Edgar Filing: FIRST COMMONWEALTH FINANCIAL CORP /PA/

FCF-2013.3.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2013



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



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

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

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

Large accelerated filer ¨ 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 May 6, 2013, was 97,898,950.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

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

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	50

ITEM 4.	Controls and Procedures	50

PART II.	Other Information

ITEM 1.	Legal Proceedings	51

ITEM 1A.	Risk Factors	51

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

ITEM 3.	Defaults Upon Senior Securities	52

ITEM 4.	Mine Safety Disclosures	52

ITEM 5.	Other Information	52

ITEM 6.	Exhibits	53

	Signatures	54

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)



	March 31, 2013			December 31, 2012
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	53,991		$	98,724
Interest-bearing bank deposits	1,780			4,258
Securities available for sale, at fair value	1,297,203			1,171,303
Other investments	28,357			28,228
Loans:
Portfolio loans	4,218,810			4,204,704
Allowance for credit losses	(62,262		)	(67,187		)
Net loans	4,156,548			4,137,517
Premises and equipment, net	69,009			68,970
Other real estate owned	10,933			11,262
Goodwill	159,956			159,956
Amortizing intangibles, net	2,017			2,375
Bank owned life insurance	172,175			170,925
Other assets	147,070			141,872
Total assets	$	6,099,039		$	5,995,390
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	883,307		$	883,269
Interest-bearing	3,828,271			3,674,612
Total deposits	4,711,578			4,557,881
Short-term borrowings	308,100			356,227
Subordinated debentures	105,750			105,750
Other long-term debt	174,318			174,471
Total long-term debt	280,068			280,221
Other liabilities	51,565			55,054
Total liabilities	5,351,311			5,249,383
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at March 31, 2013 and December 31, 2012 and 99,298,120 and 99,629,494 shares outstanding at March 31, 2013 and December 31, 2012, respectively	105,563			105,563
Additional paid-in capital	365,354			365,354
Retained earnings	321,185			315,608
Accumulated other comprehensive (loss) income, net	(312		)	1,259
Treasury stock (6,265,335 and 5,933,961 shares at March 31, 2013 and December 31, 2012, respectively)	(44,062		)	(41,777		)
Total shareholders’ equity	747,728			746,007
Total liabilities and shareholders’ equity	$	6,099,039		$	5,995,390

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

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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
	March 31,
	2013			2012
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	44,614		$	48,040
Interest and dividends on investments:
Taxable interest	7,109			8,549
Interest exempt from federal income taxes	1			5
Dividends	36			21
Interest on bank deposits	1			1
Total interest income	51,761			56,616
Interest Expense
Interest on deposits	4,191			6,247
Interest on short-term borrowings	220			227
Interest on subordinated debentures	1,384			1,433
Interest on other long-term debt	548			539
Total interest on long-term debt	1,932			1,972
Total interest expense	6,343			8,446
Net Interest Income	45,418			48,170
Provision for credit losses	4,497			3,787
Net Interest Income after Provision for Credit Losses	40,921			44,383
Noninterest Income
Changes in fair value on impaired securities	1,864			1,498
Non-credit related gains on securities not expected to be sold (recognized in other comprehensive income)	(1,864		)	(1,498		)
Net impairment losses	—			—
Net securities gains	4			—
Trust income	1,663			1,542
Service charges on deposit accounts	3,401			3,502
Insurance and retail brokerage commissions	1,417			1,424
Income from bank owned life insurance	1,428			1,445
Gain on sale of assets	275			2,115
Card related interchange income	3,188			3,114
Derivatives mark to market	989			606
Other income	2,520			3,632
Total noninterest income	14,885			17,380
Noninterest Expense
Salaries and employee benefits	21,793			21,758
Net occupancy expense	3,635			3,404
Furniture and equipment expense	3,272			3,184
Data processing expense	1,516			1,563
Pennsylvania shares tax expense	1,190			1,183
Intangible amortization	358			371
Collection and repossession expense	1,151			2,699
Other professional fees and services	969			1,199
FDIC insurance	1,050			1,237
Other operating expenses	6,520			10,154
Total noninterest expense	41,454			46,752
Income Before Income Taxes	14,352			15,011
Income tax provision	3,799			3,960
Net Income	$	10,553		$	11,051
Average Shares Outstanding	99,288,738			104,810,727
Average Shares Outstanding Assuming Dilution	99,305,414			104,816,442
Per Share Data:
Basic Earnings per Share	$	0.11		$	0.11
Diluted Earnings per Share	$	0.11		$	0.11
Cash Dividends Declared per Common Share	$	0.05		$	0.03

