FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2012 June (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)


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

22 North Sixth Street, Indiana, PA		15701
(Address of principal executive offices)		(Zip Code)

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

Large accelerated filer ¨ Accelerated filer x Smaller reporting company ¨ Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of August 2, 2012, was 104,724,846.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX


		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

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

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		66

ITEM 4.	Controls and Procedures		66

PART II.	Other Information

ITEM 1.	Legal Proceedings		67

ITEM 1A.	Risk Factors		67

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		67

ITEM 3.	Defaults Upon Senior Securities		67

ITEM 4.	Mine Safety Disclosures		67

ITEM 5.	Other Information		67

ITEM 6.	Exhibits		68

	Signatures		69

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)


	June 30, 2012			December 31, 2011
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	82,659		$	74,967
Interest-bearing bank deposits		3,839			3,511
Securities available for sale, at fair value		1,159,202			1,142,776
Other investments		35,916			39,796
Loans held for sale		0			13,412
Loans:
Portfolio loans		4,159,531			4,043,643
Allowance for credit losses		(61,676	)		(61,234	)

Net loans		4,097,855			3,982,409

Premises and equipment, net		66,740			66,755
Other real estate owned		19,140			30,035
Goodwill		159,956			159,956
Amortizing intangibles, net		3,101			3,843
Other assets		318,408			323,662

Total assets	$	5,946,816		$	5,841,122

Liabilities
Deposits (all domestic):
Noninterest-bearing	$	823,880		$	780,377
Interest-bearing		3,638,082			3,724,307

Total deposits		4,461,962			4,504,684
Short-term borrowings		474,264			312,777

Subordinated debentures		105,750			105,750
Other long-term debt		75,370			101,664

Total long-term debt		181,120			207,414
Other liabilities		56,980			57,704

Total liabilities		5,174,326			5,082,579

Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued		0			0
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at June 30, 2012 and December 31, 2011 and 104,728,846 and 104,916,994 shares outstanding at June 30, 2012 and December 31, 2011, respectively		105,563			105,563
Additional paid-in capital		365,541			365,868
Retained earnings		307,466			294,056
Accumulated other comprehensive income, net		2,834			2,001
Treasury stock (834,609 and 646,461 shares at June 30, 2012 and December 31, 2011, respectively)		(8,314	)		(7,345	)
Unearned ESOP shares		(600	)		(1,600	)

Total shareholders’ equity		772,490			758,543

Total liabilities and shareholders’ equity	$	5,946,816		$	5,841,122

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For the Three-Months Ended June 30,						For the Six-Months Ended June 30,
	2012			2011			2012			2011
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	46,408		$	49,379		$	94,448		$	100,262
Interest and dividends on investments:
Taxable interest		8,279			8,558			16,828			16,932
Interest exempt from federal income taxes		5			13			10			199
Dividends		19			12			40			29
Interest on bank deposits		1			27			2			36

Total interest income		54,712			57,989			111,328			117,458
Interest Expense
Interest on deposits		5,643			9,093			11,890			18,629
Interest on short-term borrowings		279			178			506			363

Interest on subordinated debentures		1,422			1,386			2,855			2,769
Interest on other long-term debt		450			447			989			943

Total interest on long-term debt		1,872			1,833			3,844			3,712

Total interest expense		7,794			11,104			16,240			22,704

Net Interest Income		46,918			46,885			95,088			94,754
Provision for credit losses		4,297			9,112			8,084			22,929

Net Interest Income after Provision for Credit Losses		42,621			37,773			87,004			71,825
Noninterest Income
Changes in fair value on impaired securities		(1,323	)		448			175			2,317
Non-credit related losses (gains) on securities not expected to be sold (recognized in other comprehensive income)		1,323			(448	)		(175	)		(2,317	)

Net impairment losses		0			0			0			0
Net securities gains		0			1,608			0			2,185
Trust income		1,607			1,764			3,149			3,482
Service charges on deposit accounts		3,737			3,748			7,239			7,174
Insurance and retail brokerage commissions		1,670			1,616			3,094			3,178
Income from bank owned life insurance		1,459			1,390			2,904			2,747
Gain on sale of assets		1,444			1,251			3,559			1,482
Card related interchange income		3,285			3,042			6,399			5,842
Other income		2,894			2,645			7,132			5,302

Total noninterest income		16,096			17,064			33,476			31,392
Noninterest Expense
Salaries and employee benefits		22,363			21,546			44,121			42,674
Net occupancy expense		3,303			3,495			6,707			7,227
Furniture and equipment expense		3,024			3,135			6,208			6,315
Data processing expense		1,796			1,525			3,359			2,949
Pennsylvania shares tax expense		1,510			1,434			2,693			2,612
Intangible amortization		371			389			742			779
Collection and repossession expense		670			1,726			3,369			3,042
Other professional fees and services		940			1,099			2,139			2,224
FDIC insurance		1,262			1,248			2,499			3,083
Loss on sale or write-down of assets		500			4,214			3,789			4,515
Other operating expenses		6,109			5,889			12,974			11,709

Total noninterest expense		41,848			45,700			88,600			87,129

Income Before Income Taxes		16,869			9,137			31,880			16,088
Income tax provision		4,548			1,718			8,508			3,423

