FCF-2014.9.30-10Q

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 September 30, 2014
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  x    Accelerated filer  ¨    Smaller reporting company  ¨    Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of issuer’s common stock, $1.00 par value, as of November 6, 2014, was 91,722,649.

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)
 
 
September 30,
2014
 
December 31,
2013
 
(dollars in thousands,
except share data)
Assets
 
 
 
Cash and due from banks
$
78,696

 
$
74,427

Interest-bearing bank deposits
5,374

 
3,012

Securities available for sale, at fair value
1,332,774

 
1,318,365

Other investments
50,994

 
35,444

Loans held for sale
1,305

 
—

Loans:
 
 
 
Portfolio loans
4,411,481

 
4,283,833

Allowance for credit losses
(50,784
)
 
(54,225
)
Net loans
4,360,697

 
4,229,608

Premises and equipment, net
66,278

 
67,940

Other real estate owned
7,751

 
11,728

Goodwill
159,371

 
159,956

Amortizing intangibles, net
781

 
1,311

Bank owned life insurance
176,500

 
174,372

Other assets
115,577

 
138,698

Total assets
$
6,356,098

 
$
6,214,861

Liabilities
 
 
 
Deposits (all domestic):
 
 
 
Noninterest-bearing
$
995,014

 
$
912,361

Interest-bearing
3,377,374

 
3,691,502

Total deposits
4,372,388

 
4,603,863

Short-term borrowings
1,034,967

 
626,615

Subordinated debentures
72,167

 
72,167

Other long-term debt
116,539

 
144,385

Total long-term debt
188,706

 
216,552

Other liabilities
50,553

 
56,134

Total liabilities
5,646,614

 
5,503,164

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 September 30, 2014 and December 31, 2013, and 91,722,649 and 95,245,215 shares outstanding at September 30, 2014 and December 31, 2013, respectively
105,563

 
105,563

Additional paid-in capital
365,576

 
365,333

Retained earnings
351,718

 
334,748

Accumulated other comprehensive loss, net
(9,676
)
 
(20,588
)
Treasury stock (13,840,806 and 10,318,240 shares at September 30, 2014 and December 31, 2013, respectively)
(103,697
)
 
(73,359
)
Total shareholders’ equity
709,484

 
711,697

Total liabilities and shareholders’ equity
$
6,356,098

 
$
6,214,861


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 Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands, except share data)
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
43,200

 
$
43,935

 
$
128,490

 
$
132,178

Interest and dividends on investments:
 
 
 
 
 
 
 
Taxable interest
7,118

 
8,280

 
21,632

 
22,708

Interest exempt from federal income taxes
104

 
1

 
172

 
3

Dividends
663

 
90

 
1,459

 
156

Interest on bank deposits
4

 
2

 
8

 
5

Total interest income
51,089

 
52,308

 
151,761

 
155,050

Interest Expense
 
 
 
 
 
 
 
Interest on deposits
2,974

 
3,750

 
9,897

 
11,948

Interest on short-term borrowings
662

 
362

 
1,608

 
869

Interest on subordinated debentures
578

 
584

 
1,715

 
2,548

Interest on other long-term debt
322

 
383

 
1,014

 
1,340

Total interest expense
4,536

 
5,079

 
14,234

 
16,705

Net Interest Income
46,553

 
47,229

 
137,527

 
138,345

Provision for credit losses
2,073

 
2,714

 
8,621

 
18,011

Net Interest Income after Provision for Credit Losses
44,480

 
44,515

 
128,906

 
120,334

Noninterest Income
 
 
 
 
 
 
 
Net securities gains
48

 
229

 
50

 
237

Trust income
1,678

 
1,406

 
4,587

 
4,677

Service charges on deposit accounts
4,099

 
4,227

 
12,032

 
11,443

Insurance and retail brokerage commissions
1,709

 
1,822

 
4,704

 
4,623

Income from bank owned life insurance
1,330

 
1,359

 
4,131

 
4,219

Gain on sale of assets
742

 
1,356

 
4,488

 
2,056

Card related interchange income
3,599

 
3,536

 
10,620

 
10,214

Other income
1,845

 
3,148

 
6,360

 
9,430

Total noninterest income
15,050

 
17,083

 
46,972

 
46,899

Noninterest Expense
 
 
 
 
 
 
 
