September 30, 2012, while as of December 31, 2011, there were $0.6 million in unrealized losses related to these investments. When unrealized losses exist, management reviews each of the issuer’s asset quality, earnings trend and capital position, to determine whether issues in an unrealized

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

The following table presents the gross unrealized losses and estimated fair values at December 31, 2011 by investment category and time frame for which securities have been in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	1,086	$	(6	)	$	16	$	0	(a)	$	1,102	$	(6	)
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential		25		0	(a)		0		0			25		0
Mortgage-Backed Securities – Commercial		151		(1	)		0		0			151		(1	)
Other Government-Sponsored Enterprises		55,969		(132	)		0		0			55,969		(132	)
Corporate Securities		4,536		(562	)		0		0			4,536		(562	)
Pooled Trust Preferred Collateralized Debt Obligations		0		0			22,927		(31,785	)		22,927		(31,785	)

Total Securities Available for Sale	$	61,767	$	(701	)	$	22,943	$	(31,785	)	$	84,710	$	(32,486	)

(a)	Gross unrealized losses related to these types of securities are less than $1 thousand.

As of September 30, 2012, the book value of our pooled trust preferred collateralized debt obligations totaled $52.7 million with an estimated fair value of $23.1 million, which includes securities comprised of 339 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainders are mezzanine tranches, three of which have no senior class remaining in the issue. Two of the pooled issues, representing $2.9 million of the $52.7 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, 2012, after taking into account management’s best estimates of future interest deferrals and defaults, six of our securities had no excess subordination in the tranches we own and seven of our securities had excess subordination which ranged from 10% to 566% of the current performing collateral.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

The following table provides information related to our pooled trust preferred collateralized debt obligations as of September 30, 2012:


Deal	Class	Book Value		Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks		Deferrals and Defaults as a % of Current Collateral			Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL I	Senior	$	1,009	$	993	$	(16	)	Aa3/A		17		38.98	%		213.61	%
Pre TSL IV	Mezzanine		1,830		645		(1,185	)	Caa2/CCC		6		27.07			95.96
Pre TSL V	Mezzanine		53		55		2		C/–		3		100.00			0.00
Pre TSL VII	Mezzanine		4,114		3,419		(695	)	Ca/C		17		45.50			0.00
Pre TSL VIII	Mezzanine		1,794		1,016		(778	)	C/C		34		48.43			0.00
Pre TSL IX	Mezzanine		2,259		811		(1,448	)	Ca/C		47		25.88			9.64
Pre TSL X	Mezzanine		1,447		1,118		(329	)	Ca/C		51		38.24			0.00
Pre TSL XII	Mezzanine		5,516		2,696		(2,820	)	Ca/C		73		34.04			0.00
Pre TSL XIII	Mezzanine		12,418		4,714		(7,704	)	Ca/C		63		37.50			13.84
Pre TSL XIV	Mezzanine		13,069		4,570		(8,499	)	Ca/C		61		40.08			32.10
MMCap I	Senior		1,898		1,841		(57	)	A3/A		17		48.60			565.56
MMCap I	Mezzanine		849		455		(394	)	Ca/C		17		48.60			14.50
MM Comm IX	Mezzanine		6,440		718		(5,722	)	Ca/CC		30		39.29			0.00

Total		$	52,696	$	23,051	$	(29,645	)

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. During the nine-months ended September 30, 2012 and 2011, there were no credit related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments we determine a credit related portion and a non-credit related portion of other-than-temporary impairment. The credit related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit related impairment. A discounted cash flow analysis provides the best estimate of credit related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at September 30, 2012. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

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

•

Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. For collateral issued by financial institutions with over $15 billion in asset size, we consider the alternative cost of funding and if that rate is less than the current rate being paid, we incorporate a prepayment in our estimate of future cash flows. The prepayment rates used are 20% in years 2 and 3 and a 2% prepayment rate thereafter. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 339 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

•

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of September 30, 2012, 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 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.