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

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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
	March 31,
	2013			2012
	(dollars in thousands)
Net Income	$	10,553		$	11,051
Other comprehensive (loss) income, before tax expense:
Unrealized holding (losses) gains on securities arising during the period	(4,275		)	99
Non-credit related gains on securities not expected to be sold	1,864			1,498
Less: reclassification adjustment for gains on securities included in net income	(4		)	—
Total other comprehensive (loss) income, before tax expense	(2,415		)	1,597
Income tax benefit (expense) related to items of other comprehensive income	844			(558		)
Total other comprehensive (loss) income	$	(1,571	)	$	1,039
Comprehensive Income	$	8,982		$	12,090

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

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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, 2012	99,629,494		$	105,563	$	365,354		$	315,608		$	1,259		$	(41,777	)	$	—	$	746,007
Net income								10,553											10,553
Other comprehensive loss											(1,571		)						(1,571		)
Cash dividends declared ($0.05 per share)								(4,976		)									(4,976		)
Discount on dividend reinvestment plan purchases					(25		)												(25		)
Treasury stock acquired	(331,374	)												(2,381		)			(2,381		)
Restricted stock	—		—		25			—						96					121
Balance at March 31, 2013	99,298,120		$	105,563	$	365,354		$	321,185		$	(312	)	$	(44,062	)	$	—	$	747,728



	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							11,051											11,051
Other comprehensive income										1,039								1,039
Cash dividends declared ($0.03 per share)							(3,147		)									(3,147		)
Net decrease in unearned ESOP shares															500			500
ESOP market value adjustment ($242, net of $85 tax benefit)				(157		)												(157		)
Discount on dividend reinvestment plan purchases				(16		)												(16		)
Tax benefit of stock options exercised				1														1
Treasury stock reissued	33,024			—			(163		)			373						210
Restricted stock	100,000	—		11			(603		)			(74		)				(666		)
Balance at March 31, 2012	105,050,018	$	105,563	$	365,707		$	301,194		$	3,040	$	(7,046	)	$	(1,100	)	$	767,358

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

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	For the Three-Months Ended
	March 31,
	2013			2012
	(dollars in thousands)
Operating Activities
Net income	$	10,553		$	11,051
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	4,497			3,787
Deferred tax expense	2,778			671
Depreciation and amortization	2,397			1,520
Net (gains) losses on securities and other assets	(1,081		)	567
Net amortization of premiums and discounts on securities	552			287
Net accretion of premiums and discounts on long-term debt	(29		)	(28		)
Income from increase in cash surrender value of bank owned life insurance	(1,428		)	(1,445		)
(Increase) decrease in interest receivable	(258		)	352
Decrease in interest payable	(826		)	(1,177		)
Increase in income taxes payable	1,008			9,569
Other-net	(5,342		)	(5,439		)
Net cash provided by operating activities	12,821			19,715
Investing Activities
Transactions with securities available for sale:
Proceeds from sales	42			—
Proceeds from maturities and redemptions	75,603			149,201
Purchases	(204,505		)	(212,061		)
Purchases of FHLB stock	(2,886		)	—
Proceeds from the redemption of FHLB stock	2,756			1,990
Proceeds from bank owned life insurance	178			—
Proceeds from sale of loans	14,099			6,809
Proceeds from sales of other assets	1,334			8,135
Net increase in loans	(41,343		)	(90,600		)
Purchases of premises and equipment	(2,164		)	(2,804		)
Net cash used in investing activities	(156,886		)	(139,330		)
Financing Activities
Net decrease in federal funds purchased	(14,800		)	(43,800		)
Net (decrease) increase in other short-term borrowings	(33,327		)	40,396
Net increase in deposits	153,709			129,163
Repayments of other long-term debt	(123		)	(118		)
Discount on dividend reinvestment plan purchases	(25		)	(16		)
Dividends paid	(4,976		)	(3,147		)
Proceeds from reissuance of treasury stock	—			210
Purchase of treasury stock	(3,604		)	—
Stock option tax benefit	—			1
Net cash provided by financing activities	96,854			122,689
Net (decrease) increase in cash and cash equivalents	(47,211		)	3,074
Cash and cash equivalents at January 1	102,982			78,478
Cash and cash equivalents at March 31	$	55,771		$	81,552

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 three-months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year of 2013. These interim financial statements should be read in conjunction with First Commonwealth’s 2012 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. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line in the Condensed Consolidated Statements of Income. The non-credit related (losses) gains on securities not expected to be sold are included in the "Noninterest Income" section of the Condensed Consolidated Statements of Income.