Net Income	$	12,321		$	7,419		$	23,372		$	12,665

Average Shares Outstanding		104,894,261			104,686,072			104,852,494			104,652,472
Average Shares Outstanding Assuming Dilution		104,901,239			104,686,072			104,855,543			104,653,604
Per Share Data:
Basic Earnings per Share	$	0.12		$	0.07		$	0.22		$	0.12
Diluted Earnings per Share	$	0.12		$	0.07		$	0.22		$	0.12
Cash Dividends Declared per Common Share	$	0.05		$	0.03		$	0.08		$	0.06

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For the Three-Months Ended June 30,						For the Six-Months Ended June 30,
	2012			2011			2012		2011
	(dollars in thousands)
Net Income	$	12,321		$	7,419		$	23,372	$	12,665
Other comprehensive (loss) income, before tax (benefit) expense:
Unrealized holding gains on securities arising during the period		998			9,125			1,097		7,509
Non-credit related (losses) gains on securities not expected to be sold		(1,323	)		448			175		2,317
Less: reclassification adjustment for (gains) losses on securities included in net income		0			(1,608	)		0		(2,185	)

Total other comprehensive (loss) income, before tax (benefit) expense		(325	)		7,965			1,272		7,641
Income tax (benefit) expense related to items of other comprehensive (loss) income		(119	)		2,787			439		2,674

Comprehensive Income	$	12,115		$	12,597		$	24,205	$	17,632

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

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


	Shares Outstanding			Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
	(dollars in thousands, except share data)
Balance at December 31, 2011		104,916,994		$	105,563	$	365,868		$	294,056		$	2,001		$	(7,345	)	$	(1,600	)	$	758,543
Net income										23,372												23,372
Other comprehensive income													833									833
Cash dividends declared ($0.08 per share)										(8,402	)											(8,402	)
Net decrease in unearned ESOP shares																			1,000			1,000
ESOP market value adjustment ($477, net of $167 tax benefit)							(310	)														(310	)
Discount on dividend reinvestment plan purchases							(42	)														(42	)
Tax benefit of stock options exercised							1															1
Treasury stock acquired		(469,700	)													(3,045	)					(3,045	)
Treasury stock reissued		57,552					0			(296	)					650						354
Restricted stock		224,000					24			(1,264	)					1,426						186

Balance at June 30, 2012		104,728,846		$	105,563	$	365,541		$	307,466		$	2,834		$	(8,314	)	$	(600	)	$	772,490


	Shares Outstanding			Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
	(dollars in thousands, except share data)
Balance at December 31, 2010		104,846,194		$	105,515	$	366,488		$	291,492		$	(2,458	)	$	(7,660	)	$	(3,600	)	$	749,777
Net income										12,665												12,665
Other comprehensive income													4,967									4,967
Cash dividends declared ($0.06 per share)										(6,278	)											(6,278	)
Net decrease in unearned ESOP shares																			1,000			1,000
ESOP market value adjustment ($472, net of $165 tax benefit)							(307	)														(307	)
Discount on dividend reinvestment plan purchases							(32	)														(32	)
Tax benefit of stock options exercised							6															6
Treasury stock acquired		(1,336	)													(9	)					(9	)
Treasury stock reissued		13,760					0			(83	)					155						72
Restricted stock		25,000			25		(10	)		0						56						71
Common stock issuance		23,376			23		121									0						144

Balance at June 30, 2011		104,906,994		$	105,563	$	366,266		$	297,796		$	2,509		$	(7,458	)	$	(2,600	)	$	762,076

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For the Six-Months Ended June 30,
	2012			2011
	(dollars in thousands)
Operating Activities
Net income	$	23,372		$	12,665
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		8,084			22,929
Deferred tax expense		1,934			211
Depreciation and amortization		3,800			4,827
Net (gains) losses on securities and other assets		(522	)		1,384
Net amortization of premiums and discounts on securities		717			460
Net accretion of premiums and discounts on long-term debt		(56	)		(69	)
Income from increase in cash surrender value of bank owned life insurance		(2,904	)		(2,747	)
Decrease in interest receivable		1,031			1,085
Decrease in interest payable		(951	)		(558	)
Increase (decrease) in income taxes payable		7,042			(894	)
Other-net		(3,945	)		(122	)

Net cash provided by operating activities		37,602			39,171
Investing Activities
Transactions with securities available for sale:
Proceeds from sales		0			69,926
Proceeds from maturities and redemptions		276,167			229,515
Purchases		(292,056	)		(331,702	)
Proceeds from the redemption of FHLB stock		3,880			4,764
Proceeds from bank owned life insurance		1,408			88
Proceeds from sale of loans		15,981			4,402
Proceeds from sales of other assets		10,971			5,513
Net (increase) decrease in loans		(125,567	)		181,216
Purchases of premises and equipment		(4,022	)		(4,230	)

Net cash (used in) provided by investing activities		(113,238	)		159,492
Financing Activities
Net decrease in federal funds purchased		(26,300	)		(12,800	)
Net increase (decrease) in other short-term borrowings		187,787			(13,126	)
Net decrease in deposits		(42,692	)		(81,657	)
Repayments of other long-term debt		(25,238	)		(24,328	)
Proceeds from issuance of common stock		0			144
Discount on dividend reinvestment plan purchases		(42	)		(32	)
Dividends paid		(8,402	)		(6,278	)
Proceeds from reissuance of treasury stock		354			72
Purchase of treasury stock		(1,812	)		(9	)
Stock option tax benefit		1			0

Net cash provided by (used in) financing activities		83,656			(138,014	)

Net increase in cash and cash equivalents		8,020			60,649
Cash and cash equivalents at January 1		78,478			69,858

Cash and cash equivalents at June 30	$	86,498		$	130,507

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

The accounting and reporting policies of First Commonwealth Financial Corporation and its subsidiaries (“First Commonwealth” or “Company”) conform with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of First Commonwealth’s financial position, results of operations, cash flows and changes in shareholders’ equity as of and for the periods presented.