Our cash flow analysis as of September 30, 2012, indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the nine-months ended September 30, 2012. Based upon the analysis performed by management, it is probable that six of our pooled trust preferred

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the table on page 17 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of September 30, 2012 indicates it is probable that we will collect all contractual principal and interest payments.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL I, PreTSL IV and MMCap I-Senior. Our cash flow analysis as of September 30, 2012, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in our current book value being below the present value of estimated future principal and interest payments. The excess for each bond of the present value of future cash flows over our current book value ranges from 14% to 144% and will be recognized as an adjustment to yield over the remaining life of these securities. During the three- and nine-months ended September 30, 2012, $0.4 million and $0.9 million, respectively, of the excess was recognized as an adjustment to yield on these securities.

The following 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,
	2012			2011		2012			2011
	(dollars in thousands)
Balance, beginning (a)	$	44,230		$	44,850	$	44,736		$	44,850
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized		0			0		0			0
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized		0			0		0			0
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)		(436	)		0		(942	)		0

Balance, ending	$	43,794		$	44,850	$	43,794		$	44,850

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

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

In the third quarter of 2012 and 2011, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of September 30, 2012 and 2011, there are no equity securities in an unrealized loss position.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses

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


	September 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,087,019	$	996,739
Real estate construction		95,425		76,564
Residential real estate		1,228,328		1,137,059
Commercial real estate		1,217,249		1,267,432
Loans to individuals		586,278		565,849

Total loans and leases net of unearned income		4,214,299	$	4,043,643

During the nine-months ended September 30, 2012, all loan categories, except commercial real estate, increased with total loans increasing $170.7 million or 4% compared to balances outstanding at December 31, 2011. A majority of the loan growth was recognized in the residential real estate portfolio as a result of seasonal demand and an ongoing loan promotion. Increases in commercial, financial, agricultural and other portfolio can be attributed to growth in direct middle market lending and syndications in Pennsylvania and contiguous states, while loans to individuals increased due to growth in home equity installment loans and indirect auto lending.

Credit Quality Information

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


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

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

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

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

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movements between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Credit Quality Information (Continued)

results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas, loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

The following tables represent our credit risk profile by creditworthiness:


	September 30, 2012
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	987,376	$	71,995	$	1,212,272	$	1,087,424	$	586,191	$	3,945,258
Non-Pass
OAEM		27,334		939		5,568		63,563		3		97,407
Substandard		72,309		18,205		10,488		66,262		84		167,348
Doubtful		0		4,286		0		0		0		4,286

Total Non-Pass		99,643		23,430		16,056		129,825		87		269,041

Total	$	1,087,019	$	95,425	$	1,228,328	$	1,217,249	$	586,278	$	4,214,299


	December 31, 2011
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	904,057	$	44,914	$	1,126,143	$	1,110,664	$	565,842	$	3,751,620
Non-Pass
OAEM		27,627		4,238		5,484		61,855		7		99,211
Substandard		60,114		21,701		5,432		94,913		0		182,160
Doubtful		4,941		5,711		0		0		0		10,652

Total Non-Pass		92,682		31,650		10,916		156,768		7		292,023

Total	$	996,739	$	76,564	$	1,137,059	$	1,267,432	$	565,849	$	4,043,643

Portfolio Risks

Credit quality measures at September 30, 2012 compared to December 31, 2011 indicate a decrease in criticized loans, or loans designated OAEM, substandard or doubtful, of $23.0 million, or 8%, a decrease in delinquency 30 days and over on accruing loans of $10.2 million, or 29%, and an $8.3 million increase in nonaccrual loans, excluding loans held-for-sale.

Charge-offs for the nine-months ended September 30, 2012 totaled $13.4 million compared to $30.1 million for the nine-months ended September 30, 2011. The most significant charge-offs during the nine-months ended September 30, 2012 were a $1.4 million charge taken on a Florida real estate construction loan with a remaining balance of $4.3 million and a $1.2 million charge taken on a $2.0 million commercial loan relationship. During the nine-months ended September 30, 2011, the most significant charge-off totaled $5.2 million and related to a central Pennsylvania development loan relationship. Other significant charge-offs during the nine-month period

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Portfolio Risks (Continued)

in 2011 totaled $10.8 million and related to six construction loan projects located in Florida, Nevada, Ohio and western and central Pennsylvania.