Salaries and employee benefits
22,244

 
20,998

 
65,185

 
64,288

Net occupancy expense
3,180

 
3,274

 
9,969

 
10,130

Furniture and equipment expense
4,471

 
3,294

 
15,050

 
9,863

Data processing expense
1,583

 
1,492

 
4,593

 
4,511

Advertising and promotion expense
861

 
815

 
2,346

 
2,369

Pennsylvania shares tax expense
1,033

 
1,516

 
2,782

 
4,223

Intangible amortization
174

 
193

 
530

 
848

Collection and repossession expense
783

 
860

 
1,941

 
2,862

Other professional fees and services
1,050

 
848

 
2,777

 
2,765

FDIC insurance
926

 
1,178

 
3,026

 
3,312

Loss on redemption of subordinated debt
—

 
—

 
—

 
1,629

Conversion related expenses
783

 
65

 
1,676

 
65

Other operating expenses
4,480

 
5,512

 
13,976

 
16,632

Total noninterest expense
41,568

 
40,045

 
123,851

 
123,497

Income Before Income Taxes
17,962

 
21,553

 
52,027

 
43,736

Income tax provision
5,466

 
5,699

 
15,303

 
11,513

Net Income
$
12,496

 
$
15,854

 
$
36,724

 
$
32,223

Average Shares Outstanding
92,567,503

 
96,194,594

 
93,627,933

 
97,671,343

Average Shares Outstanding Assuming Dilution
92,578,701

 
96,208,545

 
93,632,783

 
97,675,352

Per Share Data:
 
 
 
 
 
 
 
Basic Earnings per Share
$
0.13

 
$
0.16

 
$
0.39

 
$
0.33

Diluted Earnings per Share
$
0.13

 
$
0.16

 
$
0.39

 
$
0.33

Cash Dividends Declared per Common Share
$
0.07

 
$
0.06

 
$
0.21

 
$
0.17


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 INCOME (Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
Net Income
$
12,496

 
$
15,854

 
$
36,724

 
$
32,223

Other comprehensive (loss) income, before tax benefit (expense):
 
 
 
 
 
 
 
Unrealized holding (losses) gains on securities arising during the period
(5,544
)
 
(4,003
)
 
16,863

 
(31,644
)
Less: reclassification adjustment for gains on securities included in net income
(48
)
 
(229
)
 
(50
)
 
(237
)
Unrealized holding losses on derivatives arising during the period
(27
)
 
—

 
(27
)
 
—

Less: reclassification adjustment for losses on derivatives included in net income
1

 
—

 
1

 
—

Total other comprehensive (loss) income, before tax benefit (expense)
(5,618
)
 
(4,232
)
 
16,787

 
(31,881
)
Income tax benefit (expense) related to items of other comprehensive (loss) income
1,964

 
1,485

 
(5,875
)
 
11,153

Total other comprehensive (loss) income
(3,654
)
 
(2,747
)
 
10,912

 
(20,728
)
Comprehensive Income
$
8,842

 
$
13,107

 
$
47,636

 
$
11,495



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
 
Total
Shareholders’
Equity
 
(dollars in thousands, except share and per share data)
Balance at December 31, 2013
95,245,215

 
$
105,563

 
$
365,333

 
$
334,748

 
$
(20,588
)
 
$
(73,359
)
 
$
711,697

Net income
 
 
 
 
 
 
36,724

 
 
 
 
 
36,724

Other comprehensive income
 
 
 
 
 
 
 
 
10,912

 
 
 
10,912

Cash dividends declared ($0.21 per share)
 
 
 
 
 
 
(19,754
)
 
 
 
 
 
(19,754
)
Discount on dividend reinvestment plan purchases
 
 
 
 
(65
)
 
 
 
 
 
 
 
(65
)
Treasury stock acquired
(3,633,513
)
 
 
 
 
 
 
 
 
 
(30,928
)
 
(30,928
)
Treasury stock reissued
21,960

 
 
 
35

 
—

 
 
 
157

 
192

Restricted stock
88,987

 
—

 
273

 
—

 
 
 
433

 
706

Balance at September 30, 2014
91,722,649

 
$
105,563

 
$
365,576

 
$
351,718

 
$
(9,676
)
 
$
(103,697
)
 
$
709,484

 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
net
 
Treasury
Stock
 
Total
Shareholders’
Equity
 
(dollars in thousands, except share and per share data)
Balance at December 31, 2012
99,629,494

 
$
105,563

 
$
365,354

 
$
315,608

 
$
1,259

 
$
(41,777
)
 
$
746,007

Net income
 
 
 
 
 
 
32,223

 
 
 
 
 
32,223

Other comprehensive loss
 
 
 
 
 
 
 
 
(20,728
)
 
 
 
(20,728
)
Cash dividends declared ($0.17 per share)
 
 
 
 
 
 
(16,630
)
 
 
 
 
 
(16,630
)
Discount on dividend reinvestment plan purchases
 
 
 
 
(84
)
 
 
 
 
 
 
 