The results of operations for the six-months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year of 2012. These interim financial statements should be read in conjunction with First Commonwealth’s 2011 Annual Report on Form 10-K which is available on First Commonwealth’s website at http://www.fcbanking.com.

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

Note 2 Supplemental Comprehensive Income Disclosures

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


	For the Six-Months Ended June 30,
	2012									2011
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	1,097		$	(378	)	$	719		$	7,509		$	(2,628	)	$	4,881
Non-credit related gains on securities not expected to be sold		175			(61	)		114			2,317			(811	)		1,506
Reclassification adjustment for (gains) losses on securities included in net income		0			0			0			(2,185	)		765			(1,420	)

Total other comprehensive income	$	1,272		$	(439	)	$	833		$	7,641		$	(2,674	)	$	4,967


	For the Three-Months Ended June 30,
	2012									2011
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	998		$	(344	)	$	654		$	9,125		$	(3,193	)	$	5,932
Non-credit related (losses) gains on securities not expected to be sold		(1,323	)		463			(860	)		448			(157	)		291
Reclassification adjustment for (gains) losses on securities included in net income		0			0			0			(1,608	)		563			(1,045	)

Total other comprehensive (loss) income	$	(325	)	$	119		$	(206	)	$	7,965		$	(2,787	)	$	5,178

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 3 Supplemental Cash Flow Disclosures

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


	2012		2011
	(dollars in thousands)
Cash paid during the period for:
Interest	$	17,278	$	23,377
Income taxes		5,700		3,900
Non-cash investing and financing activities:
ESOP loan reductions	$	1,000	$	1,000
Loans transferred to other real estate owned and repossessed assets		3,227		20,640
Other real estate owned sold and settled out of period		80		0
Loans transferred from held to maturity to available for sale		0		823
Gross increase in market value adjustment to securities available for sale		1,254		7,631
Unsettled treasury stock repurchases		1,233		0

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,
	2012			2011			2012			2011
Weighted average common shares issued		105,563,455			105,558,574			105,563,455			105,536,947
Average treasury shares		(410,247	)		(656,461	)		(476,286	)		(660,206	)
Averaged unearned ESOP shares		(50,170	)		(181,835	)		(67,580	)		(198,285	)
Average unearned nonvested shares		(208,777	)		(34,206	)		(167,095	)		(25,984	)

Weighted average common shares and common stock equivalents used to calculate basic earnings per share		104,894,261			104,686,072			104,852,494			104,652,472
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share		6,978			0			3,049			0
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		0			0			0			1,132

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		104,901,239			104,686,072			104,855,543			104,653,604

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.


	2012						2011
			Price Range						Price Range
	Shares		From		To		Shares		From		To
Stock Options		329,866	$	6.36	$	14.55		546,270	$	6.36	$	14.55
Restricted Stock		96,113		5.96		6.82		20,725		5.70		6.82

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 5 Variable Interest Entities

As defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, a Variable Interest Entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Under ASC 810-10, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is deemed to be the primary beneficiary, which generally means it is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both.

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

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


	June 30,		December 31,
	2012		2011
	(dollars in thousands)
Low Income Housing Limited Partnership Investments	$	510	$	667

Note 6 Commitments and Contingent Liabilities

Commitments and letters of credit

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

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


	June 30,		December 31,
	2012		2011
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,480,490	$	1,495,009
Financial standby letters of credit		48,641		53,689
Performance standby letters of credit		66,197		76,371
Commercial letters of credit		1,048		1,297

The current notional amounts outstanding as of June 30, 2012 include financial standby letters of credit of $0.1 million, performance standby letters of credit of $5.8 million, and commercial letters of credit $0.3 million issued

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 6 Commitments and Contingent Liabilities (Continued)

Commitments and letters of credit (Continued)

during the first six months of 2012. A liability of $0.1 million has been recorded as of June 30, 2012 and December 31, 2011, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