Criticized loans totaled $269.0 million at September 30, 2012 and represented 6% of the loan portfolio. This represents a $23.0 million decrease compared with the portfolio as of December 31, 2011. These loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate at this time. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

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

Risk factors associated with commercial real estate and construction related loans are monitored closely since this is an area that represents a significant portion of the loan portfolio and has experienced the most stress during the economic downturn.

In addition, during the first nine months of 2012, nine relationships consisting of fifteen loans, were classified as troubled debt restructuring. These loans increased the nonperforming loan balance by $10.3 million with a $3.2 million increase in specific reserves.

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of September 30, 2012 and December 31, 2011. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.


	September 30, 2012
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,440	$	679	$	221	$	28,827	$	31,167	$	1,055,852	$	1,087,019
Real estate construction		235		0		152		11,569		11,956		83,469		95,425
Residential real estate		7,642		1,986		1,277		8,910		19,815		1,208,513		1,228,328
Commercial real estate		6,651		169		162		37,340		44,322		1,172,927		1,217,249
Loans to individuals		2,684		820		1,186		84		4,774		581,504		586,278

Total	$	18,652	$	3,654	$	2,998	$	86,730	$	112,034	$	4,102,265	$	4,214,299

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Age Analysis of Past Due Loans by Segment (Continued)


	December 31, 2011
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	5,433	$	824	$	287	$	33,459	$	40,003	$	956,736	$	996,739
Real estate construction		0		180		0		14,911		15,091		61,473		76,564
Residential real estate		7,144		2,100		8,767		3,153		21,164		1,115,895		1,137,059
Commercial real estate		3,671		1,241		157		26,953		32,022		1,235,410		1,267,432
Loans to individuals		2,952		962		1,804		0		5,718		560,131		565,849

Total	$	19,200	$	5,307	$	11,015	$	78,476	$	113,998	$	3,929,645	$	4,043,643

The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed in nonaccrual status at 150 days past due. In periods prior to the third quarter of 2012, if a consumer loan was well secured and in the process of collection, it remained on accrual status, as delinquency was not a factor in moving it to nonaccrual status.

Nonaccrual Loans

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

Impaired Loans

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

Nonperforming loans, excluding loans held for sale, decreased $4.9 million to $93.9 million at September 30, 2012 compared to $98.8 million at December 31, 2011. Contributing to this decrease was an $11.3 million loan to a waste management company which was paid off in the first quarter and a $10.3 million loan to an information technology firm which was returned to accrual status in the second quarter. The most significant loans placed into nonperforming status during the first nine months of 2012 included $6.7 million to a western Pennsylvania in-patient facility, $4.9 million for a commercial real estate loan to a nonprofit institution, $2.5 million to a manufacturer of medical equipment and $2.8 million to a western Pennsylvania construction firm. During the third quarter of 2012, a $0.9 million payment was received on the aforementioned $4.9 million loan to a nonprofit, providing for a current balance on this loan of $3.9 million. Also impacting the balance of nonperforming loans for the period was the movement to nonaccrual status of $4.8 million in consumer loans which were 150 days or more past due. Beginning in the third quarter of 2012, consumer loans are moved to nonaccrual status once they reach 150 days past due, however, in prior periods, these loans were not placed in nonaccrual status if they were well secured and in the process of collection. The majority of the consumer loans moved to nonaccrual status in the third quarter, or $4.7 million of the $4.8 million, were residential real estate loans.

The specific allowance for nonperforming loans decreased by $0.3 million at September 30, 2012 compared to December 31, 2011, primarily due to the decrease in balances. Unfunded commitments related to nonperforming loans were $5.1 million at September 30, 2012 and after consideration of available collateral related to these commitments, an off balance sheet reserve of $44 thousand was established.