	For the Three-Months Ended March 31,
	2013									2012
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount		Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains on securities arising during the period	$	(4,275	)	$	1,495		$	(2,780	)	$	99	$	(34	)	$	65
Non-credit related gains on securities not expected to be sold	1,864			(652		)	1,212			1,498		(524		)	974
Reclassification adjustment for gains on securities included in net income	(4		)	1			(3		)	—		—			—
Total available for sale securities	$	(2,415	)	$	844		$	(1,571	)	$	1,597	$	(558	)	$	1,039
Total other comprehensive (loss) income	$	(2,415	)	$	844		$	(1,571	)	$	1,597	$	(558	)	$	1,039

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	2013								2012
	Securities Available for Sale			Post-Retirement Obligation		Accumulated Other Comprehensive Income			Securities Available for Sale		Post-Retirement Obligation		Accumulated Other Comprehensive Income
	(dollars in thousands)
Balance at December 31	$	1,121		$	138	$	1,259		$	1,669	$	332	$	2,001
Other comprehensive (loss) income before reclassification adjustment	(2,780		)	—		(2,780		)	65		—		65
Amounts reclassified from accumulated other comprehensive income (loss)	1,209			—		1,209			974		—		974
Net other comprehensive (loss) income during the period	(1,571		)	—		(1,571		)	1,039		—		1,039
Balance at March 31	$	(450	)	$	138	$	(312	)	$	2,708	$	332	$	3,040

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 three-months ended March 31,:



	2013			2012
	(dollars in thousands)
Cash paid during the period for:
Interest	$	7,211		$	9,668
Non-cash investing and financing activities:
ESOP loan reductions	$	—		$	500
Loans transferred to other real estate owned and repossessed assets	1,207			2,561
Loans transferred from held to maturity to held for sale	16,613			—
Loans sold, not settled	2,640			—
Gross (decrease) increase in market value adjustment to securities available for sale	(2,411		)	1,597

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4 Earnings per Share

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



	For the Three-Months Ended March 31,
	2013		2012
Weighted average common shares issued	105,563,455		105,563,455
Average treasury shares	(6,104,526	)	(542,326	)
Averaged unearned ESOP shares	—		(84,989	)
Average unearned nonvested shares	(170,191	)	(125,413	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	99,288,738		104,810,727
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	16,676		5,715
Additional common stock equivalents (stock options) used to calculate diluted earnings per share	—		—
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	99,305,414		104,816,442

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



	2013					2012
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Stock Options	82,041	$	9.19	$	14.55	380,677	$	6.36	$	14.55
Restricted Stock	—	—		—		68,995	5.96		6.82

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:



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Low Income Housing Limited Partnership Investments	$	304	$	347

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,474,447	$	1,506,618
Financial standby letters of credit	40,829		47,185
Performance standby letters of credit	49,249		69,240
Commercial letters of credit	330		685

The current notional amounts outstanding as of March 31, 2013 include financial standby letters of credit of $36 thousand, performance standby letters of credit of $0.1 million, and there were no commercial letters of credit issued during the first three months of 2013. A liability of $0.2 million and $0.2 million has been recorded as of March 31, 2013 and December 31, 2012, 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 $2.3 million as of March 31, 2013 and $2.4 million as of December 31, 2012. 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other matters

First Commonwealth identified an error related to historical tax reporting for approximately 700-900 customers. A liability related to this error is considered probable, resulting in the establishment of a $0.4 million contingency reserve as of March 31, 2013. This reserve represents management's best estimate of liability related to this issue. Although resolution of this issue is in the initial stages, there may be a range of reasonably possible losses in excess of the estimated liability that could result in a liability of up to $0.2 million in excess of the amount accrued. The contingent reserve is included in “Other liabilities” in the Condensed Consolidated Statements of Financial Condition.

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.