(84
)
Treasury stock acquired
(4,168,088
)
 
 
 
 
 
 
 
 
 
(30,001
)
 
(30,001
)
Treasury stock reissued
25,359

 
 
 
—

 
—

 
 
 
176

 
176

Restricted stock
58,000

 
—

 
68

 
2

 
 
 
323

 
393

Balance at September 30, 2013
95,544,765

 
$
105,563

 
$
365,338

 
$
331,203

 
$
(19,469
)
 
$
(71,279
)
 
$
711,356



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 Nine Months Ended
 
September 30,
 
2014
 
2013
Operating Activities
(dollars in thousands)
Net income
$
36,724

 
$
32,223

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
8,621

 
18,011

Deferred tax expense
6,207

 
9,441

Depreciation and amortization
11,659

 
6,899

Net gains on securities and other assets
(3,137
)
 
(892
)
Net amortization of premiums and discounts on securities
1,610

 
278

Net accretion of premiums and discounts on long term debt
(37
)
 
(88
)
Income from increase in cash surrender value of bank owned life insurance
(3,904
)
 
(4,219
)
(Increase) decrease in interest receivable
(339
)
 
1,807

Mortgage loans originated for sale
(3,810
)
 
—

Proceeds from sale of mortgage loans
2,569

 
—

Decrease in interest payable
(476
)
 
(1,297
)
Increase (decrease) in income taxes payable
1,157

 
(1,093
)
Decrease in prepaid FDIC insurance
—

 
9,205

Other-net
772

 
(2,434
)
Net cash provided by operating activities
57,616

 
67,841

Investing Activities
 
 
 
Transactions with securities available for sale:
 
 
 
Proceeds from sales
132,868

 
671

Proceeds from maturities and redemptions
199,580

 
258,097

Purchases
(325,955
)
 
(410,435
)
Purchases of FHLB stock
(32,115
)
 
(15,378
)
Proceeds from the redemption of FHLB stock
16,565

 
9,902

Proceeds from bank owned life insurance
1,776

 
2,092

Proceeds from sale of loans
3,112

 
20,760

Proceeds from sale of other assets
11,314

 
10,880

Net increase in loans
(146,863
)
 
(94,250
)
Purchases of premises and equipment
(9,781
)
 
(4,576
)
Net cash used in investing activities
(149,499
)
 
(222,237
)
Financing Activities
 
 
 
Net increase (decrease) in federal funds purchased
3,500

 
(23,000
)
Net increase in other short-term borrowings
404,852

 
218,401

Net (decrease) increase in deposits
(231,475
)
 
59,945

Repayments of other long-term debt
(32,808
)
 
(29,883
)
Proceeds from other long-term debt
5,000

 
—

Repayments of subordinated debentures
—

 
(34,702
)
Discount on dividend reinvestment plan purchases
(65
)
 
(84
)
Dividends paid
(19,754
)
 
(16,630
)
Proceeds from reissuance of treasury stock
192

 
176

Purchase of treasury stock
(30,928
)
 
(29,553
)
Net cash provided by financing activities
98,514

 
144,670

Net increase (decrease) in cash and cash equivalents
6,631

 
(9,726
)
Cash and cash equivalents at January 1
77,439

 
102,982

Cash and cash equivalents at September 30
$
84,070

 
$
93,256


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 nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year of 2014. These interim financial statements should be read in conjunction with First Commonwealth’s 2013 Annual Report on Form 10-K.
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing bank deposits. Generally, federal funds are sold for one-day periods.
Note 2 Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Condensed Consolidated Statements of Income.
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
Pretax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Pretax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
(dollars in thousands)
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
16,863

 
$
(5,902
)
 
$
10,961

 
$
(31,644
)
 
$
11,070

 
$
(20,574
)
Reclassification adjustment for gains on securities included in net income
(50
)
 
18

 
(32
)
 
(237
)
 
83

 
(154
)
Total unrealized gains (losses) on securities
16,813

 
(5,884
)
 
10,929

 
(31,881
)
 
11,153

 
(20,728
)
Unrealized losses on derivatives:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on derivatives arising during the period
$
(27
)
 
$
9

 
$
(18
)
 
$
—

 
$
—

 
$
—

Reclassification adjustment for losses on derivatives included in net income
$
1

 
$
—

 
$
1

 
$
—

 
$
—

 
$
—

Total unrealized gains on derivatives
$
(26
)
 
$
9

 
$
(17
)
 
$
—

 
$
—

 
$
—

Total other comprehensive income (loss)
$
16,787

 
$
(5,875
)
 
$
10,912

 
$
(31,881
)
 
$
11,153

 
$
(20,728
)