Loans held for sale totaled $13.4 million at December 31, 2011 and the entire balance represented nonperforming loans. As of September 30, 2012, the sale of all of these loans had been completed and provided for a $2.9 million gain. While these loans were considered to be nonperforming, they were not taken into consideration when determining the allowance for credit losses as they were carried at the lower of cost or fair value.

Significant nonaccrual loans as of September 30, 2012, include the following;

•

$19.3 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in the second quarter of 2004 and was placed in nonaccrual status in the fourth quarter of 2009. A settlement plan with the borrower and three other lenders was reached in the fourth quarter of 2010 and resulted in an $8.0 million principal payment and a $15.4 million partial charge-off.

•

$16.0 million commercial real estate loan for a real estate developer in eastern Pennsylvania. This loan was originated in the third quarter of 2007 and restructured in the fourth quarter of 2011which resulted in a charge-off of $4.2 million. The most recent appraisal for the real estate collateral was completed in the third quarter of 2011.

•

$6.7 million commercial real estate loan to an in-patient facility in western Pennsylvania. This loan was originated in the fourth quarter of 2008 and placed in nonaccrual status in September 2012. Because this loan was not previously classified, the most recent appraisal for the real estate collateral was at loan origination. Therefore, the collateral valuation and resulting shortfall on this loan were determined using a real estate common level ratio.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

•

$4.3 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. This loan was originated in the second quarter of 2007. Charge-offs of $16.5 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the second quarter of 2012.

•

$3.9 million real estate secured loan to a western Pennsylvania nonprofit corporation. This loan was originated in the fourth quarter of 2008 and placed in nonaccrual status in the second quarter of 2012. The most recent appraisals for the various real estate collateral were completed in the fourth quarter of 2011 and the first quarter of 2012.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of September 30, 2012 and December 31, 2011. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated based on month-end balances of the loans of the period reported.


	September 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
With no related .allowance recorded:
Commercial, financial, agricultural and other	$	6,762	$	7,716	$	0	$	2,010	$	3,418	$	0
Real estate construction		4,087		7,424		0		10,814		20,161		0
Residential real estate		7,087		7,556		0		3,125		3,513		0
Commercial real estate		29,394		31,055		0		36,777		41,974		0
Loans to individuals		84		84		0		0		0		0

Subtotal		47,414		53,835		0		52,726		69,066		0
With an allowance recorded:
Commercial, financial, agricultural and other		26,719		27,558		7,306		34,056		34,341		9,069
Real estate construction		7,482		30,312		973		6,298		21,402		2,960
Residential real estate		2,752		2,752		719		955		955		93
Commercial real estate		9,539		9,752		3,916		4,717		4,863		1,114
Loans to individuals		0		0		0		0		0		0

Subtotal		46,492		70,374		12,914		46,026		61,561		13,236

Total	$	93,906	$	124,209	$	12,914	$	98,752	$	130,627	$	13,236

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)


	For the Nine-Months Ended September 30,
	2012				2011
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	9,281	$	116	$	3,695	$	11
Real estate construction		6,641		0		21,611		1
Residential real estate		7,604		17		2,519		4
Commercial real estate		27,869		50		27,322		246
Loans to individuals		9		0		13		0

Subtotal		51,404		183		55,160		262
With an allowance recorded:
Commercial, financial, agricultural and other		21,025		5		29,614		126
Real estate construction		7,381		0		19,858		0
Residential real estate		1,532		20		422		1
Commercial real estate		2,713		11		35,595		301
Loans to individuals		0		0		0		0

Subtotal		32,651		36		85,489		428

Total	$	84,055	$	219	$	140,649	$	690


	For the Three-Months Ended September 30,
	2012				2011
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	6,664	$	94	$	1,989	$	6
Real estate construction		4,954		0		16,465		(1	)
Residential real estate		4,374		6		3,131		3
Commercial real estate		29,878		14		19,676		228
Loans to individuals		28		0		7		0