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

Legal proceedings

McGrogan v. First Commonwealth Bank is a class action that was filed on January 12, 2009, in the Court of Common Pleas of Allegheny County, Pennsylvania. The action alleges that First Commonwealth Bank (the “Bank”) promised class members a minimum interest rate of 8% on its IRA Market Rate Savings Account for as long as the class members kept their money on deposit in the IRA account. The class asserts that the Bank committed fraud, breached its modified contract with the class members, and violated the Pennsylvania Unfair Trade Practice and Consumer Protection Law when it resigned as custodian of the IRA Market Rate Savings Accounts in 2008 and offered the class members a roll-over IRA account with a 3.5% interest rate. At that time, there were 237 account holders with an average age of 64, and the aggregate balances in the IRA Market Rate Savings accounts totaled approximately $11.5 million. Plaintiffs seek monetary damages for the alleged breach of contract, punitive damages for the alleged fraud and Unfair Trade Practice and Consumer Protection Law violations and attorney’s fees. On July 27, 2011, the court granted class certification as to the breach of modified contract claim and denied class certification as to the fraud and Pennsylvania Unfair Trade Practice and Consumer Protection Law claims. The breach of contract claim is predicated upon a letter sent to customers in 1998 which reversed an earlier decision by the Bank to reduce the rate paid on the accounts. The letter stated, in relevant part, “This letter will serve as notification that a decision has been made to re-establish the rate on your account to eight percent (8%). This rate will be retroactive to your most recent maturity date and will continue going forward on deposits presently in the account and on annual additions.” In granting class certification, the court found that the letter could constitute a modification of the original IRA contract that would obligate the Bank to pay a minimum rate of 8% until the accounts are closed. Plaintiffs and the Bank have filed motions for summary judgment. In support of its motion, the Bank has asserted that the 1998 letter did not alter the Bank’s right to resign as custodian and close the accounts, which the Bank exercised in 2008. Oral argument on the motions for summary judgment was held on April 4, 2012, and a decision is currently pending. The amount of the Bank’s liability, if any, will depend upon information which is not presently known to the Bank, including the court’s interpretation of the 1998 letter, each class member’s life expectancy and pace of distributions from the IRA account, and the extent to which damages were or could have been mitigated through alternative investments. Accordingly, the Company is unable to estimate the amount or range of a reasonably possible loss.

Other matters

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 7 Investment Securities

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


	June 30, 2012									December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
								(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	30,541	$	4,079	$	0		$	34,620	$	32,139	$	4,061	$	(6	)	$	36,194
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential		815,982		29,853		(96	)		845,739		771,196		29,835		0			801,031
Mortgage-Backed Securities – Commercial		175		2		0			177		193		1		(1	)		193
Other Government – Sponsored Enterprises		241,697		870		(1	)		242,566		267,807		973		(132	)		268,648
Obligations of States and Political Subdivisions		443		6		0			449		444		15		0			459
Corporate Securities		11,796		274		(71	)		11,999		11,811		162		(562	)		11,411
Pooled Trust Preferred Collateralized Debt Obligations		52,889		153		(31,250	)		21,792		54,762		3		(31,785	)		22,980

Total Debt Securities		1,153,523		35,237		(31,418	)		1,157,342		1,138,352		35,050		(32,486	)		1,140,916
Equities		1,860		0		0			1,860		1,860		0		0			1,860

Total Securities Available for Sale	$	1,155,383	$	35,237	$	(31,418	)	$	1,159,202	$	1,140,212	$	35,050	$	(32,486	)	$	1,142,776

The amortized cost and estimated fair value of debt securities available for sale at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	7,363	$	7,373
Due after 1 but within 5 years		234,776		235,641
Due after 5 but within 10 years		0		0
Due after 10 years		64,686		33,792

		306,825		276,806
Mortgage-Backed Securities (a)		846,698		880,536

Total Debt Securities	$	1,153,523	$	1,157,342

(a)

Mortgage Backed Securities include an amortized cost of $30.5 million and a fair value of $34.6 million for Obligations of U.S. Government agencies issued by Ginnie Mae and Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac which had an amortized cost of $816.2 million and a fair value of $845.9 million.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 7 Investment Securities (Continued)

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


	2012		2011
	(dollars in thousands)
Proceeds from sale	$	0	$	69,926

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

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

		0		75

Net gains and impairment	$	0	$	2,185

Securities available for sale with a fair value of $622.8 million and $668.8 million were pledged as of June 30, 2012 and December 31, 2011, respectively, to secure public deposits and for other purposes required or permitted by law.

There were no held-to-maturity debt securities as of June 30, 2012 and December 31, 2011. For the six-months ended June 30, 2012 and 2011, there were no gains or losses for debt securities held-to-maturity.

Note 8 Other Investments

As a member of the Federal Home Loan Bank (“FHLB”), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of June 30, 2012 and December 31, 2011, our FHLB stock totaled $35.9 million and $39.8 million, respectively and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

During 2012 and 2011, the FHLB repurchased excess stock from its members by repurchasing the lessor of 5% of the members’ total capital stock outstanding or its total excess capital stock. As a result, during the six-months ended June 30, 2012 and 2011, stock repurchases occurred in the amounts of $3.9 million and $2.4 million, respectively. The FHLB repurchased stock and paid dividends in both the first and second quarters of 2012, however, decisions regarding any future repurchase of excess capital stock and dividend payments will be made by the FHLB on a quarterly basis. Management reviewed the FHLB’s Form 10-Q for the period ended March 31, 2012 filed with the SEC on May 9, 2012.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 8 Other Investments (Continued)

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, 2012. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 9 Impairment of Investment Securities

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit related other-than-temporary impairment on debt securities is recognized in earnings while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the six-months ended June 30, 2012 and 2011, no other-than-temporary impairment charges were recognized and $0.2 and $2.3 million, respectively, in non-credit related gains on our trust preferred collateralized debt obligations that were determined to be impaired in previous periods was recorded in OCI. All of the securities for which other-than-temporary impairment was recorded were classified as available for sale securities.

First Commonwealth utilizes the specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on equity securities.

In the Condensed Consolidated Statements of Income, the “Changes in fair value on impaired securities” line represents the change in fair value of securities impaired in the current or previous periods. The change in fair value includes both non-credit and credit related gains or losses. Credit related losses occur when the entire amortized cost of the security will not be recovered. The “Non-credit related losses (gains) on securities not expected to be sold (recognized in other comprehensive income)” line represents the gains and losses on the securities resulting from factors other than credit. The non-credit related gain or loss is disclosed in the Condensed Consolidated Statements of Income and recognized through other comprehensive income. The “Net impairment losses” line represents the credit related losses recognized in total noninterest income for the related period.