Note 7 Investment Securities

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



	March 31, 2013									December 31, 2012
	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	$	26,533	$	3,929	$	—		$	30,462	$	27,883	$	3,781	$	—		$	31,664
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential	969,600		23,213		(2,153		)	990,660		839,102		25,691		(392		)	864,401
Mortgage-Backed Securities – Commercial	139		1		—			140		148		1		—			149
Other Government-Sponsored Enterprises	241,972		579		(113		)	242,438		241,970		766		(72		)	242,664
Obligations of States and Political Subdivisions	82		3		—			85		82		4		—			86
Corporate Securities	6,700		303		(30		)	6,973		6,703		288		—			6,991
Pooled Trust Preferred Collateralized Debt Obligations	51,077		1		(26,566		)	24,512		51,866		3		(28,496		)	23,373
Total Debt Securities	1,296,103		28,029		(28,862		)	1,295,270		1,167,754		30,534		(28,960		)	1,169,328
Equities	1,820		113		—			1,933		1,859		116		—			1,975
Total Securities Available for Sale	$	1,297,923	$	28,142	$	(28,862	)	$	1,297,203	$	1,169,613	$	30,650	$	(28,960	)	$	1,171,303

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at March 31, 2013, 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	$	25,081	$	25,332
Due after 1 but within 5 years	216,972		217,191
Due after 5 but within 10 years	—		—
Due after 10 years	57,778		31,485
	299,831		274,008
Mortgage-Backed Securities (a)	996,272		1,021,262
Total Debt Securities	$	1,296,103	$	1,295,270


(a)	Mortgage Backed Securities include an amortized cost of $26.5 million and a fair value of $30.5 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 $969.7 million and a fair value of $990.8 million.

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



	2013		2012
	(dollars in thousands)
Proceeds from sales	$	42	$	—
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	4	$	—
Gross losses	—		—
	4		—
Maturities and impairment
Gross gains	—		—
Gross losses	—		—
Other-than-temporary impairment	—		—
	—		—
Net gains and impairment	$	4	$	—

Securities available for sale with an estimated fair value of $602.0 million and $631.0 million were pledged as of March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012, our FHLB stock totaled $28.4 million and $28.2 million, respectively and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

During 2013 and 2012, 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 three-months ended March 31, 2013 and 2012, $2.8 million and $2.0 million, respectively of the stock owned by First Commonwealth was repurchased. The

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FHLB repurchased stock and paid dividends in 2013 and 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-K for the period ended December 31, 2012 filed with the SEC on March 14, 2013.

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 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 three-months ended March 31, 2013. 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 three-months ended March 31, 2013 and 2012, no other-than-temporary impairment charges were recognized. For the three-months ended March 31, 2013, $1.9 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 2012, $1.5 million in non-credit related gains 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 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 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at March 31, 2013 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	$	—	$	—		$	13	$	—		(a)	$	13	$	—
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	248,747	$	(2,153	)	$	20	$	—		(a)	$	248,767	$	(2,153	)
Other Government-Sponsored Enterprises	$	59,464	$	(113	)	$	—	$	—			$	59,464	$	(113	)
Corporate Securities	4,797		(30		)	—		—				4,797		(30		)
Pooled Trust Preferred Collateralized Debt Obligations	$	—	$	—		$	24,454	$	(26,566	)		$	24,454	$	(26,566	)
Total Securities Available for Sale	$	313,008	$	(2,296	)	$	24,487	$	(26,566	)		$	337,495	$	(28,862	)


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

At March 31, 2013, pooled trust preferred collateralized debt obligations accounted for 92% of the unrealized losses, while fixed income securities issued by U.S. Government-sponsored enterprises comprised 8% of total unrealized losses. There were no equity securities in an unrealized loss position at March 31, 2013.