Subtotal		45,898		114		41,268		236
With an allowance recorded:
Commercial, financial, agricultural and other		25,469		2		37,552		50
Real estate construction		8,848		0		20,237		(2	)
Residential real estate		2,130		6		669		1
Commercial real estate		4,754		11		51,677		124
Loans to individuals		0		0		0		0

Subtotal		41,201		19		110,135		173

Total	$	87,099	$	133	$	151,403	$	409

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

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

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


	September 30, 2012		December 31, 2011
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	7,176	$	20,276
Nonaccrual status		46,026		44,841

Total	$	53,202	$	65,117

Commitments
Letters of credit	$	0	$	12,580
Unused lines of credit		1,342		42

Total	$	1,342	$	12,622

At September 30, 2012, troubled debt restructured loans on accruing status decreased $13.1 million compared to December 31, 2011 and commitments related to troubled debt restructured loans decreased $11.3 million for the same period. These decreases are primarily a result of the payoff of an $11.3 million loan to a waste management company in Pennsylvania as a result of the sale of the business. In addition, a $2.2 million loan to a retail development company in western Pennsylvania paid off during the first quarter. During 2012 and 2011 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

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


	For the Nine-Months Ended September 30, 2012
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		10	$	1,599	$	187	$	7,538	$	9,324	$	8,885	$	3,140
Real estate construction		1		823		0		0		823		791		0
Residential real estate		3		0		97		83		180		131		0
Commercial real estate		1		0		516		0		516		529		98

Total		15	$	2,422	$	800	$	7,621	$	10,843	$	10,336	$	3,238

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)


	For the Nine-Months Ended September 30, 2011
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		10	$	100	$	105	$	2,218	$	2,423	$	2,402	$	606
Real estate construction		4		354		0		0		354		506		0
Residential real estate		5		0		100		179		279		274		7
Commercial real estate		18		17,202		199		1,978		19,379		19,237		1,551

Total		37	$	17,656	$	404	$	4,375	$	22,435	$	22,419	$	2,164

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the nine-months ended September 30, 2012 and 2011, $0.8 million and $0.3 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

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


	For the Three-Months Ended September 30, 2012
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		6	$	1,153	$	169	$	1,509	$	2,831	$	3,004	$	746
Real estate construction		0		0		0		0		0		0		0
Residential real estate		0		0		0		0		0		0		0
Commercial real estate		1		0		516		0		516		529		98

Total		7	$	1,153	$	685	$	1,509	$	3,347	$	3,533	$	844

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)


	For the Three-Months Ended September 30, 2011
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		1	$	0	$	0	$	50	$	50	$	46	$	0
Real estate construction		0		0		0		0		0		0		0
Residential real estate		2		0		73		104		177		175		7
Commercial real estate		3		39		0		481		520		517		0

Total		6	$	39	$	73	$	635	$	747	$	738	$	7

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the three-months ended September 30, 2012, $0.7 million of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization. There were no loans for the three-months ended September 30, 2011 with modifications to rate as well as payment.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. There were no loans restructured over the previous twelve months considered to default during the three-months ended September 30, 2012 and 2011. The following provides information related to restructured loans that were considered to default during the nine-months ended September 30:


	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(dollars in thousands)
Real estate construction		0	$	0		1	$	88

Total		0	$	0		1	$	88

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

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


	For the Nine-Months Ended September 30, 2012
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	18,200		$	6,756		$	8,237		$	18,961		$	4,244		$	4,836	$	61,234
Charge-offs		(4,939	)		(2,356	)		(2,984	)		(638	)		(2,494	)		0		(13,411	)
Recoveries		349			121			331			256			396			0		1,453
Provision		4,470			4,341			1,120			1,855			2,074			978		14,838

Ending Balance	$	18,080		$	8,862		$	6,704		$	20,434		$	4,220		$	5,814	$	64,114

Ending balance: individually evaluated for impaired	$	7,306		$	973		$	719		$	3,916		$	0		$	0	$	12,914
Ending balance: collectively evaluated for impaired		10,774			7,889			5,985			16,518			4,220			5,814		51,200
Loans:
Ending balance		1,087,019			95,425			1,228,328			1,217,249			586,278					4,214,299
Ending balance: individually evaluated for impaired		32,833			11,427			7,224			37,369			0					88,853
Ending balance: collectively evaluated for impaired		1,054,186			83,998			1,221,104			1,179,880			586,278					4,125,446