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

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

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


	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	0	$	0		$	15	$	0	(a)	$	15	$	0
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage-Backed Securities – Residential		24,232		(96	)		0		0			24,232		(96	)
Other Government-Sponsored Enterprises		2,999		(1	)		0		0			2,999		(1	)
Obligations of States and Political Subdivisions		360		0	(a)		0		0			360		0
Corporate Securities		8,079		(71	)		0		0			8,079		(71	)
Pooled Trust Preferred Collateralized Debt Obligations		0		0			21,437		(31,250	)		21,437		(31,250	)

Total Debt Securities		35,670		(168	)		21,452		(31,250	)		57,122		(31,418	)
Equities		0		0			0		0			0		0

Total Securities Available for Sale	$	35,670	$	(168	)	$	21,452	$	(31,250	)	$	57,122	$	(31,418	)

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

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

As of June 30, 2012, our corporate securities had an amortized cost and an estimated fair value of $11.8 million and $12.0 million, respectively, and were comprised of single issue trust preferred securities issued primarily by money center and large regional banks. As of December 31, 2011, the same portion of the portfolio had an amortized cost of $11.8 million and an estimated fair value of $11.4 million. Included in the corporate securities

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

portfolio are investments which had a gross unrealized loss of $71 thousand as of June 30, 2012 and $0.6 million as of December 31, 2011. After a review of each of the issuer’s asset quality, earnings trend and capital position, it was determined that none of the issues in an unrealized loss position were other-than-temporarily impaired. Additionally, all interest payments on these securities are being made as contractually required.

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


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

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

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

As of June 30, 2012, the book value of our pooled trust preferred collateralized debt obligations totaled $52.9 million with an estimated fair value of $21.8 million, which includes securities comprised of 348 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainders are mezzanine tranches, three of which have no senior class remaining in the issue. Two of the pooled issues, representing $3.5 million of the $52.9 million book value, remain above investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of June 30, 2012, after taking into account management’s best estimates of future interest deferrals and defaults, seven of our securities had no excess subordination in the tranches we own and seven of our securities had excess subordination which ranged from 8% to 282% of the current performing collateral.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

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


Deal	Class	Book Value		Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks		Deferrals and Defaults as a % of Current Collateral			Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL I	Senior	$	1,581	$	1,545	$	(36	)	Aa3/BBB		20		39.50	%		217.29	%
Pre TSL IV	Mezzanine		1,830		622		(1,208	)	Caa2/CCC		6		27.07			96.48
Pre TSL V	Mezzanine		51		54		3		C/D		3		100.00			0.00
Pre TSL VI	Mezzanine		152		302		150		Ca/D		5		12.27			205.63
Pre TSL VII	Mezzanine		4,062		2,939		(1,123	)	Ca/C		17		52.13			0.00
Pre TSL VIII	Mezzanine		1,735		981		(754	)	C/C		35		45.91			0.00
Pre TSL IX	Mezzanine		2,250		766		(1,484	)	Ca/C		47		25.88			8.19
Pre TSL X	Mezzanine		1,399		1,026		(373	)	C/C		51		38.24			0.00
Pre TSL XII	Mezzanine		5,486		2,698		(2,788	)	Ca/C		74		33.05			0.00
Pre TSL XIII	Mezzanine		12,258		3,820		(8,438	)	Ca/C		63		39.60			0.00
Pre TSL XIV	Mezzanine		12,942		4,158		(8,784	)	Ca/C		63		38.42			31.74
MMCap I	Senior		1,898		1,807		(91	)	A3/BBB		20		38.89			282.43
MMCap I	Mezzanine		844		448		(396	)	Ca/C		20		38.89			11.77
MM Comm IX	Mezzanine		6,401		626		(5,775	)	Ca/D		31		38.14			0.00

Total		$	52,889	$	21,792	$	(31,097	)

Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and market uncertainties related to the financial industry are factors contributing to the impairment on these securities.

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

Additional information related to the discounted cash flow analysis follows:

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

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

•

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

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 348 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, 2012, default probabilities for performing collateral ranged from 0.33% to 75%.

Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying piece of collateral. Using the results of the credit evaluation, the next step of the process is to look at pricing of senior debt or credit default swaps for the issuer (or where such information is unavailable, for companies having similar credit profiles as the issuer). The pricing of these market indicators provides the information necessary to determine appropriate default probabilities for each bank.

In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults which results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security. The results of the stress test allows management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.

Our cash flow analysis as of June 30, 2012, indicates that no credit related other-than-temporary impairment has occurred on our pooled trust preferred securities during the six-months ended June 30, 2012. Based upon the analysis performed by management, it is probable that seven of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 9 Impairment of Investment Securities (Continued)

in prior periods. These securities are identified in the table on page 17 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of June 30, 2012 indicates it is probable that we will collect all contractual principal and interest payments.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL I, PreTSL IV and MMCap I-Senior. Our cash flow analysis as of June 30, 2012, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in our current book value being below the present value of estimated future principal and interest payments. The excess for each bond of the present value of future cash flows over our current book value ranges from 29% to 520% and will be recognized as an adjustment to yield over the remaining life of these securities. During the three- and six-months ended June 30, 2012, $0.3 million and $0.5 million, respectively, of the excess was recognized as an adjustment to yield on these securities.