The following table presents the gross unrealized losses and estimated fair values at December 31, 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	$	—	$	—		$	13	$	—		(a)	$	13	$	—
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential	76,296		(392		)	21		—			(a)	76,317		(392		)
Other Government-Sponsored Enterprises	59,303		(72		)	—		—				59,303		(72		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			23,316		(28,496		)		23,316		(28,496		)
Total Securities Available for Sale	$	135,599	$	(464	)	$	23,350	$	(28,496	)		$	158,949	$	(28,960	)


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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2013, our corporate securities had an amortized cost and an estimated fair value of $6.7 million and $7.0 million, respectively, and were comprised of single issue trust preferred securities issued primarily by money center and large regional banks. As of December 31, 2012, the same portion of the portfolio had an amortized cost of $6.7 million and an estimated fair value of $7.0 million. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trend and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

As of March 31, 2013, the book value of our pooled trust preferred collateralized debt obligations totaled $51.1 million with an estimated fair value of $24.5 million, which includes securities comprised of 319 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainders are mezzanine tranches, four of which have no senior class remaining in the issue. Two of the pooled issues, representing $1.2 million of the $51.1 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 March 31, 2013, after taking into account management’s best estimates of future interest deferrals and defaults, seven of our securities had no excess subordination in the tranches we own and five of our securities had excess subordination which ranged from 11% to 631% of the current performing collateral.

The following table provides information related to our pooled trust preferred collateralized debt obligations as of March 31, 2013:



Deal	Class	Book Value		Estimated Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks	Deferrals and Defaults as a % of Current Collateral		Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL I	Senior	$	2	$	2	$	—		Aa3/A	9	33.33	%	NM
Pre TSL IV	Mezzanine	1,830		1,160		(670		)	Caa2/CCC	6	27.07		80.70
Pre TSL V	Mezzanine	55		56		1			C/–	3	100.00		—
Pre TSL VII	Mezzanine	3,686		3,513		(173		)	Ca/C	16	45.70		—
Pre TSL VIII	Mezzanine	1,868		1,007		(861		)	C/C	31	54.03		—
Pre TSL IX	Mezzanine	2,277		1,054		(1,223		)	Ca/C	45	27.04		10.57
Pre TSL X	Mezzanine	1,343		1,157		(186		)	Ca/C	48	34.74		—
Pre TSL XII	Mezzanine	5,400		2,553		(2,847		)	Ca/C	70	32.55		—
Pre TSL XIII	Mezzanine	12,719		5,561		(7,158		)	Ca/C	63	31.20		15.98
Pre TSL XIV	Mezzanine	13,304		5,230		(8,074		)	Ca/C	61	36.03		31.67
MMCap I	Senior	1,219		1,203		(16		)	Aa2/A	16	54.75		631.19
MMCap I	Mezzanine	867		520		(347		)	Ca/C	16	54.75		—
MM Comm IX	Mezzanine	6,507		1,496		(5,011		)	Ca/CC	28	43.38		—
Total		$	51,077	$	24,512	$	(26,565	)

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 three-months ended March 31, 2013 and 2012, 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at March 31, 2013. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

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

•

Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7%, a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion, if the coupon is over 10%, a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 319 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 March 31, 2013, 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 March 31, 2013, indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the three-months ended March 31, 2013. Based upon the analysis performed by management, it is probable that seven of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the table on page 16 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

securities listed in that table, our analysis as of March 31, 2013 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 March 31, 2013, 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 6% to 154% and will be recognized as an adjustment to yield over the remaining life of these securities. During the three-months ended March 31, 2013 and 2012, $0.3 million and $0.2 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 March 31,
	2013			2012
	(dollars in thousands)
Balance, beginning (a)	$	43,274		$	44,736
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—			—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—			—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	(283		)	(235		)
Balance, ending	$	42,991		$	44,501


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


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

In the first quarter of 2013 and 2012, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of March 31, 2013 and 2012, there are no equity securities in an unrealized loss position.

Note 10 Loans and Allowance for Credit Losses

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



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,057,663	$	1,019,822
Real estate construction	70,461		87,438
Residential real estate	1,255,515		1,241,565
Commercial real estate	1,243,676		1,273,661
Loans to individuals	591,495		582,218
Total loans and leases net of unearned income	$	4,218,810	$	4,204,704

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:

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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 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:



	March 31, 2013
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	942,673	$	50,664	$	1,238,633	$	1,140,648	$	591,326	$	3,963,944
Non-Pass
OAEM	43,909		911		5,075		59,894		2		109,791
Substandard	71,081		15,364		11,807		43,134		167		141,553
Doubtful	—		3,522		—		—		—		3,522
Total Non-Pass	114,990		19,797		16,882		103,028		169		254,866
Total	$	1,057,663	$	70,461	$	1,255,515	$	1,243,676	$	591,495	$	4,218,810

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2012
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	925,868	$	64,353	$	1,224,849	$	1,119,093	$	582,039	$	3,916,202
Non-Pass
OAEM	31,049		925		5,647		82,581		3		120,205
Substandard	62,905		18,638		11,069		71,987		176		164,775
Doubtful	—		3,522		—		—		—		3,522
Total Non-Pass	93,954		23,085		16,716		154,568		179		288,502
Total	$	1,019,822	$	87,438	$	1,241,565	$	1,273,661	$	582,218	$	4,204,704

Portfolio Risks

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

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate 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.

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.

Age Analysis of Past Due Loans by Segment

The following tables delineate the aging analysis of the recorded investments in past due loans as of March 31, 2013 and December 31, 2012. Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.



	March 31, 2013
	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	$	3,054	$	2,380	$	1,108	$	28,666	$	35,208	$	1,022,455	$	1,057,663
Real estate construction	206		15		500		7,112		7,833		62,628		70,461
Residential real estate	6,282		2,420		963		9,740		19,405		1,236,110		1,255,515
Commercial real estate	9,903		921		279		18,456		29,559		1,214,117		1,243,676
Loans to individuals	2,565		576		1,077		167		4,385		587,110		591,495
Total	$	22,010	$	6,312	$	3,927	$	64,141	$	96,390	$	4,122,420	$	4,218,810

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 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	$	991	$	620	$	288	$	29,258	$	31,157	$	988,665	$	1,019,822
Real estate construction	2		19		15		9,778		9,814		77,624		87,438
Residential real estate	6,597		2,357		730		9,283		18,967		1,222,598		1,241,565
Commercial real estate	3,339		1,389		195		46,023		50,946		1,222,715		1,273,661
Loans to individuals	3,140		934		1,219		176		5,469		576,749		582,218
Total	$	14,069	$	5,319	$	2,447	$	94,518	$	116,353	$	4,088,351	$	4,204,704

Nonaccrual Loans

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

When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal 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.

Nonperforming loans decreased $29.3 million during the three months ended March 31, 2013. Contributing to this decrease was the sale of $17.2 million of loans related to a real estate developer in eastern Pennsylvania as well as a $2.5 million commercial real estate loan in Nevada. Also, a $3.8 million hotel resort syndication loan in the state of Washington was retruned to accrual status during the first quarter of 2013. Additionally, $5.3 million in charge-offs were recognized on two commercial real estate loans during the quarter, including $2.8 million for a loan to a western Pennsylvania non-profit healthcare facility who recently filed for bankruptcy and $2.5 million for a western Pennsylvania student housing project which is in the foreclosure process.

A total of $2.7 million of loans were moved into nonaccrual status during the three-months ended March 31, 2013. Included in this total was the movement to nonaccrual status of $1.1 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The specific allowance for nonperforming loans decreased by $5.1 million at March 31, 2013 compared to December 31, 2012, primarily due to charge-offs of amounts reserved for in prior periods. Unfunded commitments related to nonperforming loans were $1.2 million at March 31, 2013 and after consideration of available collateral related to these commitments, an off balance sheet reserve of $0.2 million was established.

There were no loans held for sale at March 31, 2013 and December 31, 2012; however, sales of loans during the three-months ended March 31, 2013 and 2012 resulted in gains of $0.1 million and $1.8 million, respectively.

Significant nonaccrual loans as of March 31, 2013, include the following;

•

$18.7 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in 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.


•	$3.5 million commercial real estate loan to an in-patient facility in western Pennsylvania. This loan was originated in 2008 and placed in nonaccrual status in September 2012. Charge-offs of $2.8 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the fourth quarter of 2012.


•	$3.5 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. This loan was originated in 2007 and placed in nonaccrual status in the second quarter of 2009. Charge-offs of $17.3 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the second quarter of 2012.


•	$3.2 million, real estate secured loan to a western Pennsylvania nonprofit corporation. This loan was originated in 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 2012 and the first quarter of 2013.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of March 31, 2013 and December 31, 2012. 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 for the period reported.



	March 31, 2013						December 31, 2012
	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	$	8,649	$	9,601	$	—	$	8,080	$	8,983	$	—
Real estate construction	6,122		27,005		—		8,491		35,555		—
Residential real estate	8,666		9,269		—		7,928		8,401		—
Commercial real estate	16,711		23,250		—		33,259		35,401		—
Loans to individuals	240		247		—		256		256		—
Subtotal	40,388		69,372		—		58,014		88,596