FCF 10-Q Quarterly Report June 30, 2014 | Alphaminr
FIRST COMMONWEALTH FINANCIAL CORP /PA/
ALPHAMINR

FCF 10-Q Quarter ended June 30, 2014

Balance Sheet
Cash Flow
Income Statement
Debt
FIRST COMMONWEALTH FINANCIAL CORP /PA/
10-Ks and 10-Qs
10-Q
Quarter ended Sept. 30, 2025
10-Q
Quarter ended June 30, 2025
10-Q
Quarter ended March 31, 2025
10-K
Fiscal year ended Dec. 31, 2024
10-Q
Quarter ended Sept. 30, 2024
10-Q
Quarter ended June 30, 2024
10-Q
Quarter ended March 31, 2024
10-K
Fiscal year ended Dec. 31, 2023
10-Q
Quarter ended Sept. 30, 2023
10-Q
Quarter ended June 30, 2023
10-Q
Quarter ended March 31, 2023
10-K
Fiscal year ended Dec. 31, 2022
10-Q
Quarter ended Sept. 30, 2022
10-Q
Quarter ended June 30, 2022
10-Q
Quarter ended March 31, 2022
10-K
Fiscal year ended Dec. 31, 2021
10-Q
Quarter ended Sept. 30, 2021
10-Q
Quarter ended June 30, 2021
10-Q
Quarter ended March 31, 2021
10-K
Fiscal year ended Dec. 31, 2020
10-Q
Quarter ended Sept. 30, 2020
10-Q
Quarter ended June 30, 2020
10-Q
Quarter ended March 31, 2020
10-K
Fiscal year ended Dec. 31, 2019
10-Q
Quarter ended Sept. 30, 2019
10-Q
Quarter ended June 30, 2019
10-Q
Quarter ended March 31, 2019
10-K
Fiscal year ended Dec. 31, 2018
10-Q
Quarter ended Sept. 30, 2018
10-Q
Quarter ended June 30, 2018
10-Q
Quarter ended March 31, 2018
10-K
Fiscal year ended Dec. 31, 2017
10-Q
Quarter ended Sept. 30, 2017
10-Q
Quarter ended June 30, 2017
10-Q
Quarter ended March 31, 2017
10-K
Fiscal year ended Dec. 31, 2016
10-Q
Quarter ended Sept. 30, 2016
10-Q
Quarter ended June 30, 2016
10-Q
Quarter ended March 31, 2016
10-K
Fiscal year ended Dec. 31, 2015
10-Q
Quarter ended Sept. 30, 2015
10-Q
Quarter ended June 30, 2015
10-Q
Quarter ended March 31, 2015
10-K
Fiscal year ended Dec. 31, 2014
10-Q
Quarter ended Sept. 30, 2014
10-Q
Quarter ended June 30, 2014
10-Q
Quarter ended March 31, 2014
10-K
Fiscal year ended Dec. 31, 2013
10-Q
Quarter ended Sept. 30, 2013
10-Q
Quarter ended June 30, 2013
10-Q
Quarter ended March 31, 2013
10-K
Fiscal year ended Dec. 31, 2012
10-Q
Quarter ended Sept. 30, 2012
10-Q
Quarter ended June 30, 2012
10-Q
Quarter ended March 31, 2012
10-K
Fiscal year ended Dec. 31, 2011
10-Q
Quarter ended Sept. 30, 2011
10-Q
Quarter ended June 30, 2011
10-Q
Quarter ended March 31, 2011
10-K
Fiscal year ended Dec. 31, 2010
10-Q
Quarter ended Sept. 30, 2010
10-Q
Quarter ended June 30, 2010
10-Q
Quarter ended March 31, 2010
10-K
Fiscal year ended Dec. 31, 2009
PROXIES
DEF 14A
Filed on April 29, 2025
DEF 14A
Filed on March 13, 2025
DEF 14A
Filed on April 23, 2024
DEF 14A
Filed on March 14, 2024
DEF 14A
Filed on March 15, 2023
DEF 14A
Filed on April 26, 2022
DEF 14A
Filed on March 16, 2022
DEF 14A
Filed on March 17, 2021
DEF 14A
Filed on March 18, 2020
DEF 14A
Filed on March 14, 2019
DEF 14A
Filed on March 15, 2018
DEF 14A
Filed on March 16, 2017
DEF 14A
Filed on March 17, 2016
DEF 14A
Filed on March 19, 2015
DEF 14A
Filed on March 12, 2014
DEF 14A
Filed on March 22, 2013
DEF 14A
Filed on March 23, 2012
DEF 14A
Filed on March 16, 2011
DEF 14A
Filed on March 22, 2010
10-Q 1 fcf-2014630x10q.htm 10-Q FCF-2014.6.30-10Q

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, 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 August 5, 2014 , was 93,510,401 .


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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
June 30,
2014
December 31,
2013
(dollars in thousands,
except share data)
Assets
Cash and due from banks
$
92,860

$
74,427

Interest-bearing bank deposits
5,151

3,012

Securities available for sale, at fair value
1,347,611

1,318,365

Other investments
44,077

35,444

Loans:
Portfolio loans
4,334,214

4,283,833

Allowance for credit losses
(50,725
)
(54,225
)
Net loans
4,283,489

4,229,608

Premises and equipment, net
66,060

67,940

Other real estate owned
7,817

11,728

Goodwill
159,371

159,956

Amortizing intangibles, net
955

1,311

Bank owned life insurance
175,172

174,372

Other assets
117,659

138,698

Total assets
$
6,300,222

$
6,214,861

Liabilities
Deposits (all domestic):
Noninterest-bearing
$
1,008,031

$
912,361

Interest-bearing
3,452,390

3,691,502

Total deposits
4,460,421

4,603,863

Short-term borrowings
845,873

626,615

Subordinated debentures
72,167

72,167

Other long-term debt
136,672

144,385

Total long-term debt
208,839

216,552

Other liabilities
60,585

56,134

Total liabilities
5,575,718

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 June 30, 2014 and December 31, 2013, and 93,752,812 and 95,245,215 shares outstanding at June 30, 2014 and December 31, 2013, respectively
105,563

105,563

Additional paid-in capital
365,550

365,333

Retained earnings
345,771

334,748

Accumulated other comprehensive loss, net
(6,022
)
(20,588
)
Treasury stock (11,810,643 and 10,318,240 shares at June 30, 2014 and December 31, 2013, respectively)
(86,358
)
(73,359
)
Total shareholders’ equity
724,504

711,697

Total liabilities and shareholders’ equity
$
6,300,222

$
6,214,861


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

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,
2014
2013
2014
2013
(dollars in thousands, except share data)
Interest Income
Interest and fees on loans
$
42,192

$
43,629

$
85,290

$
88,243

Interest and dividends on investments:
Taxable interest
7,334

7,319

14,514

14,428

Interest exempt from federal income taxes
64

1

68

2

Dividends
574

30

796

66

Interest on bank deposits
2

2

4

3

Total interest income
50,166

50,981

100,672

102,742

Interest Expense
Interest on deposits
3,416

4,007

6,923

8,198

Interest on short-term borrowings
477

287

946

507

Interest on subordinated debentures
571

580

1,137

1,964

Interest on other long-term debt
319

409

692

957

Total interest expense
4,783

5,283

9,698

11,626

Net Interest Income
45,383

45,698

90,974

91,116

Provision for credit losses
3,317

10,800

6,548

15,297

Net Interest Income after Provision for Credit Losses
42,066

34,898

84,426

75,819

Noninterest Income
Net securities gains
2

4

2

8

Trust income
1,474

1,608

2,909

3,271

Service charges on deposit accounts
4,141

3,815

7,933

7,216

Insurance and retail brokerage commissions
1,600

1,384

2,995

2,801

Income from bank owned life insurance
1,432

1,432

2,801

2,860

Gain on sale of assets
2,165

425

3,746

700

Card related interchange income
3,655

3,490

7,021

6,678

Other income
2,533

2,773

4,515

6,282

Total noninterest income
17,002

14,931

31,922

29,816

Noninterest Expense
Salaries and employee benefits
21,897

21,497

42,941

43,290

Net occupancy expense
3,283

3,221

6,789

6,856

Furniture and equipment expense
5,249

3,297

10,579

6,569

Data processing expense
1,542

1,503

3,010

3,019

Advertising and promotion expense
785

775

1,485

1,554

Pennsylvania shares tax expense
1,038

1,517

1,749

2,707

Intangible amortization
178

297

356

655

Collection and repossession expense
449

851

1,158

2,002

Other professional fees and services
691

948

1,715

1,917

FDIC insurance
1,051

1,084

2,100

2,134

Loss on sale or write-down of assets
745

343

1,180

530

Loss on redemption of subordinated debt
—

1,629

—

1,629

Operational losses (recoveries)
229

214

(460
)
552

Conversion related expenses
539

—

893

—

Other operating expenses
4,720

4,822

8,788

10,038

Total noninterest expense
42,396

41,998

82,283

83,452

Income Before Income Taxes
16,672

7,831

34,065

22,183

Income tax provision
4,744

2,015

9,837

5,814

Net Income
$
11,928

$
5,816

$
24,228

$
16,369

Average Shares Outstanding
93,794,589

97,564,699

94,166,936

98,421,956

Average Shares Outstanding Assuming Dilution
93,811,543

97,577,010

94,177,831

98,429,223

Per Share Data:
Basic Earnings per Share
$
0.13

$
0.06

$
0.26

$
0.17

Diluted Earnings per Share
$
0.13

$
0.06

$
0.26

$
0.17

Cash Dividends Declared per Common Share
$
0.07

$
0.06

$
0.14

$
0.11


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

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 Six Months Ended
June 30,
June 30,
2014
2013
2014
2013
(dollars in thousands)
Net Income
$
11,928

$
5,816

$
24,228

$
16,369

Other comprehensive income (loss), before tax (expense) benefit:
Unrealized holding gains (losses) on securities arising from during the period
9,950

(25,230
)
22,407

(27,641
)
Less: reclassification adjustment for gains on securities included in net income
(2
)
(4
)
(2
)
(8
)
Total other comprehensive income (loss), before tax (expense) benefit
9,948

(25,234
)
22,405

(27,649
)
Income tax (expense) benefit related to items of other comprehensive income (loss)
(3,478
)
8,824

(7,839
)
9,668

Total other comprehensive income (loss)
6,470

(16,410
)
14,566

(17,981
)
Comprehensive Income (Loss)
$
18,398

$
(10,594
)
$
38,794

$
(1,612
)


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

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
24,228

24,228

Other comprehensive income
14,566

14,566

Cash dividends declared ($0.14 per share)
(13,205
)
(13,205
)
Discount on dividend reinvestment plan purchases
(65
)
(65
)
Treasury stock acquired
(1,603,350
)
(13,407
)
(13,407
)
Treasury stock reissued
21,960

35

—

157

192

Restricted stock
88,987

—

247

—

251

498

Balance at June 30, 2014
93,752,812

$
105,563

$
365,550

$
345,771

$
(6,022
)
$
(86,358
)
$
724,504

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
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



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

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,
2014
2013
(dollars in thousands)
Operating Activities
Net income
$
24,228

$
16,369

Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses
6,548

15,297

Deferred tax expense
4,918

3,848

Depreciation and amortization
8,436

4,736

Net (gains) losses on securities and other assets
(2,843
)
418

Net amortization of premiums and discounts on securities
1,000

1,162

Net accretion of premiums and discounts on long term debt
(37
)
(58
)
Income from increase in cash surrender value of bank owned life insurance
(2,576
)
(2,860
)
Decrease in interest receivable
668

606

Decrease in interest payable
(288
)
(1,284
)
Increase (decrease) in income taxes payable
998

(250
)
Other-net
5,685

5,708

Net cash provided by operating activities
46,737

43,692

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

42

Proceeds from maturities and redemptions
152,846

195,806

Purchases
(153,310
)
(360,010
)
Purchases of FHLB stock
(18,659
)
(10,670
)
Proceeds from the redemption of FHLB stock
10,025

4,984

Proceeds from bank owned life insurance
939

1,439

Proceeds from sale of loans
3,112

20,348

Proceeds from sale of other assets
9,500

2,853

Net increase in loans
(66,085
)
(77,496
)
Purchases of premises and equipment
(6,229
)
(3,106
)
Net cash used in investing activities
(67,861
)
(225,810
)
Financing Activities
Net increase (decrease) in federal funds purchased
13,000

(24,000
)
Net increase in other short-term borrowings
206,259

109,621

Net (decrease) increase in deposits
(143,441
)
175,186

Repayments of other long-term debt
(7,675
)
(29,797
)
Repayments of subordinated debentures
—

(34,702
)
Discount on dividend reinvestment plan purchases
(65
)
(55
)
Dividends paid
(13,205
)
(10,842
)
Proceeds from reissuance of treasury stock
192

176

Purchase of treasury stock
(13,369
)
(24,469
)
Net cash provided by financing activities
41,696

161,118

Net increase (decrease) in cash and cash equivalents
20,572

(21,000
)
Cash and cash equivalents at January 1
77,439

102,982

Cash and cash equivalents at June 30
$
98,011

$
81,982


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, 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 in the Condensed Consolidated Statements of Income.
For the Six Months Ended June 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
$
22,407

$
(7,840
)
$
14,567

$
(27,641
)
$
9,665

$
(17,976
)
Reclassification adjustment for gains on securities included in net income
(2
)
1

(1
)
(8
)
3

(5
)
Total unrealized gains (losses) on securities
22,405

(7,839
)
14,566

(27,649
)
9,668

(17,981
)
Total other comprehensive income (loss)
$
22,405

$
(7,839
)
$
14,566

$
(27,649
)
$
9,668

$
(17,981
)

For the Three Months Ended June 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
$
9,950

$
(3,479
)
$
6,471

$
(25,230
)
$
8,822

$
(16,408
)
Reclassification adjustment for gains on securities included in net income
(2
)
1

(1
)
(4
)
2

(2
)
Total unrealized gains (losses) on securities
9,948

(3,478
)
6,470

(25,234
)
8,824

(16,410
)
Total other comprehensive income (loss)
$
9,948

$
(3,478
)
$
6,470

$
(25,234
)
$
8,824

$
(16,410
)

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


The following table details the change in components of OCI for the six months ended June 30 :
2014
2013
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
$
(20,868
)
$
280

$
(20,588
)
$
1,121

$
138

$
1,259

Other comprehensive income (loss) before reclassification adjustment
14,567

—

14,567

(17,976
)
—

(17,976
)
Amounts reclassified from accumulated other comprehensive income (loss)
(1
)
—

(1
)
(5
)
—

(5
)
Net other comprehensive income (loss) during the period
14,566

—

14,566

(17,981
)
—

(17,981
)
Balance at June 30
$
(6,302
)
$
280

$
(6,022
)
$
(16,860
)
$
138

$
(16,722
)

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 six months ended June 30 :
2014
2013
(dollars in thousands)
Cash paid during the period for:
Interest
$
10,024

$
12,990

Income taxes
3,700

2,200

Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets
2,726

7,371

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
22,397

(27,625
)
Investments committed to purchase, not settled
2,732

—

Unsettled treasury stock repurchases
38

—

Proceeds from death benefit on bank-owned life insurance not received
1,062

—

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,
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
(11,584,636
)
(7,823,276
)
(11,232,622
)
(6,968,649
)
Average unearned nonvested shares
(184,230
)
(175,480
)
(163,897
)
(172,850
)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
93,794,589

97,564,699

94,166,936

98,421,956

Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share
16,954

12,311

10,895

7,267

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
93,811,543

97,577,010

94,177,831

98,429,223


9
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 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.
2014
2013
Price Range
Price Range
Shares
From
To
Shares
From
To
Stock Options
15,000

$
14.55

$
14.55

40,210

$
9.59

$
14.55

Restricted Stock
93,268

5.96

9.18

92,059

5.96

7.35

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, 2014
December 31, 2013
(dollars in thousands)
Low Income Housing Limited Partnership Investments
$
142

$
207

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, 2014
December 31, 2013
(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
$
1,532,655

$
1,571,987

Financial standby letters of credit
36,533

38,121

Performance standby letters of credit
27,178

32,441

Commercial letters of credit
—

—

The notional amounts outstanding as of June 30, 2014 include amounts issued in 2014 of $0.3 million in financial standby letters of credit and $0.5 million in performance standby letters of credit. There were no commercial letters of credit issued

10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


during 2014 . A liability of $0.1 million has been recorded as of June 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 $3.1 million as of June 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 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 motion for summary judgment; it is pending.

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. 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.

At this time, the Bank believes the claims are without merit.

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
In 2013, First Commonwealth identified an error related to historical tax reporting for approximately 700 - 900 customers, resulting in the establishment of an $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.
Note 7 Investment Securities
Below is an analysis of the amortized cost and estimated fair values of securities available for sale at:
June 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
$
20,686

$
2,617

$
—

$
23,303

$
22,639

$
2,624

$
(59
)
$
25,204

Obligations of U.S. Government-Sponsored Enterprises:


Mortgage-Backed Securities – Residential
1,001,669

15,257

(13,807
)
1,003,119

1,009,519

12,531

(27,163
)
994,887

Mortgage-Backed Securities – Commercial
88

2

—

90

104

1

—

105

Other Government-Sponsored Enterprises
269,175

15

(803
)
268,387

267,971

81

(1,927
)
266,125

Obligations of States and Political Subdivisions
15,738

156

(5
)
15,889

80

—

—

80

Corporate Securities
6,688

561

—

7,249

6,693

328

—

7,021

Pooled Trust Preferred Collateralized Debt Obligations
41,851

109

(13,806
)
28,154

42,040

—

(18,517
)
23,523

Total Debt Securities
1,355,895

18,717

(28,421
)
1,346,191

1,349,046

15,565

(47,666
)
1,316,945

Equities
1,420

—

—

1,420

1,420

—

—

1,420

Total Securities Available for Sale
$
1,357,315

$
18,717

$
(28,421
)
$
1,347,611

$
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.

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




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 June 30, 2014 , by contractual maturity, are shown below.
Amortized
Cost
Estimated
Fair Value
(dollars in thousands)
Due within 1 year
$
2,600

$
2,601

Due after 1 but within 5 years
266,575

265,786

Due after 5 but within 10 years
8,402

8,506

Due after 10 years
55,875

42,786

333,452

319,679

Mortgage-Backed Securities (a)
1,022,443

1,026,512

Total Debt Securities
$
1,355,895

$
1,346,191

(a)
Mortgage Backed Securities include an amortized cost of $20.7 million and a fair value of $23.3 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $1,001.8 million and a fair value of $1,003.2 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 :
2014
2013
(dollars in thousands)
Proceeds from sales
$
—

$
42

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

$
4

Gross losses
—

—

—

4

Maturities and impairment
Gross gains
2

4

Gross losses
—

—

2

4

Net gains and impairment
$
2

$
8

Securities available for sale with an estimated fair value of $511.9 million and $594.9 million were pledged as of June 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 six months ended June 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.

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


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 11, “Fair Values of Assets and Liabilities,” for additional information.
The following table presents the gross unrealized losses and estimated fair values at June 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-Sponsored Enterprises:
Mortgage-Backed Securities – Residential
$
117,662

$
(373
)
$
432,719

$
(13,434
)
$
550,381

$
(13,807
)
Other Government-Sponsored Enterprises
131,555

(238
)
80,916

(565
)
212,471

(803
)
Obligations of States and Political Subdivisions
490

(5
)
—

—

490

(5
)
Pooled Trust Preferred Collateralized Debt Obligations
2,626

(65
)
23,922

(13,741
)
26,548

(13,806
)
Total Securities Available for Sale
$
252,333

$
(681
)
$
537,557

$
(27,740
)
$
789,890

$
(28,421
)
At June 30, 2014 , pooled trust preferred collateralized debt obligations accounted for 49% of the unrealized losses, while fixed income securities issued by U.S. Government-sponsored enterprises comprised 51% 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, 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 June 30, 2014 , our corporate securities had an amortized cost and an estimated fair value of $6.7 million and $7.2 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 June 30, 2014 and December 31, 2013 .

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


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 June 30, 2014 , the book value of our pooled trust preferred collateralized debt obligations totaled $41.9 million with an estimated fair value of $28.2 million , which includes securities comprised of 285 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 security consisted of a security issued by any one institution. As of June 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 10% to 55% of the current performing collateral.
The following table provides information related to our pooled trust preferred collateralized debt obligations as of June 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

$
1,294

$
(536
)
B1/BB
6

18.05
%
55.11
%
Pre TSL V
Mezzanine
59

109

50

C/-
3

100.00

—

Pre TSL VII
Mezzanine
2,691

2,626

(65
)
Ca/-
14

52.23

—

Pre TSL VIII
Mezzanine
1,941

1,281

(660
)
C/C
30

54.77

—

Pre TSL IX
Mezzanine
2,322

1,380

(942
)
Caa1/C
41

28.47

10.41

Pre TSL X
Mezzanine
1,438

1,497

59

Caa3/C
46

33.74

—

Pre TSL XII
Mezzanine
5,446

3,289

(2,157
)
Caa3/C
66

25.87

—

Pre TSL XIII
Mezzanine
12,343

8,103

(4,240
)
Caa3/C
59

20.68

12.85

Pre TSL XIV
Mezzanine
13,344

8,196

(5,148
)
Ca/C
57

26.73

38.29

MMCap I
Mezzanine
437

379

(58
)
Ca/C
11

59.24

34.51

Total
$
41,851

$
28,154

$
(13,697
)
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 six months ended June 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 June 30, 2014 . We consider the discounted cash flow analysis to be our primary evidence when determining whether credit related other-than-temporary impairment exists.

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


Results of a discounted cash flow test are significantly affected by other variables such as the estimate of future cash flows, credit worthiness of the underlying banks and determination of probability of default of the underlying collateral. The following provides additional information for each of these variables:
•
Estimate of Future Cash Flows – Cash flows are constructed in an INTEX cash flow model which includes each deal’s structural features. Projected cash flows include prepayment assumptions which are dependent on the issuer's asset size and coupon rate. For collateral issued by financial institutions over $15 billion in asset size with a coupon over 7% , a 100% prepayment rate is assumed. Financial institutions over $15 billion with a coupon of 7% or under are assigned a prepayment rate of 40% for two years and 2% thereafter. Financial institutions with assets between $2 billion and $15 billion with coupons over 7% are assigned a 5% prepayment rate. For financial institutions below $2 billion , if the coupon is over 10% , a prepayment rate of 5% is assumed and for all other issuers, there is no prepayment assumption incorporated into the cash flows. The modeled cash flows are then used to estimate if all the scheduled principal and interest payments of our investments will be returned.
•
Credit Analysis – A quarterly credit evaluation is performed for each of the 285 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, 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 June 30, 2014 , indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the six months ended June 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 15 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, 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 June 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 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 23% to

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


151% 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.
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,
2014
2013
2014
2013
(dollars in thousands)
Balance, beginning (a)
$
27,254

$
42,991

$
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)
(412
)
(292
)
(701
)
(575
)
Balance, ending
$
26,842

$
42,699

$
26,842

$
42,699

(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 six 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 June 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 June 30, 2014 and December 31, 2013 , our FHLB stock totaled $44.1 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 six months ended June 30, 2014 and 2013 , $10.0 million and $5.0 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. Management reviewed the FHLB’s Form 10-Q for the period ended March 31, 2014 filed with the SEC on May 8, 2014 .
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, 2014 .

17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.
Note 9 Loans and Allowance for Credit Losses
The following table provides outstanding balances related to each of our loan types:
June 30, 2014
December 31, 2013
(dollars in thousands)
Commercial, financial, agricultural and other
$
1,062,001

$
1,021,056

Real estate construction
100,709

93,289

Residential real estate
1,238,791

1,262,718

Commercial real estate
1,306,752

1,296,472

Loans to individuals
625,961

610,298

Total loans and leases net of unearned income
$
4,334,214

$
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. 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.

18
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:
June 30, 2014
Commercial, financial, agricultural and other
Real estate construction
Residential real estate
Commercial real estate
Loans to individuals
Total
(dollars in thousands)
Pass
$
976,591

$
91,732

$
1,225,291

$
1,257,512

$
625,718

$
4,176,844

Non-Pass
OAEM
46,934

8,310

3,160

28,800

—

87,204

Substandard
34,198

667

10,340

20,440

243

65,888

Doubtful
4,278

—

—

—

—

4,278

Total Non-Pass
85,410

8,977

13,500

49,240

243

157,370

Total
$
1,062,001

$
100,709

$
1,238,791

$
1,306,752

$
625,961

$
4,334,214

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

$
1,262,718

$
1,296,472

$
610,298

$
4,283,833

Portfolio Risks
The credit quality of our loan portfolio can potentially represent significant risk to our earnings, capital, regulatory agency relationships, investment community reputation and shareholder returns. First Commonwealth devotes a substantial amount of resources managing this risk primarily through our credit administration department that develops and administers policies and procedures for underwriting, maintaining, monitoring and collecting activities. Credit administration is independent of lending departments and oversight is provided by the credit committee of the First Commonwealth Board of Directors.
Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate to absorb losses inherent to the portfolio as of June 30, 2014 . However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.


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


Age Analysis of Past Due Loans by Segment
The following tables delineate the aging analysis of the recorded investments in past due loans as of June 30, 2014 and December 31, 2013 . Also included in these tables are loans that are 90 days or more past due and still accruing because they are well-secured and in the process of collection.
June 30, 2014
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
Nonaccrual
Total past
due and
nonaccrual
Current
Total
(dollars in thousands)
Commercial, financial, agricultural and other
$
687

$
173

$
230

$
19,678

$
20,768

$
1,041,233

$
1,062,001

Real estate construction
—

—

—

303

303

100,406

100,709

Residential real estate
4,649

1,222

891

8,734

15,496

1,223,295

1,238,791

Commercial real estate
956

4,163

—

6,764

11,883

1,294,869

1,306,752

Loans to individuals
2,553

1,096

1,289

242

5,180

620,781

625,961

Total
$
8,845

$
6,654

$
2,410

$
35,721

$
53,630

$
4,280,584

$
4,334,214

December 31, 2013
30 - 59
days
past due
60 - 89
days
past
due
90 days
and
greater
and still
accruing
Nonaccrual
Total past
due and
nonaccrual
Current
Total
(dollars in thousands)
Commercial, financial, agricultural and other
$
594

$
319

$
185

$
23,631

$
24,729

$
996,327

$
1,021,056

Real estate construction
—

—

—

2,567

2,567

90,722

93,289

Residential real estate
4,002

524

1,041

10,520

16,087

1,246,631

1,262,718

Commercial real estate
1,199

23

13

8,966

10,201

1,286,271

1,296,472

Loans to individuals
2,895

990

1,266

204

5,355

604,943

610,298

Total
$
8,690

$
1,856

$
2,505

$
45,888

$
58,939

$
4,224,894

$
4,283,833

Nonaccrual Loans
The previous tables summarize nonaccrual loans by loan segment. The Company generally places loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain, when part of the principal balance has been charged off and no restructuring has occurred, or the loans reach a certain number of days past due. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed in nonaccrual status at 150 days past due.
When a loan is placed on nonaccrual, the accrued unpaid interest receivable is reversed against interest income and all future payments received are applied as a reduction to the loan principal. Generally, the loan is returned to accrual status when (a) all delinquent interest and principal become current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer doubtful.
Impaired Loans
Management considers loans to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Determination of impairment is treated the same across all loan categories. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole source for repayment of the loan is the operation or liquidation of collateral. When the loan is collateral dependent, the appraised value less estimated cost to sell is utilized. If management determines the value of the impaired loan is less than the

20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


recorded investment in the loan, impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans on accrual status are considered to be impaired loans.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.
Nonperforming loans decreased $13.1 million during the six months ended June 30, 2014 . Contributing to this decrease was the sale of four real estate construction loans totaling $3.0 million and the payoff of six loans totaling $12.5 million . The payoffs included a $4.7 million commercial relationship to a local developer, a $3.1 million commercial real estate loan with a non-profit organization in western Pennsylvania, a $2.9 million commercial real estate loan to a real estate investor in western Pennsylvania, a $0.9 million residential real estate loan in western Pennsylvania, a $0.6 million commercial relationship with a western Pennsylvania glass manufacturer and a $0.3 million commercial real estate loan with a western Pennsylvania real estate investor. Additionally, charge-offs recognized during the first half of 2014 include $5.8 million for a commercial industrial loan relationship with a gas drilling business that operated in western Pennsylvania with headquarters in Louisiana, $0.5 million for a commercial industrial loan to a local energy company, $0.4 million for a consumer home equity loan in western Pennsylvania, $0.3 million for a commercial real estate construction project in western Pennsylvania upon which the property was foreclosed and $0.6 million for a commercial loan in western Pennsylvania.

Offsetting the previously noted decreases in nonperforming loans is a total of $17.2 million in loans which were moved into nonaccrual status during the six months ended June 30, 2014 , the majority of which relates to a $4.3 million commercial industrial relationship with an audio visual equipment distributor, a $0.7 million commercial real estate relationship with a personal care facility in western Pennsylvania, and a $0.7 million commercial real estate relationship with a western Pennsylvania funeral home. In addition to this, $1.8 million in consumer loans which were 150 days or more past due were moved to nonaccrual status.
The specific allowance for nonperforming loans decrease d by $2.8 million at June 30, 2014 compared to December 31, 2013 , primarily due to the charge-offs noted on the previously mentioned loans offset by specific reserves recognized on the loans transferred into nonaccrual status. Unfunded commitments related to nonperforming loans were $3.3 million at June 30, 2014 and after consideration of available collateral related to these commitments, a reserve of $0.1 million was established was established for these off balance sheet exposures.
There were no loans held for sale at June 30, 2014 and December 31, 2013 ; however, sales of loans during the six months ended June 30, 2014 and 2013 resulted in gains of $0.1 million and $0.4 million , respectively.
Significant nonaccrual loans as of June 30, 2014 , include the following:
•
$10.6 million relationship of commercial industrial loans to a local energy company. These loans were originated from 2008 to 2011 and were placed in nonaccrual status during the third quarter of 2013. One of these loans, totaling $2.7 million , was modified, resulting in TDR classification in the second quarter of 2012. A second of these loans, totaling $0.3 million , was modified, resulting in TDR classification in the first quarter of 2013. During the six months ended June 30, 2014 , chargeoffs of $0.5 million related to this relationship were recorded. A valuation of the collateral was completed during the third quarter of 2013.
•
$4.3 million in commercial industrial loans to an audio visual equipment distributor. These loans were originated in 2013 and placed on nonaccrual status in the second quarter of 2014. A valuation of the collateral was completed during the second quarter of 2014.
•
$3.0 million in commercial real estate and industrial loans to a specialty metal processor in western Pennsylvania. These loans were originated in 2003 and were placed on nonaccrual status in the second quarter of 2013. The assets collateralizing this relationship as well as the appraisal for the real estate collateral were valued in the second quarter of 2014.

21
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 include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of June 30, 2014 and December 31, 2013 . Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated using month-end balances of the loans for the period reported and are included in the table below based on its period-end allowance position.
June 30, 2014
December 31, 2013
Recorded
investment
Unpaid
principal
balance
Related
allowance
Recorded
investment
Unpaid
principal
balance
Related
allowance
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other
$
7,422

$
8,585



$
6,752

$
7,649



Real estate construction
586

1,154



3,486

6,664



Residential real estate
9,102

10,183



9,333

9,952



Commercial real estate
7,366

8,379



13,606

14,719



Loans to individuals
341

373



289

307



Subtotal
24,817

28,674



33,466

39,291



With an allowance recorded:
Commercial, financial, agricultural and other
17,994

18,422

4,995

21,482

22,082

7,364

Real estate construction
—

—

—

414

737

94

Residential real estate
1,940

2,085

546

3,533

3,585

1,282

Commercial real estate
1,536

1,673

531

488

612

84

Loans to individuals
—

—

—

—

—

—

Subtotal
21,470

22,180

6,072

25,917

27,016

8,824

Total
$
46,287

$
50,854

$
6,072

$
59,383

$
66,307

$
8,824

For the Six Months Ended June 30,
2014
2013
Average
recorded
investment
Interest
Income
Recognized
Average
recorded
investment
Interest
Income
Recognized
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other
$
13,841

$
32

$
12,333

$
106

Real estate construction
2,112

18

6,900

—

Residential real estate
10,602

124

8,732

78

Commercial real estate
8,494

55

27,867

25

Loans to individuals
290

2

246

2

Subtotal
35,339

231

56,078

211

With an allowance recorded:
Commercial, financial, agricultural and other
14,333

76

20,534

31

Real estate construction
—

—

2,017

26

Residential real estate
1,738

15

3,117

12

Commercial real estate
670

2

5,760

52

Loans to individuals
—

—

—

—

Subtotal
16,741

93

31,428

121

Total
$
52,080

$
324

$
87,506

$
332


22
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,
2014
2013
Average
recorded
investment
Interest
Income
Recognized
Average
recorded
investment
Interest
Income
Recognized
(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other
$
12,658

$
14

$
12,853

$
55

Real estate construction
1,148

6

5,538

—

Residential real estate
9,858

75

9,003

41

Commercial real estate
7,388

22

20,865

13

Loans to individuals
310

1

246

1

Subtotal
31,362

118

48,505

110

With an allowance recorded:
Commercial, financial, agricultural and other
15,086

32

18,486

12

Real estate construction
—

—

1,733

14

Residential real estate
1,836

7

3,680

8

Commercial real estate
1,136

1

5,708

28

Loans to individuals
—

—

—

—

Subtotal
18,058

40

29,607

62

Total
$
49,420

$
158

$
78,112

$
172

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.
The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:
June 30, 2014
December 31, 2013
(dollars in thousands)
Troubled debt restructured loans
Accrual status
$
10,566

$
13,495

Nonaccrual status
6,793

16,980

Total
$
17,359

$
30,475

Commitments
Letters of credit
$
—

$
—

Unused lines of credit
2,482

452

Total
$
2,482

$
452

At June 30, 2014 , troubled debt restructured loans decreased $13.1 million compared to December 31, 2013 , and commitments related to troubled debt restructured loans increased $2.0 million for the same period. This decrease in loans is primarily a result of the payoff of four commercial loans totaling $11.3 million , including a $4.7 million commercial relationship with a local real estate developer, a $3.1 million commercial real estate loan with a non-profit organization and a $2.9 million commercial real estate loan in western Pennsylvania. The increase in unused line of credit commitments is related to two commercial borrowers.

23
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 provide detail, including specific reserves and reasons for modification, related to loans identified as troubled debt restructurings:
For the Six Months Ended June 30, 2014
Type of Modification
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other
2

$
1,480

$
—

$
—

$
1,480

$
1,463

$
20

Residential real estate
21

—

291

644

935

895

48

Commercial real estate
1

—

—

12

12

7

—

Loans to individuals
10

—

73

27

100

85

—

Total
34

$
1,480

$
364

$
683

$
2,527

$
2,450

$
68


For the Six Months Ended June 30, 2013
Type of Modification
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other
3

$
526

$
—

$
12

$
538

$
472

$
100

Residential real estate
22

280

326

1,284

1,890

1,801

562

Commercial real estate
1

—

244

—

244

237

—

Loans to individuals
6

—

34

6

40

29

—

Total
32

$
806

$
604

$
1,302

$
2,712

$
2,539

$
662

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the six months ended June 30, 2014 and 2013 , $0.3 million and $0.6 million , respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of reamortization. For both 2014 and 2013 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.
For the Three Months Ended June 30, 2014
Type of Modification
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other
1

$
1,420

$
—

$
—

$
1,420

$
1,433

$
—

Residential real estate
8

—

120

126

246

243

2

Loans to individuals
4

—

42

7

49

42

—

Total
13

$
1,420

$
162

$
133

$
1,715

$
1,718

$
2


24
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
Type of Modification
Number
of
Contracts
Extend
Maturity
Modify
Rate
Modify
Payments
Total
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Specific
Reserve
(dollars in thousands)
Commercial, financial, agricultural and other
1

$
100

$
—

$
—

$
100

$
100

$
100

Residential real estate
13

273

113

769

1,155

1,132

562

Loans to individuals
2

—

10

3

13

9

—

Total
16

$
373

$
123

$
772

$
1,268

$
1,241

$
662

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate may include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the three months ended June 30, 2014 and 2013 , $0.1 million and $0.1 million , respectively, of total rate modifications represent loans with modifications to the rate as well as payment as a result of reamortization. For both 2014 and 2013 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.
A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to restructured loans that were considered to default during the six months ended June 30 :
2014
2013
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(dollars in thousands)
Residential real estate
2

$
51

1

$
9

Loans to individuals
—

—

3

9

Total
2

$
51

4

$
18

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following table provides information related to restructured loans that were considered to default during the three months ended June 30 :

2014
2013
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(dollars in thousands)
Residential real estate
1

$
6

—

$
—

Loans to individuals
—

—

2

5

Total
1

$
6

2

$
5



25
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 provide detail related to the allowance for credit losses:
For the Six Months Ended June 30, 2014
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Unallocated
Total
(dollars in thousands)
Allowance for credit losses:
Beginning Balance
$
22,663

$
6,600

$
7,727

$
11,778

$
5,457

$
—

$
54,225

Charge-offs
(7,859
)
(296
)
(1,735
)
(297
)
(1,562
)
—

(11,749
)
Recoveries
421

337

323

255

365

—

1,701

Provision (credit)
6,731

(742
)
(190
)
(75
)
824

—

6,548

Ending Balance
$
21,956

$
5,899

$
6,125

$
11,661

$
5,084

$
—

$
50,725

Ending balance: individually evaluated for impairment
$
4,995

$
—

$
546

$
531

$
—

$
—

$
6,072

Ending balance: collectively evaluated for impairment
16,961

5,899

5,579

11,130

5,084

—

44,653

Loans:
Ending balance
1,062,001

100,709

1,238,791

1,306,752

625,961

4,334,214

Ending balance: individually evaluated for impairment
24,573

486

7,624

6,965

—

39,648

Ending balance: collectively evaluated for impairment
1,037,428

100,223

1,231,167

1,299,787

625,961

4,294,566

For the Six Months Ended June 30, 2013
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Unallocated
Total
(dollars in thousands)
Allowance for credit losses:
Beginning Balance
$
19,852

$
8,928

$
5,908

$
22,441

$
4,132

$
5,926

$
67,187

Charge-offs
(14,221
)
(755
)
(643
)
(9,238
)
(1,755
)
—

(26,612
)
Recoveries
264

59

812

108

337

—

1,580

Provision (credit)
10,680

14

362

2,817

1,428

(4
)
15,297

Ending Balance
$
16,575

$
8,246

$
6,439

$
16,128

$
4,142

$
5,922

$
57,452

Ending balance: individually evaluated for impairment
$
6,627

$
267

$
1,943

$
818

$
—

$
—

$
9,655

Ending balance: collectively evaluated for impairment
9,948

7,979

4,496

15,310

4,142

5,922

47,797

Loans:
Ending balance
1,012,315

66,243

1,269,830

1,280,784

600,580

4,229,752

Ending balance: individually evaluated for impairment
24,592

3,904

10,468

27,862

—

66,826

Ending balance: collectively evaluated for impairment
987,723

62,339

1,259,362

1,252,922

600,580

4,162,926


26
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, 2014
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Unallocated
Total
(dollars in thousands)
Allowance for credit losses:
Beginning Balance
$
26,125

$
6,214

$
6,026

$
11,119

$
5,022

$
—

$
54,506

Charge-offs
(6,258
)
(296
)
(640
)
(157
)
(752
)
—

(8,103
)
Recoveries
336

168

79

235

187

—

1,005

Provision (credit)
1,753

(187
)
660

464

627

—

3,317

Ending Balance
$
21,956

$
5,899

$
6,125

$
11,661

$
5,084

$
—

$
50,725

For the Three Months Ended, June 30, 2013
Commercial,
financial,
agricultural
and other
Real estate
construction
Residential
real estate
Commercial
real estate
Loans to
individuals
Unallocated
Total
(dollars in thousands)
Allowance for credit losses:
Beginning Balance
$
20,275

$
7,733

$
5,749

$
18,470

$
4,139

$
5,896

$
62,262

Charge-offs
(13,683
)
(671
)
(321
)
(694
)
(767
)
—

(16,136
)
Recoveries
136

47

89

11

243

—

526

Provision (credit)
9,847

1,137

922

(1,659
)
527

26

10,800

Ending Balance
$
16,575

$
8,246

$
6,439

$
16,128

$
4,142

$
5,922

$
57,452


The change in the unallocated portion of the allowance for credit losses comparing June 30, 2014 with June 30, 2013 is a result of the unallocated portion of the allowance for credit losses no longer being treated as a separate component of the allowance as of December 31, 2013. Instead it is incorporated into the reserve provided for each loan category. This portion of the allowance for credit losses reflects the qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience.
Note 10 Income Taxes
At June 30, 2014 and December 31, 2013 , First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. Federal and state tax years 2010 through 2012 were open for examination as of June 30, 2014 .
Note 11 Fair Values of Assets and Liabilities
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the Condensed Consolidated Statements of Financial Condition or in the “Other assets” category of the Condensed Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.
FASB ASC Topic 825, “Financial Instruments” permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.
In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:

27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


•
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using quoted market prices.
•
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, corporate securities, FHLB stock, interest rate derivatives that include interest rate caps, interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.
Level 2 investment securities are valued by a recognized third party pricing service using observable inputs. The model used by the pricing service varies by asset class and incorporates available market, trade and bid information as well as cash flow information when applicable. Because many fixed-income investment securities do not trade on a daily basis, the model uses available information such as benchmark yield curves, benchmarking of like investment securities, sector groupings and matrix pricing. The model will also use processes such as an option adjusted spread to assess the impact of interest rates and to develop prepayment estimates. Market inputs normally used in the pricing model include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
Management validates the market values provided by the third party service by having another recognized pricing service price 100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.
Other Investments are comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 8, “Impairment of Investment Securities.”
Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities and consist of interest rate swaps where there is no significant deterioration in the counterparties' (loan customers') credit risk since origination of the interest rate swap as well as interest rate caps and risk participation agreements. First Commonwealth values its interest rate swap and cap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to three months, Eurodollar futures contracts and swap rates from three years to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 12, “Derivatives.”
For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.
We also utilize this approach to estimate our own credit risk on derivative liability positions. In 2014 , we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.
The estimated fair value for other real estate owned included in Level 2 is determined by either an independent market-based appraisal less estimated costs to sell or an executed sales agreement.
•
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. If the inputs used to provide the valuation are unobservable and/or there is very little, if any, market activity for the security or similar securities, the securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are pooled trust preferred collateralized debt obligations, non-marketable equity investments, certain interest rate derivatives, certain other real estate owned and certain impaired loans.
Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities since 2009; therefore

28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


it is more appropriate to determine estimated fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 8, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.
Management validates the fair value of the pooled trust preferred collateralized debt obligations by monitoring the performance of the underlying collateral, discussing the discount rate, cash flow assumptions and general market trends with the specialized third party and confirming changes in the underlying collateral to the trustee reports. Management’s monitoring of the underlying collateral includes deferrals of interest payments, payment defaults, cures of previously deferred interest payments, any regulatory filings or actions and general news related to the underlying collateral. Management also evaluates fair value changes compared to expectations based on changes in the interest rates used in determining the discount rate and general financial markets.
The estimated fair value of the non-marketable equity investments included in Level 3 is based on par value.
For interest rate derivatives included in Level 3, the fair value incorporates credit risk by considering such factors as likelihood of default and expected loss given default based on the credit quality of the underlying counterparties (loan customers).
In accordance with ASU 2011 -4 , the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.
Fair Value (dollars
in thousands)
Valuation
Technique
Unobservable Inputs
Range /
(weighted average)
Pooled Trust Preferred Securities
$28,154
Discounted Cash Flow
Probability of default
0% - 100% (17.48%)
Prepayment rates
0% - 100% (6.35%)
Discount rates
5.5% - 14.5% (a)
Equities
1,420
Par Value
N/A
N/A
Interest Rate Swap
—
Option model
Counterparty credit risk
3.74% - 6.62% (b)
Impaired Loans
6,120 (c)
Reserve study
Discount rate
10.00%
Gas per MCF
$3.84 - $6.45 (d)
Oil per BBL/d
$83.64 - $107.00 (d)
NGL per gallon
$0.83 (d)
113 (c)
Discounted Cash Flow
Discount Rate
9.00%
Other Real Estate Owned
139
Internal Valuation
N/A
N/A
(a)
incorporates spread over risk free rate related primarily to credit quality and illiquidity of securities.
(b)
represents the range of the credit spread curve used in valuation.
(c)
the remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those loans are based on bankruptcy agreement documentation.
(d)
unobservable inputs are defined as follows: MCF - million cubic feet; BBL/d - barrels per day; NGL - natural gas liquid.
The significant unobservable inputs used in the fair value measurement of pooled trust preferred securities are the probability of default, discount rates and prepayment rates. Significant increases in the probability of default or discount rate used would result in a decrease in the estimated fair value of these securities while decreases in these variables would result in higher fair value measurements. In general, a change in the assumption of probability of default is accompanied by a directionally similar change in the discount rate. In most cases, increases in the prepayment rate assumptions would result in a higher estimated fair value for these securities while decreases would provide for a lower value. The direction of this change is somewhat dependent on the structure of the investment and the amount of the investment tranches senior to our position.
The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil and natural gas prices and increases in these rates would result in an increase in the estimated fair value of the loans, while a decrease in these prices would result in a lower fair value measurement.

29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The significant unobservable input used in the fair value measurement of interest rate swaps classified as Level 3 is counterparty credit risk and the resulting range of the credit spread curve used in the valuation. Higher credit risk would result in an increased credit spread, which would reduce the fair value of the interest rate swap.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis:
June 30, 2014
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential
$
—

$
23,303

$
—

$
23,303

Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential
—

1,003,119

—

1,003,119

Mortgage-Backed Securities - Commercial
—

90

—

90

Other Government-Sponsored Enterprises
—

268,387

—

268,387

Obligations of States and Political Subdivisions
—

15,889

—

15,889

Corporate Securities
—

7,249

—

7,249

Pooled Trust Preferred Collateralized Debt Obligations
—

—

28,154

28,154

Total Debt Securities
—

1,318,037

28,154

1,346,191

Equities
—

—

1,420

1,420

Total Securities Available for Sale
—

1,318,037

29,574

1,347,611

Other Investments
—

44,077

—

44,077

Loans held for sale
—

—

—

—

Other Assets(a)
—

11,104

—

11,104

Total Assets
$
—

$
1,373,218

$
29,574

$
1,402,792

Other Liabilities(a)
$
—

$
10,851

$
—

$
10,851

Total Liabilities
$
—

$
10,851

$
—

$
10,851

(a)
Non-hedging interest rate derivatives


30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


December 31, 2013
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities - Residential
$
—

$
25,204

$
—

$
25,204

Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities - Residential
—

994,887

—

994,887

Mortgage-Backed Securities - Commercial
—

105

—

105

Other Government-Sponsored Enterprises
—

266,125

—

266,125

Obligations of States and Political Subdivisions
—

80

—

80

Corporate Securities
—

7,021

—

7,021

Pooled Trust Preferred Collateralized Debt Obligations
—

—

23,523

23,523

Total Debt Securities
—

1,293,422

23,523

1,316,945

Equities
—

—

1,420

1,420

Total Securities Available for Sale
—

1,293,422

24,943

1,318,365

Other Investments
—

35,444

—

35,444

Loans Held for Sale
—

—

—

—

Other Assets(a)
—

14,358

—

14,358

Total Assets
$
—

$
1,343,224

$
24,943

$
1,368,167

Other Liabilities(a)
$
—

$
14,318

$
—

$
14,318

Total Liabilities
$
—

$
14,318

$
—

$
14,318

(a)
Non-hedging interest rate derivatives

For the six months ended June 30 , changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
2014
Pooled Trust
Preferred
Collateralized
Debt
Obligations
Equities
Loans
Held for
Sale
Other
Assets
Total
(dollars in thousands)
Balance, beginning of period
$
23,523

$
1,420

$
—

$
—

$
24,943

Total gains or losses
Included in earnings
—

—

77

—

77

Included in other comprehensive income
5,796

—

—

—

5,796

Purchases, issuances, sales, and settlements
Purchases
—

—

—

—

—

Issuances
—

—

—

—

—

Sales
—

—

(3,112
)
—

(3,112
)
Settlements
(1,165
)
—

—

—

(1,165
)
Transfers into Level 3
—

—

3,035

—

3,035

Balance, end of period
$
28,154

$
1,420

$
—

$
—

$
29,574


31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2013
Pooled Trust
Preferred
Collateralized
Debt
Obligations
Equities
Loans Held for Sale
Other
Assets
Total
(dollars in thousands)
Balance, beginning of period
$
23,373

$
1,420

$
—

$
—

$
24,793

Total gains or losses
Included in earnings
—

—

383

—

383

Included in other comprehensive income
5,683

—

—

—

5,683

Purchases, issuances, sales, and settlements
Purchases
—

—

—

—

—

Issuances
—

—

—

—

—

Sales
—

—

(20,518
)
—

(20,518
)
Settlements
(3,187
)
—

—

—

(3,187
)
Transfers into Level 3
—

—

20,135

—

20,135

Balance, end of period
$
25,869

$
1,420

$
—

$
—

$
27,289

For the six months ended June 30, 2014 and 2013 , there were no transfers between fair value Levels 1 and 2 . However, $3.0 million and $20.1 million of loans were transferred into Level 3 from Level 2 during the six months ended June 30, 2014 and 2013 , respectively, due to the loans being transferred to a held for sale status. The loans transferred and subsequently sold related to three nonperforming loan relationships for which this was determined to be the appropriate exit strategy. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at June 30, 2014 and 2013 .

For the three months ended June 30 , changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
2014
Pooled Trust
Preferred
Collateralized
Debt
Obligations
Equities
Loans Held
for Sale
Other
Assets
Total
(dollars in thousands)
Balance, beginning of period
$
27,876

$
1,420

$
—

$
—

$
29,296

Total gains or losses
Included in earnings
—

—

77

—

77

Included in other comprehensive income
1,053

—

—

—

1,053

Purchases, issuances, sales, and settlements
Purchases
—

—

—

—

—

Issuances
—

—

—

—

—

Sales
—

—

(2,396
)
—

(2,396
)
Settlements
(775
)
—

—

—

(775
)
Transfers from Level 3
—

—

—

—

—

Transfers into Level 3
—

—

2,319

—

2,319

Balance, end of period
$
28,154

$
1,420

$
—

$
—

$
29,574


32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2013
Pooled Trust
Preferred
Collateralized
Debt
Obligations
Equities
Loans Held for Sale
Other
Assets
Total
(dollars in thousands)
Balance, beginning of period
$
24,512

$
1,420

$
—

$
—

25,932

Total gains or losses
Included in earnings
—

—

257

—

257

Included in other comprehensive income
3,292

—

—

—

3,292

Purchases, issuances, sales, and settlements
Purchases
—

—

—

—

—

Issuances
—

—

—

—

—

Sales
—

—

(3,779
)
—

(3,779
)
Settlements
(1,935
)
—

—

—

(1,935
)
Transfers from Level 3
—

—

3,522

—

3,522

Balance, end of period
$
25,869

$
1,420

$
—

$
—

$
27,289

For the three months ended June 30, 2014 and 2013 , there were no transfers between fair value Levels 1 and 2 . However, a $2.3 million nonperforming loan was transferred into Level 3 from Level 2 during the three months ended June 30, 2014 as a result of the loan being transferred to a held for sale status. There were $3.5 million of loans transfered from Level 2 to Level 3 during the three months ended June 30, 2013 as the result of one nonperforming relationship for which this was determined to be the appropriate exit strategy. There were no gains or losses included in earnings for the periods presented that are attributable to the change in realized gains (losses) relating to assets held at June 30, 2014 and 2013 .

The tables below present the balances of assets measured at fair value on a non-recurring basis at:
June 30, 2014
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Impaired loans
$
—

$
27,342

$
12,873

$
40,215

Other real estate owned
—

8,221

139

8,360

Total Assets
$
—

$
35,563

$
13,012

$
48,575

December 31, 2013
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Impaired loans
$
—

$
36,903

$
13,656

$
50,559

Other real estate owned
—

12,752

172

12,924

Total Assets
$
—

$
49,655

$
13,828

$
63,483


33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following losses were realized on the assets measured on a nonrecurring basis:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2014
2013
2014
2013
(dollars in thousands)
Impaired loans
$
(3,020
)
$
(10,806
)
$
(2,739
)
$
(11,086
)
Other real estate owned
(728
)
(241
)
(1,078
)
(362
)
Total losses
$
(3,748
)
$
(11,047
)
$
(3,817
)
$
(11,448
)
Impaired loans over $0.1 million are individually reviewed to determine the amount of each loan considered to be at risk of non-collection. The fair value for impaired loans that are collateral based is determined by reviewing real property appraisals, equipment valuations, accounts receivable listings and other financial information. A discounted cash flow analysis is performed to determine fair value for impaired loans when an observable market price or a current appraisal is not available. For real estate secured loans, First Commonwealth’s loan policy requires updated appraisals be obtained at least every twelve months on all impaired loans with balances of $250 thousand and over. For real estate secured loans with balances under $250 thousand , we rely on broker price opinions. For non-real estate secured assets, the Company normally relies on third party valuations specific to the collateral type.
The fair value for other real estate owned determined by either an independent market based appraisal less estimated costs to sell or an executed sales agreement is classified as Level 2. The fair value for other real estate owned determined using an internal valuation is classified as Level 3. Other real estate owned has a book cost of $7.8 million as of June 30, 2014 and consisted primarily of commercial real estate properties in Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.
Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 13, “Goodwill.” There were no other assets or liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2014 .
FASB ASC 825-10, “Transition Related to FSP FAS 107 -1 ” and APB 28 -1 , “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.
Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.
Securities: Fair values for securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock, is considered a reasonable estimate of fair value.
Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and nonperforming loans, which is not an exit price under FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”
Off-balance sheet instruments: Many of First Commonwealth’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is required to

34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The carrying amount and fair value for standby letters of credit was $0.1 million at June 30, 2014 and December 31, 2013 , respectively. See Note 6, “Commitments and Contingent Liabilities,” for additional information.
Deposit liabilities: Estimated fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date because of the customers’ ability to withdraw funds immediately. The carrying value of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Also, fair values of fixed rate time deposits for both periods are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities.
Short-term borrowings: The fair values of borrowings from the FHLB were estimated based on the estimated incremental borrowing rate for similar types of borrowings. The carrying amounts of other short-term borrowings such as federal funds purchased and securities sold under agreement to repurchase were used to approximate fair value due to the short-term nature of the borrowings.
Long-term debt and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by discounting the future cash flows using First Commonwealth’s estimate of the current market rate for similar types of borrowing arrangements or an announced redemption price.
The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:
June 30, 2014
Fair Value Measurements Using:
Carrying
Amount
Total
Level 1
Level 2
Level 3
(dollars in thousands)
Financial assets
Cash and due from banks
$
92,860

$
92,860

$
92,860

$
—

$
—

Interest-bearing deposits
5,151

5,151

5,151

—

—

Securities available for sale
1,347,611

1,347,611

—

1,318,037

29,574

Other investments
44,077

44,077

—

44,077

—

Loans
4,334,214

4,350,182

—

27,342

4,322,840

Financial liabilities
Deposits
4,460,421

4,465,990

—

4,465,990

—

Short-term borrowings
845,873

845,862

—

845,862

—

Long-term debt
136,672

137,861

—

137,861

—

Subordinated debt
72,167

61,755

—

—

61,755



35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


December 31, 2013
Fair Value Measurements Using:
Carrying
Amount
Total
Level 1
Level 2
Level 3
(dollars in thousands)
Financial assets
Cash and due from banks
$
74,427

$
74,427

$
74,427

$
—

$
—

Interest-bearing deposits
3,012

3,012

3,012

—

—

Securities available for sale
1,318,365

1,318,365

—

1,293,422

24,943

Other investments
35,444

35,444

—

35,444

—

Loans
4,283,833

4,321,847

—

36,903

4,284,944

Financial liabilities
Deposits
4,603,863

4,531,685

—

4,531,685

—

Short-term borrowings
626,615

626,603

—

626,603

—

Long-term debt
144,385

145,477

—

145,477

—

Subordinated debt
72,167

51,706

—

—

51,706



Note 12 Derivatives
First Commonwealth is a party to interest rate derivatives that are not designated as accounting hedges. These derivatives relate to interest rate swaps that First Commonwealth enters into with customers to allow customers to convert variable rate loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. First Commonwealth pays the other financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest from the financial institution for the same floating rate on the same notional amount. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.
We have eleven risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. We have four risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are the lead bank. The risk participation agreement provides credit protection to us should the borrower fail to perform on its interest rate derivative contract with us.
First Commonwealth is also party to interest rate caps that are not designated as hedging instruments. These derivatives relate to contracts that First Commonwealth enters into with loan customers providing a maximum interest rate on their variable rate loan. At the same time the interest rate cap is entered into with the customer, First Commonwealth enters into an offsetting interest rate cap with another financial institution. The notional amount and maximum interest rate on both interest cap contracts are identical.
The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.

36
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 depicts the credit value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements participated to other banks:
June 30, 2014
December 31, 2013
(dollars in thousands)
Credit value adjustment
$
360

$
77

Notional Amount:
Interest rate derivatives
307,909

274,718

Interest rate caps
7,219

7,500

Risk participation agreements
103,196

82,197

Sold credit protection on risk participation agreements
(24,929
)
(19,161
)
The table below presents the amount representing the change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in other income on the Condensed Consolidated Statements of Income:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2014
2013
2014
2013
(dollars in thousands)
Non-hedging interest rate derivatives:
Increase in other income
$
342

$
78

$
284

$
1,067

Note 13 Goodwill
FASB ASC Topic 350-20, “Intangibles – Goodwill and Other” requires an annual valuation of the fair value of a reporting unit that has goodwill and a comparison of the fair value to the book value of equity to determine whether the goodwill has been impaired. Goodwill is also required to be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. When triggering events or circumstances indicate goodwill testing is required, an assessment of qualitative factors can be completed before performing the two step goodwill impairment test. ASU 2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step goodwill impairment test is not required.
First Commonwealth is considered to be one reporting unit. The carrying amount of goodwill as of June 30, 2014 and December 31, 2013 was $159.4 million and $159.9 million , respectively. No impairment charges on goodwill or other intangible assets were incurred in 2014 or 2013 . The $0.5 million decline in goodwill during the six months ended June 30, 2014 represents the amount of goodwill included in the carrying value of the investment advisory business which was sold during the first quarter of 2014.
We test goodwill for impairment as of November 30th each year and again at any quarter-end if any material events occur during a quarter that may affect goodwill. An assessment of qualitative factors was completed as of June 30, 2014 and indicated that it is more likely than not that the fair value of First Commonwealth exceeds its carrying amount, therefore the two step goodwill impairment test was not considered necessary. The assessment of qualitative factors incorporated the results of the Step 1 goodwill impairment test completed as of November 30, 2013 as well as macroeconomic factors, industry and market considerations, the company’s overall financial performance, and other company specific events occurring since the completion of the November 30, 2013 test.
As of June 30, 2014 , goodwill was not considered impaired; however, changing economic conditions that may adversely affect our performance, fair value of our assets and liabilities, or stock price could result in impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 14 New Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-01, "Investments - Equity Method and Joint Ventures (Topic 323)," which permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The proportional amortization method allows an entity to amortize the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). This amendment is effective for interim and annual periods beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In January 2014, the FASB issued ASU 2014-04, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40)." This amendment clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of property upon either, 1. the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or 2. the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction are required. This amendment is effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)." This amendment changes the reporting requirements for discontinued operations. A disposal of a component of an entity or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift resulting in a major effect on the entity's operations and financial results when any of the following occurs: 1. the component or group of components of an entity meets the criteria to be classified as held for sale, 2. the component or group of components of an entity is disposed of by sale, or 3. the component or group of components of an entity is disposed of other than by sale. If one of these criteria are met, the entity will present the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the statement of financial position for each comparative period along with additional footnote disclosure. This amendment is effective for annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In June 2014, the FASB issued ASU 2014-11, "Transfers and Servicing (Topic 860)," which requires two accounting changes. One changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting and the other for requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty in regards to repurchase financing arrangements, which will result in secured borrowing accounting for the repurchase agreement. The Update requres diclosure for certain transactions comprising a transfer of a financial asset accounted for as a sale and an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to economic return. The amendment also requires disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. This amendment will be effective for public entities for the first interim or annual period beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.

In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718)," which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. This amendment is effective for annual periods and interim periods within those annual periods beginning after December 15,

38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Financial Statements and Supplementary Data
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2015 with earlier adoption permitted. The adoption of this ASU is not expected to have a material impact on First Commonwealth’s financial condition or results of operations.


39

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and six months ended June 30, 2014 and 2013 , and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Forward-Looking Statements
Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements:
•
risks arising from the pending conversion of our core processing system, including the inability of the Bank to timely or accurately process transactions for its customers or the disruption of customer access to account information, which may result in additional expense, loss of customers or liability under contractual arrangements or applicable law to customers or other parties;
•
weakening economic and business conditions, both nationally and in our markets, which could cause deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;
•
prolonged low interest rates, which could reduce our net interest margin;
•
increases in defaults by borrowers and other delinquencies, which could result in increases in our provision for credit losses and related expenses;
•
cyber-attacks and fraud, which could disrupt our systems and services, breach the privacy of our customer and business information or result in loss of client assets;
•
legislative and regulatory changes, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by federal banking authorities and related regulations, subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;
•
declines in the valuations of real estate, which could negatively affect the creditworthiness of our borrowers and the value of collateral securing our loans;
•
the assumptions used in calculating the appropriate amount to be placed into our allowance for credit losses may prove to be inaccurate;
•
restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;
•
further declines in the market value of investment securities that are considered to be other-than-temporary, which would negatively impact our earnings and capital levels;
•
changes in accounting standards and compliance requirements may have an adverse affect on our operating results and financial condition;
•
competitive pressures among depository and other financial institutions, some of which may have greater financial resources or more attractive product or service offerings, may adversely affect growth or profitability of our products and services; and
•
other risks and uncertainties described in this report and in the other reports that we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Explanation of Use of Non-GAAP Financial Measure
In addition to the results of operations presented in accordance with generally accepted accounting principles (“GAAP”), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe this non-GAAP financial measure provides information

40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


useful to investors in understanding our underlying operational performance and our business and performance trends as it facilitates comparison with the performance of others in the financial services industry. Although we believe that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP.
We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Condensed Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 44 and 49 for the three and six months ended June 30, 2014 and 2013 .
Results of Operations
Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
Net Income
For the six months ended June 30, 2014 , First Commonwealth had net income of $24.2 million , or $0.26 per share, compared to net income of $16.4 million , or $0.17 per share, in the six months ended June 30, 2013 . The increase in net income was the result of a reduction in the provision for credit losses, increased noninterest income and decreases in noninterest expense.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $92.7 million in the first six months of 2014 compared to $93.2 million for the same period in 2013 . Net interest income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at 74% and 75% for the six months ended June 30, 2014 and 2013 , respectively.
Net interest margin, on a fully taxable equivalent basis, was 3.30% for the six months ended June 30, 2014 compared to 3.40% for the six months ended June 30, 2013 . The 10 basis point decline can be attributed to the repricing of our adjustable rate assets and the repayment or amortization of fixed rate assets in a declining interest rate environment as well as lower interest rates available on new investments and loans.
The taxable equivalent yield on interest-earning assets was 3.64% for the six months ended June 30, 2014 , a decrease of 18 basis points from the 3.82% yield for the same period in 2013 . Growth in earning assets has helped to offset the spread compression, as average earning assets for the six months ended June 30, 2014 increased $139.4 million , or 3% , compared to the comparable period in 2013 . However, approximately 56% of the growth in earning assets is generated by the investment portfolio where purchases provide approximately 102 basis points less yield than the loan portfolio. Investment portfolio purchases during the six months ended June 30, 2014 have been primarily in mortgage-related assets with approximate durations of 36-48 months and municipal securities with a duration of 10 years. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities as interest rates rise.
Reductions in the cost of interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities was 0.43% for the six months ended June 30, 2014 , compared to 0.53% for the same period in 2013 .
Comparing the six months ended June 30, 2014 with the same period in 2013 , changes in interest rates negatively impacted net interest income by $3.3 million . The lower yield on interest-earning assets adversely impacted net interest income by $4.8 million , while the decline in the cost of interest-bearing liabilities had a positive impact of $1.5 million . We have been able to partially mitigate the impact of lower interest rates and the effect on net interest income through improving the mix of deposits and borrowed funds, growing the loan portfolio and increasing our investment volumes within established interest rate risk management guidelines.
While decreases in interest rates and yields compressed the net interest margin, increases in average interest-earning assets tempered the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $2.8 million in the six months ended June 30, 2014 compared to the same period in 2013 . Higher levels of interest-earning assets resulted in an increase of $2.3 million in interest income, while volume changes decreased interest expense by $0.5 million , primarily as the result of changes in long-term debt and time deposits.
Net interest income also benefited from a $66.3 million increase in average net free funds at June 30, 2014 as compared to June 30, 2013 . Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing

41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase of $71.3 million, or 8.3%, in noninterest-bearing demand deposit average balances as a result of marketing promotions aimed at attracting new and retaining existing customers. Additionally, higher costing time deposits continue to mature and reprice to lower costing certificates or other deposit alternatives. Average time deposits for the six months ended June 30, 2014 decreased $57.3 million compared to the comparable period in 2013 .
The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the six months ended June 30, 2014 :
2014
2013
(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income
$
100,672

$
102,742

Adjustment to fully taxable equivalent basis
1,691

2,058

Interest income adjusted to fully taxable equivalent basis (non-GAAP)
102,363

104,800

Interest expense
9,698

11,626

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
92,665

$
93,174




42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis, for the six months ended June 30, 2014 :
2014
2013
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks
$
3,785

$
4

0.21
%
$
3,149

$
3

0.19
%
Tax-free investment securities (e)
5,712

105

3.70

85

3

7.40

Taxable investment securities
1,354,113

15,310

2.28

1,281,409

14,494

2.28

Loans, net of unearned income (b)(c)
4,303,278

86,944

4.07

4,242,800

90,300

4.29

Total interest-earning assets
5,666,888

102,363

3.64

5,527,443

104,800

3.82

Noninterest-earning assets:
Cash
71,690

71,883

Allowance for credit losses
(56,239
)
(66,572
)
Other assets
544,806

568,260

Total noninterest-earning assets
560,257

573,571

Total Assets
$
6,227,145

$
6,101,014

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)
$
638,247

$
101

0.03
%
$
677,879

$
130

0.04
%
Savings deposits (d)
1,896,419

1,167

0.12

1,940,790

1,682

0.17

Time deposits
1,121,916

5,655

1.02

1,179,196

6,386

1.09

Short-term borrowings
652,243

946

0.29

400,827

507

0.26

Long-term debt
213,587

1,829

1.73

250,569

2,921

2.35

Total interest-bearing liabilities
4,522,412

9,698

0.43

4,449,261

11,626

0.53

Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)
932,807

861,486

Other liabilities
52,343

48,064

Shareholders’ equity
719,583

742,203

Total noninterest-bearing funding sources
1,704,733

1,651,753

Total Liabilities and Shareholders’ Equity
$
6,227,145

$
6,101,014

Net Interest Income and Net Yield on Interest-Earning Assets
$
92,665

3.30
%
$
93,174

3.40
%
(a)
Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
(b)
Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c)
Loan income includes loan fees earned.
(d)
Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.
(e)
Yield on tax-free investment securities calculated using fully taxable equivalent interest income of $3,112 for the six months ended June 30, 2013 .


43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


The following table shows the effect of changes in volumes and rates on interest income and interest expense for the six months ended June 30, 2014 compared with June 30, 2013 :
Analysis of Year-to-Year Changes in Net Interest Income
Total
Change
Change Due To
Volume
Change Due To
Rate (a)
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
1

$
1

$
—

Tax-free investment securities
102

206

(104
)
Taxable investment securities
816

822

(6
)
Loans
(3,356
)
1,287

(4,643
)
Total interest income (b)
(2,437
)
2,316

(4,753
)
Interest-bearing liabilities:
Interest-bearing demand deposits
(29
)
(8
)
(21
)
Savings deposits
(515
)
(37
)
(478
)
Time deposits
(731
)
(310
)
(421
)
Short-term borrowings
439

324

115

Long-term debt
(1,092
)
(431
)
(661
)
Total interest expense
(1,928
)
(462
)
(1,466
)
Net interest income
$
(509
)
$
2,778

$
(3,287
)
(a)
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b)
Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of allowance for credit losses needed or probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.
The table below provides a breakout of the provision for credit losses by loan category for the six months ended June 30 :
2014
2013
Dollars
Percentage
Dollars
Percentage
(dollars in thousands)
Commercial, financial, agricultural and other
$
6,731

103
%
$
10,680

70
%
Real estate construction
(742
)
(11
)
14

—

Residential real estate
(190
)
(3
)
362

2

Commercial real estate
(75
)
(1
)
2,817

19

Loans to individuals
824

12

1,428

9

Unallocated
—

—

(4
)
—

Total
$
6,548

100
%
$
15,297

100
%
The provision for credit losses for the six months ended June 30, 2014 decreased in comparison to the six months ended June 30, 2013 by $8.7 million , or 57% , as a result of overall improvement in loan portfolio credit metrics. The majority of the 2014 provision expense, or $5.8 million, is attributable to specific reserves for an $8.2 million loan to an oil and gas servicing company which was transferred to nonaccrual status during the first quarter of 2014. This loan was sold during the second quarter of 2014, resulting in a $5.8 million charge-off. Also impacting the provision expense for the commercial, financial, and agricultural loan category were specific reserves related to a $4.3 million loan to an audio visual equipment distributor which was transferred into nonaccrual status during the second quarter of 2014. Offsetting these increases in provision expense was the release of approximately $2.7 million in specific reserves related to the payoff of a $4.7 million nonaccrual loan to a local developer. For the first half of 2014, the negative provision expense for real estate construction, residential real estate and

44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


commercial real estate is a result of declines in both the level of criticized loans and historical loss rates for these loan categories. The level of provision expense in the second quarter of 2013 was primarily due to further deterioration in value of certain assets of a commercial relationship with a local developer, which resulted in a net charge-off of $10.1 million, as well as the sale of two commercial real estate loans sold in the first quarter of 2013 resulting in an additional $3.1 million in provision expense.
The allowance for credit losses was $50.7 million , or 1.17% , of total loans outstanding at June 30, 2014 , compared to $54.2 million , or 1.27% , at December 31, 2013 and $57.5 million , or 1.36% , at June 30, 2013 . The change compared to December 31, 2013 , can be attributed to a $5.0 million , or 3% , decrease in criticized loans, which includes a reduction of $13.1 million , or 22% , in nonperforming loans as well as a $2.8 million decrease in the level of specific reserves held on impaired loans. Nonperforming loans as a percentage of total loans decreased to 1.07% at June 30, 2014 from 1.39% at December 31, 2013 and 1.73% as of June 30, 2013 . The allowance to nonperforming loan ratio was 110% , 91% and 79% as of June 30, 2014 , December 31, 2013 and June 30, 2013 , respectively.
Below is an analysis of the consolidated allowance for credit losses for the six months ended June 30, 2014 and 2013 and the year-ended December 31, 2013 :
June 30, 2014
June 30, 2013
December 31, 2013
(dollars in thousands)
Balance, beginning of period
$
54,225

$
67,187

$
67,187

Loans charged off:
Commercial, financial, agricultural and other
7,859

14,221

18,399

Real estate construction
296

755

773

Residential real estate
1,735

643

1,814

Commercial real estate
297

9,238

10,513

Loans to individuals
1,562

1,755

3,679

Total loans charged off
11,749

26,612

35,178

Recoveries of loans previously charged off:
Commercial, financial, agricultural and other
421

264

455

Real estate construction
337

59

501

Residential real estate
323

812

1,264

Commercial real estate
255

108

136

Loans to individuals
365

337

633

Total recoveries
1,701

1,580

2,989

Net credit losses
10,048

25,032

32,189

Provision charged to expense
6,548

15,297

19,227

Balance, end of period
$
50,725

$
57,452

$
54,225


45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


Noninterest Income
The following table presents the components of noninterest income for the six months ended June 30, 2014 :
2014
2013
$ Change
% Change
(dollars in thousands)
Noninterest Income:
Trust income
$
2,909

$
3,271

$
(362
)
(11
)%
Service charges on deposit accounts
7,933

7,216

717

10

Insurance and retail brokerage commissions
2,995

2,801

194

7

Income from bank owned life insurance
2,801

2,860

(59
)
(2
)
Card related interchange income
7,021

6,678

343

5

Other income
4,515

6,282

(1,767
)
(28
)
Subtotal
28,174

29,108

(934
)
(3
)
Net securities gains
2

8

(6
)
(75
)
Gain on sale of assets
3,746

700

3,046

435

Total noninterest income
$
31,922

$
29,816

$
2,106

7
%
Noninterest income, excluding net securities gains and gain on sale of assets, decreased $0.9 million , or 3% , for the first six months of 2014 compared to 2013 . The most notable change in this total is the $1.8 million decrease in the other income category, which is largely attributable to a $1.1 million reduction in commercial loan swap-related income due to a positive $1.0 million credit adjustment in the first six months of 2013 related to decrease in counterparty risk.
Total noninterest income increased $2.1 million , or 7% , in comparison to the six months ended June 30, 2013 . The most significant changes include a $3.0 million increase in gain on sale of assets as a result of a $1.2 million gain recognized on the sale of the Company's registered investment advisory business and the sale of three OREO properties that resulted in gains of $2.4 million.

46
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


Noninterest Expense
The following table presents the components of noninterest expense for the six months ended June 30 :
2014
2013
$ Change
% Change
(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits
$
42,941

$
43,290

$
(349
)
(1
)%
Net occupancy expense
6,789

6,856

(67
)
(1
)
Furniture and equipment expense - excluding IT conversion
6,427

6,569

(142
)
(2
)
Data processing expense
3,010

3,019

(9
)
—

Advertising and promotion expense
1,485

1,554

(69
)
(4
)
Pennsylvania shares tax expense
1,749

2,707

(958
)
(35
)
Intangible amortization
356

655

(299
)
(46
)
Collection and repossession expense
1,158

2,002

(844
)
(42
)
Other professional fees and services
1,715

1,917

(202
)
(11
)
FDIC insurance
2,100

2,134

(34
)
(2
)
Other operating expenses
8,788

10,038

(1,250
)
(12
)
Subtotal
76,518

80,741

(4,223
)
(5
)
Loss on sale or write-down of assets
1,180

530

650

123

Loss on redemption of subordinated debt
—

1,629

(1,629
)
—

Furniture and equipment expense - related to IT conversion
4,152

—

4,152

N/A

Conversion related expenses
893

—

893

N/A

Operational losses (recoveries)
(460
)
552

(1,012
)
(183
)%
Total noninterest expense
$
82,283

$
83,452

$
(1,169
)
(1
)%

Noninterest expense, excluding loss on sale or write-down of assets, loss on redemption of subordinated debt, conversion related expenses and operational (recoveries) losses, decreased $4.2 million , or 5% , for the the six months ended June 30, 2014 compared to the same period in 2013 .

The 2014 decrease is largely attributable to a $0.8 million decrease in collection and repossession expense due to the resolution of several large credits and overall improvement in the credit quality of the loan portfolio, a $1.0 million decrease in Pennsylvania shares tax as a result of changes in the Pennsylvania tax law and a $1.3 million decrease in other operating expenses. The decrease in other operating expenses is primarily the result of a $0.8 million expense recognized during the six months ended June 30, 2013 related to a contingency reserve established for a 1099 tax reporting issue. During the six months ended June 30, 2014, the reporting issue was largely resolved and $0.3 million of the reserve was reversed from expenses.

Operational (recoveries) losses decreased $1.0 million in 2014 due to an insurance recovery of $0.9 million received in the first quarter of 2014 . This recovery related to a $3.5 million fraud loss recognized in 2012.

On September 30, 2013, First Commonwealth executed a contract with Jack Henry and Associates to license the Jack Henry and Associates SilverLake System core processing software and to outsource certain data processing services. A system conversion is expected to occur during the third quarter of 2014. First Commonwealth will incur approximately $12.0 million of charges related to this conversion. Included in this amount is accelerated depreciation for data processing hardware and software which was recognized beginning in the fourth quarter of 2013 and will continue through the anticipated conversion date in August 2014. Also included are early termination charges on existing contracts and staffing and employment-related charges, which will be recognized as they occur. During the six months ended June 30, 2014 , $4.2 million in accelerated depreciation and $0.9 million in other conversion related expenses were recognized. Including the expense recognized in the fourth quarter of 2013, as of June 30, 2014, a total of $9.6 million in conversion related expenses have been recognized. Additional expenses of $2.0 million are anticipated in the third quarter of 2014, after which savings of approximately $1.5 million per quarter are expected starting in the fourth quarter of 2014.


47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


As a result of the April 1, 2013 early redemption of $32.5 million in redeemable capital securities issued by First Commonwealth Capital Trust I, a loss of $1.6 million was recognized. This loss includes a $1.1 million prepayment penalty and
$0.5 million of unamortized deferred issuance costs. There were no similar expenses in 2014.

Income Tax
The provision for income taxes increased $4.0 million for the six months ended June 30, 2014 , compared to the corresponding period in 2013 . The higher provision for income taxes was primarily the result of a $11.9 million increase in the level of net income before tax.
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income for the six months ended June 30, 2014 and 2013 .
We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank-owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The level of tax benefits that reduce our tax rate below the 35% statutory rate produced an annual effective tax rate of 28.9% and 26.2% for the six months ended June 30, 2014 and 2013 , respectively.
As of June 30, 2014 , our deferred tax assets totaled $50.4 million . Based on our evaluation as of June 30, 2014 , we determined that it is more likely than not that all of these assets will be realized. As a result, we did not record a valuation allowance against these assets. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved forecasts, evaluation of historical earning levels and consideration of potential tax strategies. If future events differ from our current forecasts, we may need to establish a valuation allowance, which could have a material impact on our financial condition and results of operations.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Net Income
For the three months ended June 30, 2014 , First Commonwealth had net income of $11.9 million , or $0.13 per share, compared to net income of $5.8 million , or $0.06 per share, in the three months ended June 30, 2013 . The increase in net income was the result of declines in the provision for credit losses and noninterest expense.
Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $46.2 million in the second quarter of 2014 compared to $46.7 million for the same period in 2013 . Net interest income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at 73% and 75% for the three months ended June 30, 2014 and 2013 , respectively.
Net interest margin, on a fully taxable equivalent basis, was 3.26% for the three months ended June 30, 2014 compared to 3.35% for the three months ended June 30, 2013 . The 9 basis point decline was affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.
Runoff of existing assets earning higher interest rates and competitive pricing pressure has continued to provide for lower yields on earning assets. Growth in earning assets has helped to offset the spread compression, as average earning assets for the three months ended June 30, 2014 increased $81.9 million , or 1% , compared to the comparable period in 2013 . However, during the second quarter of 2014, approximately 54% of the growth in earning assets was generated by the investment portfolio where purchases provide approximately 83 basis points less yield than the loan portfolio. Investment portfolio purchases during the three months ended June 30, 2014 have been primarily in mortgage-related assets with approximate durations of 36-48 months and municipal securities with a duration of 10 years. The mortgage-related investments have monthly principal payments that will provide for reinvestment opportunities as interest rates rise.
The taxable equivalent yield on interest-earning assets was 3.60% for the three months ended June 30, 2014 , a decrease of 13 basis points from the 3.73% yield for the same period in 2013 . This decline can be attributed to the repricing of our adjustable rate assets and the repayment or amortization of fixed rate assets in a declining interest rate environment as well as lower

48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


interest rates available on new investments and loans. Reductions in the cost of interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities was 0.43% for the three months ended June 30, 2014 , compared to 0.47% for the same period in 2013 .
Comparing the three months ended June 30, 2014 with the same period in 2013 , changes in interest rates negatively impacted net interest income by $1.5 million . The lower yield on interest-earning assets adversely impacted net interest income by $1.8 million , while the decline in the cost of interest-bearing liabilities had a positive impact of $0.3 million .
While decreases in interest rates and yields compressed the net interest margin, increases in average interest-earning assets tempered the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $1.0 million in the three months ended June 30, 2014 compared to the same period in 2013 . Higher levels of interest-earning assets resulted in an increase of $0.8 million in interest income, while volume changes decreased interest expense by $0.2 million , primarily as the result of changes in time deposits.
Positively affecting net interest income was a $107.2 million increase in average net free funds at June 30, 2014 as compared to June 30, 2013 . Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase in noninterest-bearing demand deposit average balances. Additionally, higher costing time deposits continue to mature and reprice to lower costing certificates or other deposit alternatives. Average time deposits for the three months ended June 30, 2014 decreased $102.5 million compared to the comparable period in 2013 .
The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three months ended June 30 :
2014
2013
(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income
$
50,166

$
50,981

Adjustment to fully taxable equivalent basis
814

1,030

Interest income adjusted to fully taxable equivalent basis (non-GAAP)
50,980

52,011

Interest expense
4,783

5,283

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)
$
46,197

$
46,728



49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)



The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis, for the three months ended June 30 :
2014
2013
Average
Balance
Income /
Expense (a)
Yield
or
Rate
Average
Balance
Income /
Expense (a)
Yield
or
Rate
(dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits with banks
$
4,184

$
2

0.19
%
$
2,954

$
2

0.27
%
Tax-free investment securities (e)
10,626

98

3.70

84

2

7.41

Taxable investment securities
1,361,353

7,908

2.33

1,327,714

7,349

2.22

Loans, net of unearned income (b)(c)
4,299,228

42,972

4.01

4,262,773

44,658

4.20

Total interest-earning assets
5,675,391

50,980

3.60

5,593,525

52,011

3.73

Noninterest-earning assets:
Cash
72,830

73,123

Allowance for credit losses
(56,151
)
(64,333
)
Other assets
539,195

569,028

Total noninterest-earning assets
555,874

577,818

Total Assets
$
6,231,265

$
6,171,343

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)
$
639,313

$
50

0.03
%
$
689,644

$
65

0.04
%
Savings deposits (d)
1,872,863

570

0.12

1,940,868

762

0.16

Time deposits
1,113,859

2,796

1.01

1,216,403

3,180

1.05

Short-term borrowings
651,450

477

0.29

445,249

287

0.26

Long-term debt
210,703

890

1.69

221,310

989

1.79

Total interest-bearing liabilities
4,488,188

4,783

0.43

4,513,474

5,283

0.47

Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)
968,926

873,827

Other liabilities
51,138

46,847

Shareholders’ equity
723,013

737,195

Total noninterest-bearing funding sources
1,743,077

1,657,869

Total Liabilities and Shareholders’ Equity
$
6,231,265

$
6,171,343

Net Interest Income and Net Yield on Interest-Earning Assets
$
46,197

3.26
%
$
46,728

3.35
%
(a)
Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.
(b)
Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c)
Loan income includes loan fees earned.
(d)
Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.
(e)
Yield on tax-free investment securities calculated using fully taxable equivalent interest income of $1,555 for the three months ended June 30, 2013 .


50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)



The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three months ended June 30, 2014 compared with June 30, 2013 :
Analysis of Year-to-Year Changes in Net Interest Income
Total
Change
Change Due To
Volume
Change Due To
Rate (a)
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
—

$
1

$
(1
)
Tax-free investment securities
96

195

(99
)
Taxable investment securities
559

185

374

Loans
(1,686
)
382

(2,068
)
Total interest income (b)
(1,031
)
763

(1,794
)
Interest-bearing liabilities:
Interest-bearing demand deposits
(15
)
(5
)
(10
)
Savings deposits
(192
)
(27
)
(165
)
Time deposits
(384
)
(268
)
(116
)
Short-term borrowings
190

134

56

Long-term debt
(99
)
(47
)
(52
)
Total interest expense
(500
)
(213
)
(287
)
Net interest income
$
(531
)
$
976

$
(1,507
)
(a)
Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b)
Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.

Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of allowance for credit losses needed or probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.
The table below provides a breakout of the provision for credit losses by loan category for the three months ended June 30 :
2014
2013
Dollars
Percentage
Dollars
Percentage
(dollars in thousands)
Commercial, financial, agricultural and other
$
1,753

53
%
$
9,847

91
%
Real estate construction
(187
)
(6
)
1,137

11

Residential real estate
660

20

922

8

Commercial real estate
464

14

(1,659
)
(15
)
Loans to individuals
627

19

527

5

Unallocated
—

—

26

—

Total
$
3,317

100
%
$
10,800

100
%
The provision for credit losses for the three months ended June 30, 2014 decreased in comparison to the three months ended June 30, 2013 by $7.5 million , or 69.3% . The majority of the 2014 provision expense is attributable to specific reserves for the commercial, financial and agricultural category, including $1.3 million in provision expense related to an $8.2 million loan to an oil and gas servicing company. This loan was transferred to nonaccrual status during the first quarter and sold during the second quarter. In addition, specific reserves in this category have also increased due to a $4.3 million loan to an audio visual equipment distributor which was transferred into nonaccrual status during the second quarter of 2014. Offsetting these increases in provision expense was the release of approximately $2.7 million in reserves related to a $4.7 million commercial

51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


relationship with a local developer which paid off during the quarter. For the second quarter of 2014 , the negative provision expense for real estate construction, residential real estate and commercial real estate is a result of declines in both the level of criticized loans and historical loss rates for these loan categories. The level of provision expense in the second quarter of 2013 was primarily due to deterioration in the value of certain assets of a commercial relationship with a local developer which resulted in a net charge-off or $10.1 million.

Below is an analysis of the consolidated allowance for credit losses for the three months ended June 30, 2014 and 2013 and the year ended December 31, 2013 :
June 30, 2014
June 30, 2013
December 31, 2013
(dollars in thousands)
Balance, beginning of period
$
54,506

$
62,262

$
67,187

Loans charged off:
Commercial, financial, agricultural and other
6,258

13,683

18,399

Real estate construction
296

671

773

Residential real estate
640

321

1,814

Commercial real estate
157

694

10,513

Loans to individuals
752

767

3,679

Total loans charged off
8,103

16,136

35,178

Recoveries of loans previously charged off:
Commercial, financial, agricultural and other
336

136

455

Real estate construction
168

47

501

Residential real estate
79

89

1,264

Commercial real estate
235

11

136

Loans to individuals
187

243

633

Total recoveries
1,005

526

2,989

Net credit losses
7,098

15,610

32,189

Provision charged to expense
3,317

10,800

19,227

Balance, end of period
$
50,725

$
57,452

$
54,225


Noninterest Income
The following table presents the components of noninterest income for the three months ended June 30, 2014 :
2014
2013
$ Change
% Change
(dollars in thousands)
Noninterest Income:
Trust income
$
1,474

$
1,608

$
(134
)
(8
)%
Service charges on deposit accounts
4,141

3,815

326

9

Insurance and retail brokerage commissions
1,600

1,384

216

16

Income from bank owned life insurance
1,432

1,432

—

—

Card related interchange income
3,655

3,490

165

5

Other income
2,533

2,773

(240
)
(9
)
Subtotal
14,835

14,502

333

2

Net securities gains
2

4

(2
)
(50
)
Gain on sale of assets
2,165

425

1,740

409

Total noninterest income
$
17,002

$
14,931

$
2,071

14
%

52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


Noninterest income, excluding net securities gains and gain on sale of assets increased 0.3 million , or 2% , for the second quarter of 2014 compared to 2013 . Total noninterest income increased $2.1 million , or 14% ,in comparison to the three months ended June 30, 2013 . The most significant changes include a 1.7 million increase in gain on sale of assets due to the sale of an OREO property resulting in a gain of $2.0 million.
Noninterest Expense
The following table presents the components of noninterest expense for the three months ended June 30 :
2014
2013
$ Change
% Change
(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits
$
21,897

$
21,497

$
400

2
%
Net occupancy expense
3,283

3,221

62

2

Furniture and equipment expense
3,158

3,297

(139
)
(4
)
Data processing expense
1,542

1,503

39

3

Advertising and promotion expense
785

775

10

1

Pennsylvania shares tax expense
1,038

1,517

(479
)
(32
)
Intangible amortization
178

297

(119
)
(40
)
Collection and repossession expense
449

851

(402
)
(47
)
Other professional fees and services
691

948

(257
)
(27
)
FDIC insurance
1,051

1,084

(33
)
(3
)
Other operating expenses
4,720

4,822

(102
)
(2
)
Subtotal
38,792

39,812

(1,020
)
(3
)
Loss on sale or write-down of assets
745

343

402

117

Loss on redemption of subordinated debt
—

1,629

(1,629
)
—

Furniture and equipment expense - related to IT conversion
2,091

—

2,091

N/A

Conversion related expenses
539

—

354

N/A

Operational losses (recoveries)
229

214

15

7
%
Total noninterest expense
$
42,396

$
41,998

$
213

1
%

Noninterest expense, excluding loss on sale or write-down of assets, loss on redemption of subordinated debt, conversion related expenses and operational (recoveries) losses, decreased $1.0 million , or 3% , for the three months ended June 30, 2014 compared to the same period in 2013 .

The 2014 decrease is largely attributable to a $0.4 million decrease in collection and repossession expenses due to improvements in the quality of the loan portfolio and a $0.5 million decrease in Pennsylvania shares tax as a result of changes in the Pennsylvania tax law and numerous cost saving initiatives implemented over the past year.

As previously noted, in 2013, First Commonwealth executed a contract with Jack Henry and Associates to license the Jack Henry and Associates SilverLake System core processing software and to outsource certain data processing services. A system conversion is expected to occur in August 2014 and will result in a total of approximately $12.0 million of conversion related charges. As of June 30, 2014, $9.6 million of these charges have been recognized, with the remaining $2.0 million projected for the third quarter of 2014. During the three months ended June 30, 2014 , $2.1 million in accelerated depreciation and $0.5 million in other conversion related expenses were recognized.

As a result of the April 1, 2013 early redemption of $32.5 million in redeemable capital securities issued by First Commonwealth Capital Trust I, a loss of $1.6 million was recognized. This loss includes a $1.1 million prepayment penalty and
$0.5 million of unamortized deferred issuance costs. There were no similar expenses in 2014.


53
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


Income Tax
The provision for income taxes increased $2.7 million for the three months ended June 30, 2014 , compared to the corresponding period in 2013 . The higher provision for income taxes was primarily the result of a $8.8 million increase in the level of net income before tax.
We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income for the three months ended June 30, 2014 and 2013 .
We generate an annual effective tax rate that is less than the statutory rate of 35% due to benefits resulting from tax-exempt interest, income from bank owned life insurance and tax benefits associated with low income housing tax credits, which are relatively consistent regardless of the level of pretax income. The level of tax benefits that reduce our tax rate below the 35% statutory rate produced an annual effective tax rate of 28.5% and 25.7% for the three months ended June 30, 2014 and 2013 , respectively.

Liquidity
Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through the core deposit base of First Commonwealth Bank and the maturity or repayment of loans and other interest-earning assets, including investments. During the first six months of 2014 , liquidity provided from the net increase in short-term borrowings totaled $219.3 million , while the maturity and redemption of investment securities provided $152.8 million This liquidity provided funds needed to originate loans and purchase investment securities.  We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank (“FRB”) of Cleveland and access to certificates of deposit through brokers.
In order to increase and diversify our funding sources, we participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of June 30, 2014 , our maximum borrowing capacity under this program was $941.9 million and as of that date there was $185.6 million outstanding. Also included in this amount is a reciprocal program which allows our depositors to receive expanded FDIC coverage by placing multiple certificates of deposit at other CDARS member banks. As of June 30, 2014 , our outstanding certificates of deposits from this program have an average weighted rate of 0.27% and an average original term of 181 days .
An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program which enables us to pledge certain loans, not being used as collateral at the FHLB, as collateral for borrowings at the FRB. At June 30, 2014 , the borrowing capacity under this program totaled $636.6 million and there were no amounts outstanding.
As of June 30, 2014 , our maximum borrowing capacity at the FHLB of Pittsburgh was $1.6 billion and as of that date amounts used against this capacity included $826.7 million in outstanding borrowings and $28.2 million in letter of credit commitments used for pledging public funds and other non-deposit purposes.
First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution. As of June 30, 2014 , there are no amounts outstanding on this line.
First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is influenced by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. The following table shows a breakdown of the components of First Commonwealth’s deposits:

54
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


June 30, 2014
December 31, 2013
(dollars in thousands)
Noninterest-bearing demand deposits
$
1,008,031

$
912,361

Interest-bearing demand deposits
83,137

89,149

Savings deposits
2,387,628

2,506,631

Time deposits
981,625

1,095,722

Total
$
4,460,421

$
4,603,863

During the first six months of 2014 , total deposits decreased $143.4 million due to a $114.1 million decrease in time deposits and a decrease of $125.0 million in interest-bearing and savings deposits, offset by a $95.7 million increase in noninterest-bearing deposits. The decrease in time deposits is due to a decline in wholesale certificates of deposits of $65.5 million coupled with a decline in core certificates of deposit of $48.6 million . Wholesale certificates can offer a more attractive source of incremental funding as they generally have a lower incremental cost of funds than traditional certificates of deposit funding. The decline in interest-bearing demand and savings deposits are partially due to the elimination in 2014 of several promotional interest rates as a means of standardizing rates in anticipation of the IT system conversion described earlier.
Market Risk
The following gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive liabilities repricing within a one-year period was 0.73 and 0.71 at June 30, 2014 and December 31, 2013 , respectively. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.
Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. A lower level of rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below the gap analysis. The following is the gap analysis as of June 30, 2014 and December 31, 2013 :
June 30, 2014
0-90 Days
91-180
Days
181-365
Days
Cumulative
0-365 Days
Over 1 Year
Through 5
Years
Over 5
Years
(dollars in thousands)
Loans
$
2,108,531

$
213,314

$
280,434

$
2,602,279

$
1,408,562

$
284,650

Investments
86,474

162,336

197,663

446,473

532,364

404,155

Other interest-earning assets
5,151

—

—

5,151

—

—

Total interest-sensitive assets (ISA)
2,200,156

375,650

478,097

3,053,903

1,940,926

688,805

Certificates of Deposit
355,351

132,141

209,005

696,497

280,229

4,899

Other deposits
2,470,765

—

—

2,470,765

—

—

Borrowings
938,173

25,156

50,317

1,013,646

32,375

8,691

Total interest-sensitive liabilitites (ISL)
3,764,289

157,297

259,322

4,180,908

312,604

13,590

Gap
$
(1,564,133
)
$
218,353

$
218,775

$
(1,127,005
)
$
1,628,322

$
675,215

ISA/ISL
0.58

2.39

1.84

0.73

6.21

50.68

Gap/Total assets
24.83
%
3.47
%
3.47
%
17.89
%
25.85
%
10.72
%


55
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


December 31, 2013
0-90 Days
91-180
Days
181-365
Days
Cumulative
0-365 Days
Over 1 Year
Through 5
Years
Over 5
Years
(dollars in thousands)
Loans
$
2,026,232

$
215,614

$
310,437

$
2,552,283

$
1,401,095

$
282,761

Investments
106,382

54,440

209,855

370,677

586,363

387,180

Other interest-earning assets
3,012

—

—

3,012

—

—

Total interest-sensitive assets (ISA)
2,135,626

270,054

520,292

2,925,972

1,987,458

669,941

Certificates of Deposit
373,426

146,037

231,283

750,746

338,488

6,488

Other deposits
2,595,780

—

—

2,595,780

—

—

Borrowings
698,899

7,595

50,179

756,673

81,192

5,302

Total interest-sensitive liabilitites (ISL)
3,668,105

153,632

281,462

4,103,199

419,680

11,790

Gap
$
(1,532,479
)
$
116,422

$
238,830

$
(1,177,227
)
$
1,567,778

$
658,151

ISA/ISL
0.58

1.76

1.85

0.71

4.74

56.82

Gap/Total assets
24.66
%
1.87
%
3.85
%
18.94
%
25.23
%
10.59
%

The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual changes in interest rates over a 12 month time frame as compared with net interest income if rates remained unchanged and there are no changes in balance sheet categories.
Net interest income change (12 months)
-200
-100
+100
+200
(dollars in thousands)
June 30, 2014
$
(7,150
)
$
(3,208
)
$
13

$
1,020

December 31, 2013
(8,878
)
(4,355
)
(833
)
(646
)
The analysis and model used to quantify the sensitivity of our net interest income becomes less reliable in a decreasing 200 basis point scenario given the current low interest rate environment. Results of the 100 and 200 basis point decline in interest rate scenario are affected by the fact that many of our interest-bearing liabilities are at rates below 1% and therefore cannot decline 100 or 200 basis points, yet our interest-sensitive assets are able to decline by these amounts. In the six months ended June 30, 2014 and 2013 , the cost of our interest-bearing liabilities averaged 0.43% and 0.53% , respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.64% and 3.82% , respectively.
During the second quarter of 2014, the Company analyzed the assumptions used when estimating the volatility of our non-maturity deposits. As a result of this analysis, the duration of our nonmaturity deposits was determined to be 1.4 years longer than previously modeled and the repricing sensitivity was determined to 26 basis points less in a 100 basis point increase in interest rates. The impact of these updated assumptions on the June 30, 2014 sensitivity of net interest income is provided in the following table.
Net interest income change (12 months)
-200
-100
+100
+200
(dollars in thousands)
June 30, 2014 - Current Assumption
$
(7,150
)
$
(3,208
)
$
13

$
1,020

June 30, 2014 - Prior Assumption
(7,287
)
(3,275
)
(881
)
(544
)
Change
137

67

894

1,564

Asset/liability models require certain assumptions be made, such as prepayment rates on earning assets and pricing impact on non-maturity deposits, which may differ from actual experience. These business assumptions are based upon our experience, business plans and published industry experience. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will approximate actual results.

56
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


Credit Risk
First Commonwealth maintains an allowance for credit losses at a level deemed sufficient for losses inherent in the loan portfolio at the date of each statement of financial condition. Management reviews the adequacy of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated losses.
First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual impaired loans with a balance greater than $0.1 million, loss experience trends, delinquency and other relevant factors.
First Commonwealth also maintains a reserve for unfunded loan commitments and letters of credit based upon credit risk and probability of funding. The reserve totaled $3.1 million at June 30, 2014 and is classified in "Other liabilities" on the Condensed Consolidated Statements of Financial Condition.
Nonperforming loans include nonaccrual loans and loans classified as troubled debt restructurings. Nonaccrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower, who could not obtain comparable terms from alternative financing sources. In the first six months of 2014 , 34 loans totaling $2.5 million were identified as troubled debt restructurings. Please refer to Note 9, “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructurings.

We discontinue interest accruals on a loan when, based on current information and events, it is probable that we will be unable to fully collect principal or interest due according to the contractual terms of the loan. A loan is also placed on nonaccrual status when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the borrower. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed on nonaccrual status at 150 days past due.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process. The probable risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows. Losses or specifically assigned allowance for loan losses are recognized where appropriate.
There was continued improvement in the majority of the Company's credit metrics during the second quarter of 2014. The allowance for credit losses was $50.7 million at June 30, 2014 or 1.17% of total loans outstanding compared to 1.27% reported at December 31, 2013 and 1.36% at June 30, 2013 . General reserves as a percentage of non-impaired loans were 1.04% at June 30, 2014 compared to 1.07% at December 31, 2013 and 1.15% at June 30, 2013. Nonperforming loan balances decreased $13.1 million during the first six months of 2014 . Criticized loans totaled $157.4 million at June 30, 2014 and represented 4% of the loan portfolio. The level of criticized loans decreased as of June 30, 2014 when compared to December 31, 2013 , by $5.0 million , or 3% . Delinquency on accruing loans for the same period increased $4.9 million , or 37% , the majority of which are commercial real estate and residential real estate loans.
The allowance for credit losses as a percentage of nonperforming loans was 109.59% as of June 30, 2014 compared to 91.31% at December 31, 2013 and 78.60% at June 30, 2013 . The amount of allowance related to nonperforming loans was determined by using fair values obtained from current appraisals and updated discounted cash flow analyses. The allowance for credit losses includes specific allocations of $6.1 million and general reserves of $44.7 million . Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at June 30, 2014 .


57
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures:
June 30, 2014
December 31, 2013
2014
2013
(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis
$
28,928

$
41,767


$
28,908

Troubled debt restructured loans on nonaccrual basis
6,793

17,519

16,980

Troubled debt restructured loans on accrual basis
10,566

13,811

13,495

Total nonperforming loans
$
46,287

$
73,097

$
59,383

Loans past due in excess of 90 days and still accruing
$
2,410

$
2,648

$
2,505

Other real estate owned
$
7,817

$
15,603

$
11,728

Loans outstanding at end of period
$
4,334,214

$
4,229,752


$
4,283,833

Average loans outstanding
$
4,303,278

(a)
$
4,242,800

(a)
$
4,255,593

(b)
Nonperforming loans as a percentage of total loans
1.07
%
1.73
%
1.39
%
Provision for credit losses
$
6,548

(a)
$
15,297

(a)
$
19,227

(b)
Allowance for credit losses
$
50,725

$
57,452

$
54,225

Net charge-offs
$
10,048

(a)
$
25,032

(a)
$
32,189

(b)
Net charge-offs as a percentage of average loans outstanding (annualized)
0.47
%
1.19
%
0.76
%
Provision for credit losses as a percentage of net charge-offs
65.17
%
(a)
61.11
%
(a)
59.73
%
(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding
1.17
%
1.36
%
1.27
%
Allowance for credit losses as a percentage of nonperforming loans
109.59
%
78.60
%
91.31
%
(a)
For the six -month period ended.
(b)
For the twelve-month period ended.

Nonperforming loans decreased $13.1 million to $46.3 million at June 30, 2014 compared to $59.4 million at December 31, 2013 . This decrease can be primarily attributed to the payoff of five nonperforming loan relationships totaling $11.6 million and the sale of three nonperforming loans totaling $0.7 million. Offsetting these decreases was the addition of a $4.3 million commercial industrial loan to an audio visual equipment distributor.

The following tables show the outstanding balances of our loan portfolio and the breakdown of net charge-offs and nonperforming loans by loan type as of and for the periods presented:
June 30, 2014
December 31, 2013
Amount
%
Amount
%
(dollars in thousands)
Commercial, financial, agricultural and other
$
1,062,001

25
%
$
1,021,056

24
%
Real estate construction
100,709

2

93,289

2

Residential real estate
1,238,791

29

1,262,718

30

Commercial real estate
1,306,752

30

1,296,472

30

Loans to individuals
625,961

14

610,298

14

Total loans and leases net of unearned income
$
4,334,214

100
%
$
4,283,833

100
%
During the six months ended June 30, 2014 , loans increased $50.4 million or 1% compared to balances outstanding at December 31, 2013 . Loan growth was experienced in all categories, except residential real estate. Impacting commercial financial and agricultural loans as well as commercial real estate loans was the opening in early 2014 of a new commercial business center in Cleveland as well as growth in direct middle market lending and syndications in Pennsylvania and contiguous states. Loans to Individuals increased due to growth in indirect auto lending.

58
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)



The decline in the residential real estate category can be attributed to continued runoff in our mortgage portfolio since a traditional mortgage product has not been included in the loan portfolio in close to ten years. During the third quarter of 2014, the Company will expand its product line to include traditional mortgage products as it launches a new Mortgage division.
Net charge-offs for the six months ended June 30, 2014 totaled $10.0 million compared to $25.0 million for the six months ended June 30, 2013 . The most significant charge-offs during the six months ended June 30, 2014 were $8.0 million recognized on two commercial loans and sixteen consumer loan relationships. During the six months ended June 30, 2013 , the most significant charge-offs were a $5.3 million charge recognized on two commercial real estate loans and a $3.1 million charge-off recognized upon transfer of two loans to held for sale.
For the Six Months Ended June 30, 2014
As of June 30, 2014
Net
Charge-
offs
% of
Total Net
Charge-offs
Net Charge-
offs as a % of
Average
Loans (annualized)
Nonperforming
Loans
% of Total
Nonperforming
Loans
Nonperforming
Loans as a % of
Total Loans
(dollars in thousands)
Commercial, financial, agricultural and other
$
7,438

74.02
%
0.35
%
$
25,416

54.91
%
0.59
%
Real estate construction
(41
)
(0.40
)
—

586

1.27

0.01

Residential real estate
1,412

14.05

0.07

11,042

23.85

0.25

Commercial real estate
42

0.42

—

8,902

19.23

0.21

Loans to individuals
1,197

11.91

0.05

341

0.74

0.01

Total loans, net of unearned income
$
10,048

100.00
%
0.47
%
$
46,287

100.00
%
1.07
%
As the above table illustrates, commercial, financial, agricultural and other and residential real estate loans represented a significant portion of the nonperforming loans as of June 30, 2014 . See discussions related to the provision for credit losses and loans for more information.
Capital Resources
At June 30, 2014 , shareholders’ equity was $724.5 million , an increase of $12.8 million from December 31, 2013 . The increase was primarily the result of $24.2 million net income offset by $13.4 million of common stock repurchases, $13.2 million of dividends paid to shareholders and increases of $14.6 million in the fair value of available for sale investments. Cash dividends declared per common share were $0.14 and $0.11 for the six months ended June 30, 2014 and 2013 , respectively.
First Commonwealth is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Commonwealth’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Commonwealth and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of First Commonwealth’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. First Commonwealth’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
First Commonwealth maintains capital to absorb unexpected losses. In order to provide assurance that our capital levels are adequate for our risk exposure we test our capital position under several stress scenarios on a bi-annual basis. This analysis is subject to Board of Director review and approval. Our most recent capital stress test was completed in December 2013.
On July 9, 2013, federal banking agencies approved changes to the regulatory capital framework which are effective beginning on January 1, 2015, with some items phasing in over a period of time. The most significant of these changes include higher minimum capital requirements, as the minimum Tier I capital ratio increased from 4.0% to 6.0% and the establishment of a new common equity Tier I capital ratio with a minimum level of 4.5%. Additionally, the new rules improve the quality of capital by providing stricter eligibility criteria for regulatory capital instruments and provide for a phase-in, beginning January 1, 2016, of a capital conservation buffer of 2.5% of risk-weighted assets. This buffer provides a requirement to hold common equity Tier 1

59
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)


capital above the minimum risk-based capital requirements. Management currently expects First Commonwealth will remain well-capitalized after the adoption of these changes.
Under current regulations, quantitative measures to ensure capital adequacy require First Commonwealth to maintain minimum amounts and ratios of Total and Tier I capital (common and certain other “core” equity capital) to risk weighted assets, and of Tier I capital to average assets. As of June 30, 2014 , First Commonwealth and its banking subsidiary met all capital adequacy requirements to which they are subject.
As of June 30, 2014 , First Commonwealth was considered well-capitalized under the regulatory framework for prompt corrective action. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the table below:
Actual
Regulatory
Minumum
Well
Capitalized
Regulatory
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
$
671,322

13.46
%
$
398,956

8.00
%
First Commonwealth Bank
648,257

12.98

399,460

8.00

$
499,325

10.00
%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
$
617,501

12.38
%
$
199,478

4.00
%
First Commonwealth Bank
594,436

11.90

199,730

4.00

$
299,595

6.00
%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation
$
617,501

10.19
%
$
242,494

4.00
%
First Commonwealth Bank
594,436

9.87

240,891

4.00

$
301,113

5.00
%
During the first quarter of 2014, First Commonwealth completed share repurchase programs in the amount of $25.0 million and $50.0 million which were previously announced on January 29, 2013 and June 19, 2012, respectively. On February 19, 2014, First Commonwealth's Board of Directors authorized an additional $25.0 million common stock repurchase program. As of June 30, 2014 , First Commonwealth has purchased 897,052 shares at an average price of $8.47 per share under this program. Under all three share repurchase programs, First Commonwealth purchased a total of 11,707,171 shares of common stock at an average price of $7.08 per share.
On July 22, 2014, First Commonwealth Financial Corporation declared a quarterly dividend of $0.07 per share payable on August 15, 2014 to shareholders of record as of August 4, 2014. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.

60

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Information appearing in Item 2 of this report under the caption “Market Risk” is incorporated by reference in response to this item.
ITEM 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission.
In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the current fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. No such changes were identified in connection with this evaluation.

61
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART II – OTHER INFORMATION


ITEM 1.
LEGAL PROCEEDINGS
Market Rate Savings IRA Litigation
For a description of litigation relating to the Market Rate Savings IRA product, refer to the "Legal proceedings" section in Part I, Item 1, Note 6, "Commitments and Contingent Liabilities," which is incorporated herein by reference to this item.
Other Legal Proceedings
First Commonwealth and certain of its subsidiaries have been named as defendants in various legal actions arising out of the normal course of business.  In the opinion of management, the ultimate resolution of these lawsuits should not have a material adverse effect on First Commonwealth's business, consolidated financial position or results of operations. It is possible, however, that future developments could result in an unfavorable ultimate outcome for or resolution of any one or more of the lawsuits in which First Commonwealth or its subsidiaries are defendants, which may be material to First Commonwealth's results of operations for a particular quarterly reporting period. Litigation is inherently uncertain, and management cannot make assurances that First Commonwealth will prevail in any of these actions, nor can management reasonably estimate the amount of damages that First Commonwealth might incur.

ITEM 1A.
RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 .






62
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART II – OTHER INFORMATION

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 19, 2012, the Company announced a share repurchase program through which the Board of Directors authorized management to repurchase up to $50.0 million of the Company’s common stock. On both January 29, 2013 and February 19, 2014, additional share repurchase programs were authorized for up to $25.0 million each in shares of the Company’s common stock. The following table details the amount of shares repurchased under this program during the second quarter of 2014 :
Month Ending:
Total Number of
Shares
Purchased
Average Price
Paid per Share
(or Unit)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs*
April 30, 2014
194,046

$
8.77

194,046

2,306,712

May 31, 2014
259,371

8.44

255,644

2,053,133

June 30, 2014
64,975

8.86

64,975

1,852,644

Total
518,392

$
8.61

514,665

* Remaining number of shares approved under the Plan is based on the market value of the Company's common stock of $8.59 at April 30, 2014, $8.60 at May 31, 2014 and $9.22 at June 30, 2014.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
ITEM 5.
OTHER INFORMATION
None

63
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART II – OTHER INFORMATION

ITEM 6.     EXHIBITS
Exhibit
Number
Description
Incorporated by Reference to
31.1
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1
Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.2
Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
101
The following materials from First Commonwealth Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013, (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2014 and 2013, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

Filed herewith

64

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
DATED: August 7, 2014
/s/ T. Michael Price
T. Michael Price
President and Chief Executive Officer
DATED: August 7, 2014
/s/ James R. Reske
James R. Reske
Executive Vice President and Chief Financial Officer


65
TABLE OF CONTENTS