The following provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:


	For the Three-Months Ended June 30,					For the Six-Months Ended June 30,
	2012			2011		2012			2011
	(dollars in thousands)
Balance, beginning (a)	$	44,501		$	44,850	$	44,736		$	44,850
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized		0			0		0			0
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized		0			0		0			0
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)		(271	)		0		(506	)		0

Balance, ending	$	44,230		$	44,850	$	44,230		$	44,850

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

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses

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


	June 30, 2012		December 31, 2011
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,059,675	$	996,739
Real estate construction		77,442		76,564
Residential real estate		1,213,610		1,137,059
Commercial real estate		1,232,270		1,267,432
Loans to individuals		576,534		565,849

Total loans and leases net of unearned income	$	4,159,531	$	4,043,643

During the six-months ended June 30, 2012, loans increased $115.9 million or 3% compared to balances outstanding at December 31, 2011. A majority of the loan growth was recognized in the residential real estate portfolio as a result of seasonal demand and an ongoing loan promotion. Increases in the commercial, financial, agricultural and other portfolio can be attributed primarily to growth in our syndication portfolio in Pennsylvania and contiguous states, while loans to individuals increased due to growth in home equity installment loans and indirect auto lending.

Credit Quality Information

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


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

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

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

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Credit Quality Information (Continued)

The following tables represent our credit risk profile by creditworthiness:


	June 30, 2012
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	955,231	$	50,028	$	1,202,163	$	1,103,062	$	576,530	$	3,887,014
Non-Pass
OAEM		27,384		699		5,668		68,925		4		102,680
Substandard		77,060		21,004		5,779		60,283		0		164,126
Doubtful		0		5,711		0		0		0		5,711

Total Non-Pass		104,444		27,414		11,447		129,208		4		272,517

Total	$	1,059,675	$	77,442	$	1,213,610	$	1,232,270	$	576,534	$	4,159,531


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

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

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

Portfolio Risks

Credit quality measures at June 30, 2012 compared to December 31, 2011 indicate a decrease in criticized loans, or loans designated OAEM, substandard or doubtful, of $19.5 million, or 7%, an increase in delinquency on accruing loans of $1.9 million, or 5%, and a $0.2 million increase in nonaccrual loans, excluding loans held-for-sale.

Charge-offs for the six-months ended June 30, 2012 totaled $8.7 million compared to $19.8 million for the six-months ended June 30, 2011. The most significant charge-off during the six-months ended June 30, 2012 was a $1.2 million charge taken on a $2.0 million commercial loan relationship. During the six-months ended June 30, 2011, the most significant charge-off totaled $3.1 million and related to a western Pennsylvania office complex. Other significant charge-offs totaled $7.7 million and related to five construction loan projects located in Florida, Nevada, Ohio and western and central Pennsylvania.

Criticized loans totaled $272.5 million at June 30, 2012 and represented 7% of the loan portfolio. This represents a $19.5 million decrease compared with the portfolio as of December 31, 2011. These loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate at this time. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Portfolio Risks (Continued)

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

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

In addition, during the first six months of 2012, five relationships consisting of eight loans, were classified as troubled debt restructuring. These loans increased the nonperforming loan balance by $3.8 million with no increase in specific reserves.

Age Analysis of Past Due Loans by Segment

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


	June 30, 2012
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	9,148	$	4,101	$	3,604	$	27,758	$	44,611	$	1,015,064	$	1,059,675
Real estate construction		16		0		469		15,060		15,545		61,897		77,442
Residential real estate		6,555		1,852		4,961		3,923		17,291		1,196,319		1,213,610
Commercial real estate		1,497		431		305		31,951		34,184		1,198,086		1,232,270
Loans to individuals		2,384		875		1,248		0		4,507		572,027		576,534

Total	$	19,600	$	7,259	$	10,587	$	78,692	$	116,138	$	4,043,393	$	4,159,531


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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Age Analysis of Past Due Loans by Segment (Continued)

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.

Nonaccrual Loans

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

Impaired Loans

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

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

Nonperforming loans, excluding loans held for sale, decreased $13.8 million to $84.9 million at June 30, 2012 compared to $98.8 million at December 31, 2011. Contributing to this decrease was an $11.3 million loan to a waste management company which was paid off in the first quarter and a $9.1 million loan to an information technology firm which was returned to accrual status in the second quarter. The most significant loans placed into nonperforming status during the first half of 2012 included $4.9 million for a commercial real estate loan to a nonprofit institution, $2.5 million to a manufacturer of medical equipment and $1.3 million on a residential lot development.

The specific allowance for nonperforming loans decreased by $1.5 million at June 30, 2012 compared to December 31, 2011. Unfunded commitments related to nonperforming loans were $4.8 million at June 30, 2012 and after consideration of available collateral related to these commitments, an off balance sheet reserve of $39 thousand was established.

Loans held for sale totaled $13.4 million at December 31, 2011 and the entire balance represented nonperforming loans. As of June 30, 2012, the sale of all of these loans had been completed and provided for a $2.9 million gain.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

While these loans were considered to be nonperforming, they were not taken into consideration when determining the allowance for credit losses as they were carried at the lower of cost or fair value.

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

•

$19.4 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in the second quarter of 2004 and was placed in nonaccrual status in the fourth quarter of 2009. A settlement plan with the borrower and three other lenders was reached in the fourth quarter of 2010 and resulted in an $8.0 million principal payment and a $15.4 million partial charge-off.

•

$16.3 million commercial real estate loan for a real estate developer in eastern Pennsylvania. This loan was originated in the third quarter of 2007 and restructured in the fourth quarter of 2011 and resulted in a charge-off of $4.2 million. The most recent appraisal for the real estate collateral was completed in the third quarter of 2011.

•

$5.7 million, the remaining portion of a $20.8 million construction loan for a Florida condominium project. This loan was originated in the second quarter of 2007. Charge-offs of $15.1 million have been recorded on this loan. The most recent appraisal for the real estate collateral was completed in the second quarter of 2012.

•

$4.9 million real estate secured loan to a western Pennsylvania nonprofit corporation. This loan was originated in the fourth quarter of 2008 and placed in nonaccrual status in the second quarter of 2012. The most recent appraisals for the various real estate collateral were completed in the fourth quarter of 2011 and the first quarter of 2012.

•

$3.4 million, the remaining portion of an $8.9 million commercial construction loan to a Nevada developer. This loan was originated in the second quarter of 2007. Charge-offs of $5.2 million have been recorded on this loan. The most recent appraisal was completed in the fourth quarter of 2011.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

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


	June 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	6,003	$	7,034	$	0	$	2,010	$	3,418	$	0
Real estate construction		4,132		10,281		0		10,814		20,161		0
Residential real estate		3,050		3,498		0		3,125		3,513		0
Commercial real estate		30,303		31,888		0		36,777		41,974		0
Loans to individuals		0		0		0		0		0		0

Subtotal		43,488		52,701		0		52,726		69,066		0
With an allowance recorded:
Commercial, financial, agricultural and other		25,972		26,685		8,046		34,056		34,341		9,069
Real estate construction		10,928		31,827		2,747		6,298		21,402		2,960
Residential real estate		1,820		1,820		431		955		955		93
Commercial real estate		2,735		2,939		510		4,717		4,863		1,114
Loans to individuals		0		0		0		0		0		0

Subtotal		41,455		63,271		11,734		46,026		61,561		13,236

Total	$	84,943	$	115,972	$	11,734	$	98,752	$	130,627	$	13,236


	For the Six-Months Ended June 30,
	2012				2011
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	10,291	$	21	$	3,167	$	5
Real estate construction		7,268		0		12,727		2
Residential real estate		9,219		11		2,005		2
Commercial real estate		26,529		53		29,407		18
Loans to individuals		0		0		16		0

Subtotal		53,307		85		47,322		27
With an allowance recorded:
Commercial, financial, agricultural and other		19,101		6		27,026		76
Real estate construction		6,865		0		31,124		2
Residential real estate		797		14		506		0
Commercial real estate		2,028		0		29,292		177
Loans to individuals		0		0		0		0

Subtotal		28,791		20		87,948		255

Total	$	82,098	$	105	$	135,270	$	282

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)


	For the Three-Months Ended June 30,
	2012				2011
	Average recorded investment		Interest Income Recognized		Average recorded investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	7,735	$	3	$	2,297	$	2
Real estate construction		10,118		0		10,204		2
Residential real estate		15,082		6		1,987		1
Commercial real estate		25,696		19		26,255		7
Loans to individuals		0		0		7		0

Subtotal		58,631		28		40,750		12
With an allowance recorded:
Commercial, financial, agricultural and other		17,441		3		30,770		74
Real estate construction		4,068		0		31,701		1
Residential real estate		644		7		722		0
Commercial real estate		1,253		0		39,912		164
Loans to individuals		0		0		0		0

Subtotal		23,406		10		103,105		239

Total	$	82,037	$	38	$	143,855	$	251

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, 2012		December 31, 2011
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	6,251	$	20,276
Nonaccrual status		45,235		44,841

Total	$	51,486	$	65,117

Commitments
Letters of credit	$	0	$	12,580
Unused lines of credit		55		42

Total	$	55	$	12,622

At June 30, 2012, troubled debt restructured loans on accruing status decreased $14.0 million compared to December 31, 2011 and commitments related to troubled debt restructured loans decreased $12.6 million for the same

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

period. These decreases are primarily a result of the payoff of an $11.3 million loan to a waste management company in Pennsylvania as a result of the sale of the business. In addition, a $2.2 million loan to a retail development company in western Pennsylvania paid off during the first quarter. During 2012 and 2011 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

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


	For the Six-Months Ended June 30, 2012
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		4	$	447	$	18	$	6,029	$	6,494	$	6,494	$	2,760
Real estate construction		1		823		0		0		823		815		0
Residential real estate		3		0		97		83		180		133		0

Total		8	$	1,270	$	115	$	6,112	$	7,497	$	7,442	$	2,760


	For the Six-Months Ended June 30, 2011
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		9	$	100	$	105	$	2,168	$	2,373	$	2,370	$	720
Real estate construction		4		354		0		0		354		371		15
Residential real estate		3		0		27		75		102		101		0
Commercial real estate		15		17,163		199		1,497		18,859		18,758		1,743

Total		31	$	17,617	$	331	$	3,740	$	21,688	$	21,600	$	2,478

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the six-months ended June 30, 2012 and 2011, $0.1 million and $0.3 million, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