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 September 30,
 
2014
 
2013
 
Pretax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Pretax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
(dollars in thousands)
Unrealized losses on securities:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on securities arising during the period
$
(5,544
)
 
$
1,938

 
$
(3,606
)
 
$
(4,003
)
 
$
1,405

 
$
(2,598
)
Reclassification adjustment for gains on securities included in net income
(48
)
 
17

 
(31
)
 
(229
)
 
80

 
(149
)
Total unrealized losses on securities
(5,592
)
 
1,955

 
(3,637
)
 
(4,232
)
 
1,485

 
(2,747
)
Unrealized losses on derivatives:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on derivatives arising during the period
(27
)
 
9

 
(18
)
 
—

 
—

 
—

Reclassification adjustment for losses on derivatives included in net income
1

 
—

 
1

 
—

 
—

 
—

Total unrealized gains on derivatives
(26
)
 
9

 
(17
)
 
—

 
—

 
—

Total other comprehensive loss
$
(5,618
)
 
$
1,964

 
$
(3,654
)
 
$
(4,232
)
 
$
1,485

 
$
(2,747
)
 
The following table details the change in components of OCI for the nine months ended September 30:
 
2014
 
2013
 
Securities Available for Sale
Post-Retirement Obligation
Derivatives
Accumulated Other Comprehensive Income
 
Securities Available for Sale
Post-Retirement Obligation
Derivatives
Accumulated Other Comprehensive Income
 
(dollars in thousands)
Balance at December 31
$
(20,868
)
$
280

$
—

$
(20,588
)
 
$
1,121

$
138

$
—

$
1,259

Other comprehensive income (loss) before reclassification adjustment
10,961

—

(18
)
10,943

 
(23,786
)
—

—

(23,786
)
Amounts reclassified from accumulated other comprehensive income (loss)
(32
)
—

1

(31
)
 
3,058

—

—

3,058

Net other comprehensive income (loss) during the period
10,929

—

(17
)
10,912

 
(20,728
)
—

—

(20,728
)
Balance at September 30
$
(9,939
)
$
280

$
(17
)
$
(9,676
)
 
$
(19,607
)
$
138

$
—

$
(19,469
)

Note 3 Supplemental Cash Flow Disclosures
The following table presents information related to cash paid during the period for interest as well as detail on non-cash investing and financing activities for the nine months ended September 30:
 
2014
 
2013
 
(dollars in thousands)
Cash paid during the period for:
 
 
 
Interest
$
14,747

 
$
18,115

Income taxes
7,700

 
3,080

Non-cash investing and financing activities:
 
 
 
Loans transferred to other real estate owned and repossessed assets
4,239

 
8,847

Loans transferred from held to maturity to held for sale
3,035

 
20,135

Gross increase (decrease) in market value adjustment to securities available for sale
16,812

 
(31,866
)
Investments committed to purchase, not settled
1,000

 
—

Unsettled treasury stock repurchases
—

 
1,670


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 September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Weighted average common shares issued
105,563,455

 
105,563,455

 
105,563,455

 
105,563,455

Average treasury stock shares
(12,836,692
)
 
(9,184,715
)
 
(11,773,187
)
 
(7,715,455
)
Average unearned nonvested shares
(159,260
)
 
(184,146
)
 
(162,335
)
 
(176,657
)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
92,567,503

 
96,194,594

 
93,627,933

 
97,671,343

Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share
11,198

 
13,951

 
4,850

 
4,009

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
92,578,701

 
96,208,545

 
93,632,783

 
97,675,352

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the nine months ended September 30 because to do so would have been antidilutive.
 
2014
 
2013
 
 
 
Price Range
 
 
 
Price Range
 
Shares
 
From
 
To
 
Shares
 
From
 
To
Stock Options
15,000

 
$
14.55

 
$
14.55

 
31,954

 
$
10.46

 
$
14.55

Restricted Stock
94,929

 
4.41

 
9.18

 
92,181

 
5.96

 
7.57

Note 5 Variable Interest Entities
As defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, a Variable Interest Entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Under ASC 810-10, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is deemed to be the primary beneficiary, which generally means it is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both.
First Commonwealth’s VIEs are evaluated under the guidance included in FASB Accounting Standards Update (“ASU”) 2009-17. These VIEs include qualified affordable housing projects that First Commonwealth has invested in as part of its community reinvestment initiatives. We periodically assess whether or not our variable interests in the VIE, based on qualitative analysis, provide us with a controlling interest in the VIE. The analysis includes an assessment of the characteristics of the VIE. We do not have a controlling financial interest in the VIE, which would require consolidation of the VIE, as we do not have the following characteristics: (1) the power to direct the activities that most significantly impact the VIE’s economic performance; and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
First Commonwealth’s maximum potential exposure is equal to its carrying value and is summarized in the table below:
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
Low Income Housing Limited Partnership Investments
$
109

 
$
207


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:
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
 
 
 
Commitments to extend credit
$
1,644,486

 
$
1,571,987

Financial standby letters of credit
29,379

 
38,121

Performance standby letters of credit
26,210

 
32,441

Commercial letters of credit
2,405

 
—

 
The notional amounts outstanding as of September 30, 2014 include amounts issued in 2014 of $0.3 million in financial standby letters of credit and $0.8 million in performance standby letters of credit. There were $0.2 million commercial letters of credit issued during 2014. A liability of $0.1 million has been recorded as of September 30, 2014 and December 31, 2013, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.
Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk related to these commitments resulted in the recording of a liability of $2.9 million as of September 30, 2014 and $3.2 million as of December 31, 2013. 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
Market Rate Savings IRA Litigation
McGrogan v. First Commonwealth Bank was filed as a class action 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 asserted that the Bank committed fraud, breached its modified contract with the class members, and violated the Pennsylvania Unfair Trade Practice and Consumer Protection Law ("UTPCPL") 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. Plaintiffs sought 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. The court ruled that the IRA contract only guaranteed the 8% return until the 90-day or 18-month maturity of each instrument. 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 was 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 dismissed 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. On appeal, the Superior Court affirmed the denial of class certification to the claims of fraud in the execution and violation of the UTPCPL. The Superior Court found that none of the other issues were ripe for appeal. Jurisdiction was returned to the Court of Common Pleas where the individual fraud and UTPCPL claims of Mr. and Mrs. McGrogan are pending. Plaintiffs filed their pretrial statement on June 16, 2014, seeking $0.5 million in damages for the McGrogans and $0.8 million for their adult children beneficiaries. The Bank considers these damage claims exaggerated and otherwise invalid. The Bank has filed a

11
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


motion for summary judgment, which was granted as to the claims of the adult children beneficiaries. The case is scheduled for trial on January 20, 2015.

In December 2013, three new complaints were filed by 34 former members of the McGrogan class:
(1)
Jarrett et al. v. First Commonwealth Bank - An action filed by eight plaintiffs on December 2, 2013 in the Westmoreland County Court of Common Pleas asserting claims for fraud in the inducement, fraud in the execution, violation of the UTPCPL, breach of fiduciary duty and promissory estoppel.
(2)
Young et al. v. First Commonwealth Bank - An action filed by 12 plaintiffs on December 2, 2013 in the Westmoreland County Court of Common Pleas asserting claims for fraud in the inducement, fraud in the execution, violation of the UTPCPL, breach of fiduciary duty and promissory estoppel.
(3)
Fisanik et. al. v. First Commonwealth Bank - An action filed by 14 plaintiffs on December 9, 2013 in the Cambria County Court of Common Pleas asserting claims for fraud in the inducement, fraud in the execution, violation of the UTPCPL, and breach of fiduciary duty.

The 36 plaintiffs who have filed individual actions held Market Rate Savings IRA balances totaling approximately $4 million at the time of the Bank’s resignation as custodian of the IRAs in 2008-09. The average age of the plaintiffs at that time was 62.

The Bank filed preliminary objections to the three new complaints. On July 22, 2014 the court issued an order permitting the three new cases to proceed only on theories of fraud in the execution and violation of the UTPCPL based on fraud in the execution and dismissing the claims for fraud in the inducement, breach of fiduciary duty and promissory estoppel with prejudice. Discovery in the three actions is beginning.

At this time, the Bank believes the claims are without merit.
Other matters
In 2013, First Commonwealth identified an error related to historical tax reporting for approximately 700-900 customers, resulting in the establishment of a $0.8 million contingency reserve. During the second quarter of 2014, a settlement in the amount of $0.4 million was reached with one taxing authority, while resolution with another taxing authority continues. Based on the settlement reached, management's best estimate of the remaining liability for this issue is $0.1 million. As a result, in addition to the settlement amount, $0.3 million of the contingency reserve was reversed during the second quarter of 2014. The contingency 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, financial position or cash flow of First Commonwealth or its subsidiaries.

12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 7 Investment Securities
Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:
 
September 30, 2014
 
December 31, 2013
 
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
$
21,780

 
$
2,617

 
$
(10
)
 
$
24,387

 
$
22,639

 
$
2,624

 
$
(59
)
 
$
25,204

Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 

 
 
 
 
 
 
 

Mortgage-Backed Securities – Residential
987,530

 
11,642

 
(16,414
)
 
982,758

 
1,009,519

 
12,531

 
(27,163
)
 
994,887

Mortgage-Backed Securities – Commercial
79

 
2

 
—

 
81

 
104

 
1

 
—

 
105

Other Government-Sponsored Enterprises
269,177

 
—

 
(1,460
)
 
267,717

 
267,971

 
81

 
(1,927
)
 
266,125

Obligations of States and Political Subdivisions
19,421

 
251

 
(3
)
 
19,669

 
80

 
—

 
—

 
80

Corporate Securities
6,685

 
601

 
—

 
7,286

 
6,693

 
328

 
—

 
7,021

Pooled Trust Preferred Collateralized Debt Obligations
41,971

 
248

 
(12,763
)
 
29,456

 
42,040

 
—

 
(18,517
)
 
23,523

Total Debt Securities
1,346,643

 
15,361

 
(30,650
)
 
1,331,354

 
1,349,046

 
15,565

 
(47,666
)
 
1,316,945

Equities
1,420

 
—

 
—

 
1,420

 
1,420

 
—

 
—

 
1,420

Total Securities Available for Sale
$
1,348,063

 
$
15,361

 
$
(30,650
)
 
$
1,332,774

 
$
1,350,466

 
$
15,565

 
$
(47,666
)
 
$
1,318,365


Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and obligations of U.S. Government-sponsored enterprises. These obligations have contractual maturities ranging from less than one year to approximately 30 years with lower anticipated lives to maturity due to prepayments. All mortgage backed securities contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds, therefore First Commonwealth uses computer simulation models to test the average life and yield volatility of all mortgage backed securities under various interest rate scenarios to monitor the potential impact on earnings and interest rate risk positions.

Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties. Other fixed income securities within the portfolio also contain prepayment risk.
The amortized cost and estimated fair value of debt securities available for sale at September 30, 2014, by contractual maturity, are shown below.
 
Amortized
Cost
 
Estimated
Fair Value
 
(dollars in thousands)
Due within 1 year
$
2,600

 
$
2,600

Due after 1 but within 5 years
266,577

 
265,117

Due after 5 but within 10 years
11,224

 
11,373

Due after 10 years
56,853

 
45,038

 
337,254

 
324,128

Mortgage-Backed Securities (a)
1,009,389

 
1,007,226

Total Debt Securities
$
1,346,643

 
$
1,331,354

 

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


(a)
Mortgage Backed Securities include an amortized cost of $21.8 million and a fair value of $24.4 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $987.6 million and a fair value of $982.8 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 nine months ended September 30:
 
2014
 
2013
 
(dollars in thousands)
Proceeds from sales
$
132,868

 
$
671

Gross gains (losses) realized:
 
 
 
Sales Transactions:
 
 
 
Gross gains
$
489

 
$
233

Gross losses
(441
)
 
—

 
48

 
233

Maturities and impairment
 
 
 
Gross gains
2

 
4

Gross losses
—

 
—

Other-than-temporary impairment
—

 
—

 
2

 
4

Net gains and impairment
$
50

 
$
237


During the third quarter of 2014, $132.9 million million in available for sale securities were sold as part of a strategy to protect the Company's net interest margin from the effects of a prolonged low interest rate enviroment. Proceeds from the investment sales were reinvested into like securities with a slightly longer duration and higher yield. The overall effect was to increase the yield on the investment portfolio by 7 basis points, while only extending the overall duration of the entire portfolio by 2.4 months.
Securities available for sale with an estimated fair value of $547.1 million and $594.9 million were pledged as of September 30, 2014 and December 31, 2013, respectively, to secure public deposits and for other purposes required or permitted by law.
Note 8 Impairment of Investment Securities
Securities Available for Sale
As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit related other-than-temporary impairment on debt securities is recognized in earnings while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the nine months ended September 30, 2014 and 2013, no other-than-temporary impairment charges were recognized.
First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell 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

14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


recognized in accordance with FASB ASC Topic 320. There is a risk that First Commonwealth will record other-than-temporary impairment charges in the future. See Note 11, “Fair Values of Assets and Liabilities,” for additional information.
The following table presents the gross unrealized losses and estimated fair values at September 30, 2014 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
$
2,862

 
$
(10
)
 
$
—

 
$
—

 
$
2,862

 
$
(10
)
Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
$
282,378

 
$
(1,311
)
 
$
397,581

 
$
(15,103
)
 
$
679,959

 
$
(16,414
)
Other Government-Sponsored Enterprises
159,666

 
(434
)
 
105,451

 
(1,026
)
 
265,117

 
(1,460
)
Obligations of States and Political Subdivisions
1,582

 
(3
)
 
—

 
—

 
1,582

 
(3
)
Pooled Trust Preferred Collateralized Debt Obligations
—

 
—

 
24,957

 
(12,763
)
 
24,957

 
(12,763
)
Total Securities Available for Sale
$
446,488

 
$
(1,758
)
 
$
527,989

 
$
(28,892
)
 
$
974,477

 
$
(30,650
)

At September 30, 2014, fixed income securities issued by U.S. Government-sponsored enterprises comprised 58% of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 42% of the unrealized losses due to changes in market interest rates and the illiquid market for this investment type. There were no equity securities in an unrealized loss position at September 30, 2014.
The following table presents the gross unrealized losses and estimated fair values at December 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
$
2,035

 
$
(59
)
 
$
—

 
$
—

 
$
2,035

 
$
(59
)
Obligations of U.S. Government-Sponsored Enterprises:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities – Residential
632,231

 
(22,844
)
 
65,324

 
(4,319
)
 
697,555

 
(27,163
)
Other Government-Sponsored Enterprises
183,542

 
(1,448
)
 
24,501

 
(479
)
 
208,043

 
(1,927
)
Pooled Trust Preferred Collateralized Debt Obligations
2,401

 
(237
)
 
21,122

 
(18,280
)
 
23,523

 
(18,517
)
Total Securities Available for Sale
$
820,209

 
$
(24,588
)
 
$
110,947

 
$
(23,078
)
 
$
931,156

 
$
(47,666
)
As of September 30, 2014, our corporate securities had an amortized cost and an estimated fair value of $6.7 million and $7.3 million, respectively, and were comprised of single issue trust preferred securities issued primarily by large regional banks. As of December 31, 2013, the same portion of the portfolio had an amortized cost of $6.7 million and an estimated fair value of $7.0 million. There were no corporate securities in an unrealized loss position as of September 30, 2014 and December 31, 2013. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.
As of September 30, 2014, the book value of our pooled trust preferred collateralized debt obligations totaled $42.0 million with an estimated fair value of $29.5 million, which includes securities comprised of 282 banks and other financial institutions. All of our pooled securities are mezzanine tranches, four of which now have no senior class remaining in the issue. The credit rating on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled

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


security consisted of a security issued by any one institution. As of September 30, 2014, after taking into account management’s best estimates of future interest deferrals and defaults, five of our securities had no excess subordination in the tranches we own and five of our securities had excess subordination which ranged from 2% to 43% of the current performing collateral.
 
The following table provides information related to our pooled trust preferred collateralized debt obligations as of September 30, 2014:
Deal
Class
 
Book
Value
 
Estimated Fair
Value
 
Unrealized
Gain
(Loss)
 
Moody’s/
Fitch
Ratings
 
Number
of
Banks
 
Deferrals
and
Defaults
as a % of
Current
Collateral
 
Excess
Subordination
as a % of
Current
Performing
Collateral
(dollars in thousands)
Pre TSL IV
Mezzanine
 
$
1,830

 
$
1,327

 
$
(503
)
 
B1/BB
 
6

 
18.05
%
 
41.28
%
Pre TSL V
Mezzanine
 
59

 
127

 
68

 
C/-
 
3

 
100.00

 
—

Pre TSL VII
Mezzanine
 
2,723

 
2,864

 
141

 
Ca/-
 
14

 
54.14

 
—

Pre TSL VIII
Mezzanine
 
1,956

 
1,332

 
(624
)
 
C/C
 
29

 
59.12

 
—

Pre TSL IX
Mezzanine
 
2,331

 
1,453

 
(878
)
 
B3/C
 
40

 
26.45

 
2.23

Pre TSL X
Mezzanine
 
1,469

 
1,508

 
39

 
Caa1/C
 
45

 
31.95

 
—

Pre TSL XII
Mezzanine
 
5,484

 
3,455

 
(2,029
)
 
B3/C
 
66

 
25.53

 
—

Pre TSL XIII
Mezzanine
 
12,403

 
8,536

 
(3,867
)
 
Caa1/C
 
58

 
20.94

 
23.85

Pre TSL XIV
Mezzanine
 
13,277

 
8,477

 
(4,800
)
 
Caa1/C
 
56

 
27.42

 
43.02

MMCap I
Mezzanine
 
439

 
377

 
(62
)
 
Ca/C
 
11

 
59.24

 
19.70

Total
 
 
$
41,971

 
$
29,456

 
$
(12,515
)
 
 
 
 
 
 
 
 
Lack of liquidity in the market for trust preferred collateralized debt obligations, below investment grade credit ratings and market uncertainties related to the financial industry are factors contributing to the impairment on these securities.
All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies and therefore are not considered covered funds under the Volcker Rule.
On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three and nine months ended September 30, 2014 and 2013, there were no credit related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments we determine a credit related portion and a non-credit related portion of other-than-temporary impairment. The credit related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit related impairment. A discounted cash flow analysis provides the best estimate of credit related other-than-temporary impairment for these securities.
Additional information related to the discounted cash flow analysis follows:
Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at September 30, 2014. 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

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


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 282 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.
•
Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of September 30, 2014, 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 allow management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.
Our cash flow analysis as of September 30, 2014, indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the nine months ended September 30, 2014. Based upon the analysis performed by management, it is probable that five 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 September 30, 2014 indicates it is probable that we will collect all contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods, however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.
During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of September 30, 2014, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from 22% to 154% 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 September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands)
Balance, beginning (a)
$
26,842

 
$
42,699

 
$
27,543

 
$
43,274

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)
(288
)
 
(1,326
)
 
(989
)
 
(1,901
)
Balance, ending
$
26,554

 
$
41,373

 
$
26,554

 
$
41,373

 
(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 nine months of 2014 and 2013, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of September 30, 2014 and 2013, there are no equity securities in an unrealized loss position.
Other Investments
As a member of the Federal Home Loan Bank (“FHLB”), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of September 30, 2014 and December 31, 2013, our FHLB stock totaled $51.0 million and $35.4 million, respectively and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.
Beginning in July 2013, the FHLB began repurchasing 100% of a member's excess stock on a monthly basis. In the months prior to that in 2013, the FHLB repurchased the lessor of 5% of the members' total capital stock outstanding or its total excess capital stock on a quarterly basis. As a result, during the nine months ended September 30, 2014 and 2013, $16.6 million and $9.9 million, respectively, of the stock owned by First Commonwealth was repurchased. The FHLB repurchased stock and paid dividends in 2014 and 2013, however, decisions regarding any future repurchase of excess capital stock and dividend payments will be made by the FHLB on an ongoing basis.
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 nine months ended September 30, 2014. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

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


Note 9 Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types:
 
 
September 30, 2014
 
December 31, 2013
 
(dollars in thousands)
Commercial, financial, agricultural and other
$
1,071,531

 
$
1,021,056

Real estate construction
115,788

 
93,289

Residential real estate
1,234,842

 
1,262,718

Commercial real estate
1,345,302

 
1,296,472

Loans to individuals
644,018

 
610,298

Total loans and leases net of unearned income
$
4,411,481

 
$
4,283,833

Credit Quality Information
As part of the on-going monitoring of credit quality within the loan portfolio, the following credit worthiness categories are used in grading our loans:
Pass
  
Acceptable levels of risk exist in the relationship. Includes all loans not adversely classified as OAEM, substandard or doubtful.
Other Assets Especially Mentioned (OAEM)
  
Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Bank’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.
Substandard
  
Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.
Doubtful
  
Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.
The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movement between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following tables represent our credit risk profile by creditworthiness:
 
September 30, 2014
 
Commercial, financial, agricultural and other
 
Real estate construction
 
Residential real estate
 
Commercial real estate
 
Loans to individuals
 
Total
 
(dollars in thousands)
Pass
$
996,609

 
$
106,989

 
$
1,223,231

 
$
1,301,447

 
$
643,756

 
$
4,272,032

Non-Pass
 
 
 
 
 
 
 
 
 
 
 
OAEM
40,620

 
8,222

 
1,874

 
25,009

 
—

 
75,725

Substandard
30,382

 
577

 
9,737

 
18,846

 
262

 
59,804

Doubtful
3,920

 
—

 
—

 
—

 
—

 
3,920

Total Non-Pass
74,922

 
8,799

 
11,611

 
43,855

 
262

 
139,449

Total
$
1,071,531

 
$
115,788

 
$
1,234,842

 
$
1,345,302

 
$
644,018

 
$
4,411,481

 
 
December 31, 2013
 
Commercial, financial, agricultural and other
 
Real estate construction
 
Residential real estate
 
Commercial real estate
 
Loans to individuals
 
Total
 
(dollars in thousands)
Pass
$
943,107

 
$
79,679

 
$
1,245,422

 
$
1,243,170

 
$
610,094

 
$
4,121,472

Non-Pass
 
 
 
 
 
 
 
 
 
 
 
OAEM
35,429

 
9,710

 
5,161

 
28,823

 
1

 
79,124

Substandard
42,520

 
3,900

 
12,135

 
24,479

 
203

 
83,237

Doubtful
—

 
—

 
—

 
—

 
—

 
—

Total Non-Pass
77,949

 
13,610

 
17,296

 
53,302

 
204

 
162,361

Total
$
1,021,056

 
$
93,289

 
$