	For the Nine-Months Ended September 30, 2011
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	21,700		$	18,002		$	5,454		$	16,913		$	4,215		$	4,945		$	71,229
Charge-offs		(3,642	)		(14,570	)		(2,686	)		(6,918	)		(2,332	)		0			(30,148	)
Recoveries		335			0			118			239			440			0			1,132
Provision		196			11,984			3,770			12,443			1,708			(197	)		29,904

Ending Balance	$	18,589		$	15,416		$	6,656		$	22,677		$	4,031		$	4,748		$	72,117

Ending balance: individually evaluated for impaired	$	10,503		$	12,551		$	171		$	11,674		$	0		$	0		$	34,899
Ending balance: collectively evaluated for impaired		8,086			2,865			6,485			11,003			4,031			4,748			37,218
Loans:
Ending balance		950,547			97,354			1,096,339			1,284,720			544,763						3,973,723
Ending balance: individually evaluated for impaired		37,738			35,957			2,290			81,375			0						157,360
Ending balance: collectively evaluated for impaired		912,809			61,397			1,094,049			1,203,345			544,763						3,816,363

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)


	For the Three-Months Ended September 30, 2012
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	19,302		$	8,001		$	6,619		$	17,638		$	4,209		$	5,907		$	61,676
Charge-offs		(1,271	)		(2,016	)		(530	)		(97	)		(756	)		0			(4,670	)
Recoveries		74			29			49			70			132			0			354
Provision		(25	)		2,848			566			2,823			635			(93	)		6,754

Ending Balance	$	18,080		$	8,862		$	6,704		$	20,434		$	4,220		$	5,814		$	64,114


	For the Three-Months Ended September 30, 2011
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	23,175		$	17,701		$	6,870		$	18,780		$	3,870		$	4,770		$	75,166
Charge-offs		(685	)		(6,522	)		(986	)		(1,343	)		(810	)		0			(10,346	)
Recoveries		74			0			22			75			151			0			322
Provision		(3,975	)		4,237			750			5,165			820			(22	)		6,975

Ending Balance	$	18,589		$	15,416		$	6,656		$	22,677		$	4,031		$	4,748		$	72,117

Note 11 Income Taxes

At September 30, 2012 and December 31, 2011, 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 2009 through 2011 were open for examination as of September 30, 2012.

Note 12 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 (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 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 securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, certain corporate securities, FHLB stock, interest rate derivatives that include interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.

Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.

Management validates the market values provided by the third party service by having another recognized pricing service price a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.

Other investments are comprised of FHLB stock whose fair value is based on its par value. Additional information on FHLB stock is provided in Note 8, “Other Investments.”

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities and consist of interest rate swaps where there is no significant deterioration in the counterparties (loan customers) credit risk since origination of the interest rate swap. 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 13, “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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.

We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2012, we have not realized any losses due to a counterparty’s inability to pay any net uncollateralized position.

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

•

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

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities since 2009; therefore it was more appropriate to determine 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 9, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

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

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

Loans held for sale are carried at the lower of cost or fair value with the fair value being the expected sales price of the loan. The estimated fair value of the loans held for sale was determined by calculating the discounted expected future cash flows of the loan. The discount rate applied to the future cash flows was determined based on a risk based expected return and capital structure of potential buyers. If a sales agreement has been executed, the fair value is equal to the sales price.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

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

In 2012, we have not realized any losses due to a counterparty’s inability to pay any net uncollateralized position. However, as the result of deterioration in the counterparties (loan customers) credit quality for certain interest rate derivatives, future amounts previously believed to be collectible under the terms of the interest rate derivative have now been deemed to be uncollectible.

In accordance with ASU 2011-04, the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.


		Fair

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents