FCF-2013.6.30-10Q

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 June 30, 2013
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-11138
First Commonwealth Financial Corporation
(Exact name of registrant as specified in its charter)
 
Pennsylvania
 
25-1428528
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
601 Philadelphia Street, Indiana, PA
 
15701
(Address of principal executive offices)
 
(Zip Code)
724-349-7220
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨    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 August 5, 2013, was 96,442,161.

Table of Contents

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

2
Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
 
 
June 30,
2013
 
December 31,
2012
 
(dollars in thousands,
except share data)
Assets
 
 
 
Cash and due from banks
$
77,485

 
$
98,724

Interest-bearing bank deposits
4,497

 
4,258

Securities available for sale, at fair value
1,306,687

 
1,171,303

Other investments
33,913

 
28,228

Loans:
 
 
 
Portfolio loans
4,229,752

 
4,204,704

Allowance for credit losses
(57,452
)
 
(67,187
)
Net loans
4,172,300

 
4,137,517

Premises and equipment, net
67,751

 
68,970

Other real estate owned
15,603

 
11,262

Goodwill
159,956

 
159,956

Amortizing intangibles, net
1,721

 
2,375

Bank owned life insurance
172,346

 
170,925

Other assets
140,757

 
141,872

Total assets
$
6,153,016

 
$
5,995,390

Liabilities
 
 
 
Deposits (all domestic):
 
 
 
Noninterest-bearing
$
900,940

 
$
883,269

Interest-bearing
3,832,107

 
3,674,612

Total deposits
4,733,047

 
4,557,881

Short-term borrowings
441,848

 
356,227

Subordinated debentures
72,167

 
105,750

Other long-term debt
144,615

 
174,471

Total long-term debt
216,782

 
280,221

Other liabilities
50,664

 
55,054

Total liabilities
5,442,341

 
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 June 30, 2013 and December 31, 2012, and 96,442,161 and 99,629,494 shares outstanding at June 30, 2013 and December 31, 2012, respectively
105,563

 
105,563

Additional paid-in capital
365,352

 
365,354

Retained earnings
321,135

 
315,608

Accumulated other comprehensive (loss) income, net
(16,722
)
 
1,259

Treasury stock (9,121,294 and 5,933,961 shares at June 30, 2013 and December 31, 2012, respectively)
(64,653
)
 
(41,777
)
Total shareholders’ equity
710,675

 
746,007

Total liabilities and shareholders’ equity
$
6,153,016

 
$
5,995,390


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

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
 
For the Six-Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands, except share data)
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
43,629

 
$
46,408

 
$
88,243

 
$
94,448

Interest and dividends on investments:
 
 
 
 
 
 
 
Taxable interest
7,319

 
8,279

 
14,428

 
16,828

Interest exempt from federal income taxes
1

 
5

 
2

 
10

Dividends
30

 
19

 
66

 
40

Interest on bank deposits
2

 
1

 
3

 
2

Total interest income
50,981

 
54,712

 
102,742

 
111,328

Interest Expense
 
 
 
 
 
 
 
Interest on deposits
4,007

 
5,643

 
8,198

 
11,890

Interest on short-term borrowings
287

 
279

 
507

 
506

Interest on subordinated debentures
580

 
1,422

 
1,964

 
2,855

Interest on other long-term debt
409

 
450

 
957

 
989

Total interest on long-term debt
989

 
1,872

 
2,921

 
3,844

Total interest expense
5,283

 
7,794

 
11,626

 
16,240

Net Interest Income
45,698

 
46,918

 
91,116

 
95,088

Provision for credit losses
10,800

 
4,297

 
15,297

 
8,084

Net Interest Income after Provision for Credit Losses
34,898

 
42,621

 
75,819

 
87,004

Noninterest Income
 
 
 
 
 
 
 
Changes in fair value on impaired securities
2,841

 
(1,323
)
 
4,705

 
175

Non-credit related (gains) losses on securities not expected to be sold (recognized in other comprehensive income)
(2,841
)
 
1,323

 
(4,705
)
 
(175
)
Net impairment losses
—

 
—

 
—

 
—

Net securities gains
4

 
—

 
8

 
—

Trust income
1,608

 
1,607

 
3,271

 
3,149

Service charges on deposit accounts
3,815

 
3,737

 
7,216

 
7,239

Insurance and retail brokerage commissions
1,384

 
1,670

 
2,801

 
3,094

Income from bank owned life insurance
1,432

 
1,459

 
2,860

 
2,904

Gain on sale of assets
425

 
1,444

 
700

 
3,559

Card related interchange income
3,490

 
3,285

 
6,678

 
6,399

Other income
2,773

 
2,894

 
6,282

 
7,132

Total noninterest income
14,931

 
16,096

 
29,816

 
33,476

Noninterest Expense
 
 
 
 
 
 
 
Salaries and employee benefits
21,497

 
22,363

 
43,290

 
44,121

Net occupancy expense
3,221

 
3,303

 
6,856

 
6,707

Furniture and equipment expense
3,297

 
3,024

 
6,569

 
6,208

Data processing expense
1,503

 
1,796

 
3,019

 
3,359

Pennsylvania shares tax expense
1,517

 
1,510

 
2,707

 
2,693

Intangible amortization
297

 
371

 
655

 
742

Collection and repossession expense
851

 
670

 
2,002

 
3,369

Other professional fees and services
948

 
940

 
1,917

 
2,139

FDIC insurance
1,084

 
1,262

 
2,134

 
2,499

Loss on redemption of subordinated debt
1,629

 
—

 
1,629

 
—

Other operating expenses
6,154

 
6,609

 
12,674

 
16,763

Total noninterest expense
41,998

 
41,848

 
83,452

 
88,600

Income Before Income Taxes
7,831

 
16,869

 
22,183

 
31,880

Income tax provision
2,015

 
4,548

 
5,814

 
8,508

Net Income
$
5,816

 
$
12,321

 
$
16,369

 
$
23,372

Average Shares Outstanding
97,564,699

 
104,894,261

 
98,421,956

 
104,852,494

Average Shares Outstanding Assuming Dilution
97,577,010

 
104,901,239

 
98,429,223

 
104,855,543

Per Share Data:
 
 
 
 
 
 
 
Basic Earnings per Share
$
0.06

 
$
0.12

 
$
0.17

 
$
0.22

Diluted Earnings per Share
$
0.06

 
$
0.12

 
$
0.17

 
$
0.22

Cash Dividends Declared per Common Share
$
0.06

 
$
0.05

 
$
0.11

 
$
0.08


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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
 
 
For the Three-Months Ended
 
For the Six-Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands)
Net Income
$
5,816

 
$
12,321

 
$
16,369

 
$
23,372

Other comprehensive (loss) income, before tax expense:
 
 
 
 
 
 
 
Unrealized holding (losses) gains on securities arising during the period
(28,071
)
 
998

 
(32,346
)
 
1,097

Non-credit related gains (losses) on securities not expected to be sold
2,841

 
(1,323
)
 
4,705

 
175

Less: reclassification adjustment for gains on securities included in net income
(4
)
 
—

 
(8
)
 
—

Total other comprehensive (loss) income, before tax expense
(25,234
)
 
(325
)
 
(27,649
)
 
1,272

Income tax benefit (expense) related to items of other comprehensive income
8,824

 
119

 
9,668

 
(439
)
Total other comprehensive (loss) income
$
(16,410
)
 
$
(206
)
 
$
(17,981
)
 
$
833

Comprehensive (Loss) Income
$
(10,594
)
 
$
12,115

 
$
(1,612
)
 
$
24,205



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

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
 
 
 
 
 
 
16,369

 
 
 
 
 
 
 
16,369

Other comprehensive loss
 
 
 
 
 
 
 
 
(17,981
)
 
 
 
 
 
(17,981
)
Cash dividends declared ($0.11 per share)
 
 
 
 
 
 
(10,842
)
 
 
 
 
 
 
 
(10,842
)
Discount on dividend reinvestment plan purchases
 
 
 
 
(55
)
 
 
 
 
 
 
 
 
 
(55
)
Treasury stock acquired
(3,267,692
)
 
 
 
 
 
 
 
 
 
(23,247
)
 
 
 
(23,247
)
Treasury stock reissued
25,359

 
 
 


 
—

 
 
 
176

 
 
 
176

Restricted stock
55,000

 
—

 
53

 
—

 
 
 
195

 
 
 
248

Balance at June 30, 2013
96,442,161

 
$
105,563

 
$
365,352

 
$
321,135

 
$
(16,722
)
 
$
(64,653
)
 
$
—

 
$
710,675

 
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
 
 
 
 
 
 
23,372

 
 
 
 
 
 
 
23,372

Other comprehensive income
 
 
 
 
 
 
 
 
833

 
 
 
 
 
833

Cash dividends declared ($0.08 per share)
 
 
 
 
 
 
(8,402
)
 
 
 
 
 
 
 
(8,402
)
Net decrease in unearned ESOP shares
 
 
 
 
 
 
 
 
 
 
 
 
1,000

 
1,000

ESOP market value adjustment ($477, net of $167 tax benefit)
 
 
 
 
(310
)
 
 
 
 
 
 
 
 
 
(310
)
Discount on dividend reinvestment plan purchases
 
 
 
 
(42
)
 
 
 
 
 
 
 
 
 
(42
)
Tax benefit of stock options exercised
 
 
 
 
1

 
 
 
 
 
 
 
 
 
1

Treasury stock acquired
(469,700
)
 
 
 
 
 
 
 
 
 
(3,045
)
 
 
 
(3,045
)
Treasury stock reissued
57,552

 
 
 
—

 
(296
)
 
 
 
650

 
 
 
354

Restricted stock
224,000

 
—

 
24

 
(1,264
)
 
 
 
1,426

 
 
 
186

Balance at June 30, 2012
104,728,846

 
$
105,563

 
$
365,541

 
$
307,466

 
$
2,834

 
$
(8,314
)
 
$
(600
)
 
$
772,490



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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
For the Six-Months Ended
 
June 30,
 
2013
 
2012
 
(dollars in thousands)
Operating Activities
 
 
 
Net income
$
16,369

 
$
23,372

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
15,297

 
8,084

Deferred tax expense
3,848

 
1,934

Depreciation and amortization
4,736

 
3,800

Net losses (gains) on securities and other assets
418

 
(522
)
Net amortization of premiums and discounts on securities
1,162

 
717

Net amortization of premiums and discounts on long term debt
(58
)
 
(56
)
Income from increase in cash surrender value of bank owned life insurance
(2,860
)
 
(2,904
)
Decrease in interest receivable
606

 
1,031

Decrease in interest payable
(1,284
)
 
(951
)
(Decrease) increase in income taxes payable
(250
)
 
7,042

Decrease in prepaid FDIC insurance
9,205

 
2,328

Other-net
(3,497
)
 
(6,273
)
Net cash provided by operating activities
43,692

 
37,602

Investing Activities
 
 
 
Transactions with securities available for sale:
 
 
 
Proceeds from sales
42

 
—

Proceeds from maturities and redemptions
195,806

 
276,167

Purchases
(360,010
)
 
(292,056
)
Purchases of FHLB stock
(10,670
)
 
—

Proceeds from the redemption of FHLB stock
4,984

 
3,880

Proceeds from bank owned life insurance
1,439

 
1,408

Proceeds from sale of loans
20,348

 
15,981

Proceeds from sales of other assets
2,853

 
10,971

Net increase in loans
(77,496
)
 
(125,567
)
Purchases of premises and equipment
(3,106
)
 
(4,022
)
Net cash used in investing activities
(225,810
)
 
(113,238
)
Financing Activities
 
 
 
Net decrease in federal funds purchased
(24,000
)
 
(26,300
)
Net increase in other short-term borrowings
109,621

 
187,787

Net increase (decrease) in deposits
175,186

 
(42,692
)
Repayments of other long-term debt
(29,797
)
 
(25,238
)
Repayments of subordinated debentures
(34,702
)
 
—

Discount on dividend reinvestment plan purchases
(55
)
 
(42
)
Dividends paid
(10,842
)
 
(8,402
)
Proceeds from reissuance of treasury stock
176

 
354

Purchase of treasury stock
(24,469
)
 
(1,812
)
Stock option tax benefit
—

 
1

Net cash provided by financing activities
161,118

 
83,656

Net (decrease) increase in cash and cash equivalents
(21,000
)
 
8,020

Cash and cash equivalents at January 1
102,982

 
78,478

Cash and cash equivalents at June 30
$
81,982

 
$
86,498


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

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 six-months ended June 30, 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 Six-Months Ended June 30
 
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
$
(32,346
)
 
$
11,312

 
$
(21,034
)
 
$
1,097

 
$
(378
)
 
$
719

Non-credit related gains on securities not expected to be sold
4,705

 
(1,647
)
 
3,058

 
175

 
(61
)
 
114

Reclassification adjustment for gains on securities included in net income
(8
)
 
3

 
(5
)
 
—

 
—

 
—

Total available for sale
    securities
$
(27,649
)
 
$
9,668

 
$
(17,981
)
 
$
1,272

 
$
(439
)
 
$
833

Total other comprehensive (loss) income
$
(27,649
)
 
$
9,668

 
$
(17,981
)
 
$
1,272

 
$
(439
)
 
$
833


8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
For the Three-Months Ended June 30
 
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
$
(28,071
)
 
$
9,817

 
$
(18,254
)
 
$
998

 
$
(344
)
 
$
654

Non-credit related gains (losses) on securities not expected to be sold
2,841

 
(995
)
 
1,846

 
(1,323
)
 
463

 
(860
)
Reclassification adjustment for gains on securities included in net income
(4
)
 
2

 
(2
)
 
—

 
—

 
—

Total available for sale
    securities
$
(25,234
)
 
$
8,824

 
$
(16,410
)
 
$
(325
)
 
$
119

 
$
(206
)
Total other comprehensive loss
$
(25,234
)
 
$
8,824

 
$
(16,410
)
 
$
(325
)
 
$
119

 
$
(206
)
 
The following table details the change in components of OCI for the six-months ended June 30:
 
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
(21,034
)
—

(21,034
)
 
719

—

719

Amounts reclassified from accumulated other comprehensive income (loss)
3,053

—

3,053

 
114

—

114

Net other comprehensive (loss) income during the period
(17,981
)
—

(17,981
)
 
833

—

833

Balance at June 30
$
(16,860
)
$
138

$
(16,722
)
 
$
2,502

$
332

$
2,834


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 six-months ended June 30:
 
2013
 
2012
 
(dollars in thousands)
Cash paid during the period for:
 
 
 
Interest
$
12,990

 
$
17,278

Income taxes
2,200

 
5,700

Non-cash investing and financing activities:
 
 
 
ESOP loan reductions
$
—

 
$
1,000

Loans transferred to other real estate owned and repossessed assets
7,371

 
3,227

Loans transferred from held to maturity to held for sale
20,135

 
—

Gross (decrease) increase in market value adjustment to securities available for sale
(27,625
)
 
1,254

Unsettled treasury stock repurchases
—

 
1,233


9
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 June 30
 
For the Six-Months Ended June 30
 
2013
 
2012
 
2013
 
2012
Weighted average common shares issued
105,563,455

 
105,563,455

 
105,563,455

 
105,563,455

Average treasury shares
(7,823,276
)
 
(410,247
)
 
(6,968,649
)
 
(476,286
)
Averaged unearned ESOP shares
—

 
(50,170
)
 
—

 
(67,580
)
Average unearned nonvested shares
(175,480
)
 
(208,777
)
 
(172,850
)
 
(167,095
)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
97,564,699

 
104,894,261

 
98,421,956

 
104,852,494

Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share
12,311

 
6,978

 
7,267

 
3,049

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share
97,577,010

 
104,901,239

 
98,429,223

 
104,855,543

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 six-months ended June 30 because to do so would have been antidilutive.
 
2013
 
2012
 
 
 
Price Range
 
 
 
Price Range
 
Shares
 
From
 
To
 
Shares
 
From
 
To
Stock Options
40,210

 
$
9.59

 
$
14.55

 
329,866

 
$
6.36

 
$
14.55

Restricted Stock
92,059

 
5.96

 
7.35

 
96,113

 
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:
 
June 30, 2013
 
December 31, 2012
 
(dollars in thousands)
Low Income Housing Limited Partnership Investments
$
272

 
$
347



10
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:
 
June 30, 2013
 
December 31, 2012
 
(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
 
 
 
Commitments to extend credit
$
1,542,449

 
$
1,506,618

Financial standby letters of credit
40,677

 
47,185

Performance standby letters of credit
44,389

 
69,240

Commercial letters of credit
—

 
685

 
The notional amounts outstanding as of June 30, 2013 include amounts issued in 2013 of $46 thousand in financial standby letters of credit and $0.5 million in performance standby letters of credit. There were no commercial letters of credit issued during 2013. A liability of $0.1 million and $0.2 million has been recorded as of June 30, 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 June 30, 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. The appeal was argued before the Superior Court on May 7, 2013.  A decision is currently pending.

11
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 an $0.8 million contingency reserve as of June 30, 2013. The total $0.8 million reserve for this issue represents management's best estimate of liability as resolution of this issue is in the initial stages. 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:
 
June 30, 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
$
25,119

 
$
2,944

 
$
(27
)
 
$
28,036

 
$
27,883

 
$
3,781

 
$
—

 
$
31,664

Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 

 
 
 
 
 
 
 

Mortgage-Backed Securities – Residential
981,279

 
14,549

 
(17,643
)
 
978,185

 
839,102

 
25,691

 
(392
)
 
864,401

Mortgage-Backed Securities – Commercial
125

 
1

 
—

 
126

 
148

 
1

 
—

 
149

Other Government-Sponsored Enterprises
267,966

 
311

 
(2,981
)
 
265,296

 
241,970

 
766

 
(72
)
 
242,664

Obligations of States and Political Subdivisions
81

 
2

 
—

 
83

 
82

 
4

 
—

 
86

Corporate Securities
6,698

 
312

 
(26
)
 
6,984

 
6,703

 
288

 
—

 
6,991

Pooled Trust Preferred Collateralized Debt Obligations
49,531

 
422

 
(24,084
)
 
25,869

 
51,866

 
3

 
(28,496
)
 
23,373

Total Debt Securities
1,330,799

 
18,541

 
(44,761
)
 
1,304,579

 
1,167,754

 
30,534

 
(28,960
)
 
1,169,328

Equities
1,820

 
288

 
—

 
2,108

 
1,859

 
116

 
—

 
1,975

Total Securities Available for Sale
$
1,332,619

 
$
18,829

 
$
(44,761
)
 
$
1,306,687

 
$
1,169,613

 
$
30,650

 
$
(28,960
)
 
$
1,171,303


12
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 June 30, 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
$
28,081

 
$
28,265

Due after 1 but within 5 years
239,966

 
237,114

Due after 5 but within 10 years
—

 
—

Due after 10 years
56,229

 
32,853

 
324,276

 
298,232

Mortgage-Backed Securities (a)
1,006,523

 
1,006,347

Total Debt Securities
$
1,330,799

 
$
1,304,579

 
(a)
Mortgage Backed Securities include an amortized cost of $25.1 million and a fair value of $28.0 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $981.4 million and a fair value of $978.3 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.
 
Proceeds from sales, gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to securities available for sale were as follows for the six-months ended June 30:
 
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
4

 
—

Gross losses
—

 
—

Other-than-temporary impairment
—

 
—

 
4

 
—

Net gains and impairment
$
8

 
$
—

Securities available for sale with an estimated fair value of $645.6 million and $631.0 million were pledged as of June 30, 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. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of June 30, 2013 and December 31, 2012, our FHLB stock totaled $33.9 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 six-months ended June 30, 2013 and 2012, $5.0 million and $3.9 million, respectively of the stock owned by First Commonwealth was repurchased. The FHLB repurchased stock and paid dividends in 2013 and 2012, however, decisions regarding any future repurchase of excess

13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 March 31, 2013 filed with the SEC on May 8, 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 six-months ended June 30, 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 six-months ended June 30, 2013 and 2012, no other-than-temporary impairment charges were recognized. For the six-months ended June 30, 2013, $4.7 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, $0.2 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) 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 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.

14
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 June 30, 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
$
2,096

 
$
(27
)
  
 
$
—

 
$
—


 
$
2,096

 
$
(27
)
Obligations of U.S. Government-Sponsored Enterprises:
 
 
 

 
 
 
 

 
 
 
 
Mortgage-Backed Securities – Residential
$
550,385

 
$
(17,643
)

 
$
—

 
$
—


 
$
550,385

 
$
(17,643
)
Other Government-Sponsored Enterprises
$
186,985

 
$
(2,981
)

 
$
—

 
$
—


 
$
186,985

 
$
(2,981
)
Corporate Securities
4,798

 
(26
)

 
—

 
—


 
4,798

 
(26
)
Pooled Trust Preferred Collateralized Debt Obligations
$
33

 
$
(23
)
  
 
$
21,706

 
$
(24,061
)

 
$
21,739

 
$
(24,084
)
Total Securities Available for Sale
$
744,297

 
$
(20,700
)

 
$
21,706

 
$
(24,061
)

 
$
766,003

 
$
(44,761
)
At June 30, 2013, pooled trust preferred collateralized debt obligations accounted for 54% of the unrealized losses, while fixed income securities issued by U.S. Government-sponsored enterprises comprised 46% of total unrealized losses. The unrealized losses related to U.S. Government-sponsored enterprises are the result of interest rate movements. There were no equity securities in an unrealized loss position at June 30, 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.
As of June 30, 2013 and December 31, 2012, our corporate securities had an amortized cost and an estimated fair value of $6.7 million and $7.0 million, and were comprised of single issue trust preferred securities issued primarily by large regional banks. 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 June 30, 2013, the book value of our pooled trust preferred collateralized debt obligations totaled $49.5 million with an estimated fair value of $25.9 million, which includes securities comprised of 309 banks and other financial institutions. One of our pooled securities is a senior tranche and the remainders are mezzanine tranches, four of which have no senior class remaining in the issue. One of the pooled issues, representing $2 thousand of the $49.5 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 June 30, 2013, after taking into account management’s best estimates of future interest deferrals and

15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


defaults, seven of our securities had no excess subordination in the tranches we own and four of our securities had excess subordination which ranged from 10% to 51% of the current performing collateral.
 
The following table provides information related to our pooled trust preferred collateralized debt obligations as of June 30, 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

 
1,206

 
(624
)
 
Caa2/CCC
 
6

 
18.05

 
50.84
Pre TSL V
Mezzanine
 
56

 
33

 
(23
)
 
C/–  
 
3

 
100.00

 
—
Pre TSL VII
Mezzanine
 
3,705

 
4,127

 
422

 
Ca/C
 
15

 
52.80

 
—
Pre TSL VIII
Mezzanine
 
1,898

 
1,022

 
(876
)
 
C/C
 
30

 
58.01

 
—
Pre TSL IX
Mezzanine
 
2,286

 
1,041

 
(1,245
)
 
Ca/C
 
44

 
27.04

 
9.94
Pre TSL X
Mezzanine
 
1,333

 
1,253

 
(80
)
 
Ca/C
 
47

 
34.92

 
—
Pre TSL XII
Mezzanine
 
5,357

 
2,762

 
(2,595
)
 
Ca/C
 
70

 
31.25

 
—
Pre TSL XIII
Mezzanine
 
12,451

 
6,662

 
(5,789
)
 
Ca/C
 
61

 
28.88

 
20.84
Pre TSL XIV
Mezzanine
 
13,421

 
5,611

 
(7,810
)
 
Ca/C
 
59

 
37.00

 
32.29
MMCap I
Mezzanine
 
644

 
492

 
(152
)
 
Ca/C
 
12

 
62.77

 
—
MM Comm IX
Mezzanine
 
6,548

 
1,658

 
(4,890
)
 
Ca/CC
 
27

 
44.41

 
—
Total
 
 
$
49,531

 
$
25,869

 
$
(23,662
)
 
 
 
 
 
 
 
 
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- and six-months ended June 30, 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.
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 June 30, 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

16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 309 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 June 30, 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 June 30, 2013, indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the six-months ended June 30, 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 securities listed in that table, our analysis as of June 30, 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 and PreTSL IV. Our cash flow analysis as of June 30, 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 158% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield are reflected in the following table as increases in cash flows expected to be collected.

17
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 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 June 30
 
For the Six-Months Ended June 30
 
2013
 
2012
 
2013
 
2012
 
(dollars in thousands)
Balance, beginning (a)
$
42,991

 
$
44,501

 
$
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)
(292
)
 
(271
)
 
(575
)
 
(506
)
Balance, ending
$
42,699

 
$
44,230

 
$
42,699

 
$
44,230

 
(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 second 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 June 30, 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:
 
 
June 30, 2013
 
December 31, 2012
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
1,012,315

 
$
1,019,822

Real estate construction
66,243

 
87,438

Residential real estate
1,269,830

 
1,241,565

Commercial real estate
1,280,784

 
1,273,661

Loans to individuals
600,580

 
582,218

Total loans and leases net of unearned income
$
4,229,752

 
$
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:
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.

18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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:
 
June 30, 2013
 
Commercial, financial, agricultural and other
 
Real estate construction
 
Residential real estate
 
Commercial real estate
 
Loans to individuals
 
Total
 
(dollars in thousands)
Pass
$
933,092

 
$
52,706

 
$
1,253,021

 
$
1,166,928

 
$
600,411

 
$
4,006,158

Non-Pass
 
 
 
 
 
 
 
 
 
 
 
OAEM
35,231

 
1,030

 
4,280

 
71,017

 
2

 
111,560

Substandard
43,992

 
12,507

 
12,529

 
42,839

 
167

 
112,034

Doubtful
—

 
—

 
—

 
—

 
—

 
—

Total Non-Pass
79,223

 
13,537

 
16,809

 
113,856

 
169

 
223,594

Total
$
1,012,315

 
$
66,243

 
$
1,269,830

 
$
1,280,784

 
$
600,580

 
$
4,229,752

 
 
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

 
—