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


	For the Three-Months Ended June 30, 2012
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		4	$	447	$	18	$	6,029	$	6,494	$	6,494	$	2,760
Real estate construction		1		823		0		0		823		815		0
Residential real estate		1		0		0		83		83		82		0

Total		6	$	1,270	$	18	$	6,112	$	7,400	$	7,391	$	2,760


	For the Three-Months Ended June 30, 2011
			Type of Modification
	Number of Contracts		Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other		0	$	0	$	0	$	0	$	0	$	0	$	0
Real estate construction		1		0		0		0		0		0		0
Residential real estate		2		0		15		75		90		90		0
Commercial real estate		4		10,033		0		849		10,882		10,839		250

Total		7	$	10,033	$	15	$	924	$	10,972	$	10,929	$	250

The troubled debt restructurings included in the above tables are also included in the impaired loan tables provided earlier in this note. Loans defined as modified due to a change in rate include loans that were modified for a change in rate as well as a reamortization of the principal and an extension of the maturity. For the three-months ended June 30, 2012 and 2011, $18 thousand and $15 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization.

During the three-months ended June 30, 2012, a $2.8 million nonaccrual loan to a water treatment plant and a $3.7 million accruing loan to a gas well servicing operation were each restructured with a twelve month principal forbearance. The nonaccrual loan is fully reserved for while the accruing loan is secured by company assets with no reserve allocation. These loans are part of a $21.0 million commercial loan relationship with a shallow gas well operator whose business has been impacted by the sharp decline in natural gas prices due to the success of Marcellus deep well drilling. In addition to these two loans, other loans in this relationship include loans to a related exploration and production company and loans to the principal which are secured by real estate and investment securities.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

During the second quarter of 2011, a $0.2 million real estate construction commitment was originated to a customer whose relationship was previously restructured and classified as a troubled debt restructuring. As a result, this commitment was labeled as troubled debt even though no funds had been drawn. As a result, the commitment is listed in both the quarter-to-date and year-to-date tables even though it has no balance.

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


	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(dollars in thousands)
Commercial, financial, agricultural and other		0	$	0		1	$	150
Real estate construction		0		0		1		88

Total		0	$	0		2	$	238

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


	For the Six-Months Ended June 30, 2012
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	18,200		$	6,756		$	8,237		$	18,961		$	4,244		$	4,836	$	61,234
Charge-offs		(3,668	)		(340	)		(2,454	)		(541	)		(1,738	)		0		(8,741	)
Recoveries		275			92			282			186			264			0		1,099
Provision		4,495			1,493			554			(968	)		1,439			1,071		8,084

Ending Balance	$	19,302		$	8,001		$	6,619		$	17,638		$	4,209		$	5,907	$	61,676

Ending balance: individually evaluated for impaired	$	8,046		$	2,747		$	431		$	510		$	0		$	0	$	11,734
Ending balance: collectively evaluated for impaired		11,256			5,254			6,188			17,128			4,209			5,907		49,942
Loans:
Ending balance		1,059,675			77,442			1,213,610			1,232,270			576,534					4,159,531
Ending balance: individually evaluated for impaired		31,271			14,915			2,911			31,493			0					80,590
Ending balance: collectively evaluated for impaired		1,028,404			62,527			1,210,699			1,200,777			576,534					4,078,941

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)


	For the Six-Months Ended June 30, 2011
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	21,700		$	18,002		$	5,454		$	16,913		$	4,215		$	4,945		$	71,229
Charge-offs		(2,957	)		(8,048	)		(1,700	)		(5,575	)		(1,522	)		0			(19,802	)
Recoveries		261			0			96			164			289			0			810
Provision		4,171			7,747			3,020			7,278			888			(175	)		22,929

Ending Balance	$	23,175		$	17,701		$	6,870		$	18,780		$	3,870		$	4,770		$	75,166

Ending balance: individually evaluated for impaired	$	12,717		$	14,222		$	216		$	7,711		$	0		$	0		$	34,866
Ending balance: collectively evaluated for impaired		10,458			3,479			6,654			11,069			3,870			4,770			40,300
Loans:
Ending balance		943,186			146,113			1,101,859			1,270,797			530,103						3,992,058
Ending balance: individually evaluated for impaired		40,447			37,087			2,174			63,743			0						143,451
Ending balance: collectively evaluated for impaired		902,739			109,026			1,099,685			1,207,054			530,103						3,848,607



	For the Three-Months Ended June 30, 2012
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	18,143		$	6,427		$	6,702		$	19,371		$	4,252		$	5,837		$	60,732
Charge-offs		(1,754	)		(150	)		(742	)		(306	)		(797	)		0			(3,749	)
Recoveries		37			36			149			28			146			0			396
Provision		2,876			1,688			510			(1,455	)		608			70			4,297

Ending Balance	$	19,302		$	8,001		$	6,619		$	17,638		$	4,209		$	5,907		$	61,676


	For the Three-Months Ended June 30, 2011
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	22,436		$	18,779		$	6,682		$	20,174		$	3,861		$	4,860		$	76,792
Charge-offs		(1,997	)		(3,049	)		(596	)		(4,809	)		(743	)		0			(11,194	)
Recoveries		157			0			77			88			134			0			456
Provision		2,579			1,971			707			3,327			618			(90	)		9,112

Ending Balance	$	23,175		$	17,701		$	6,870		$	18,780		$	3,870		$	4,770		$	75,166

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 11 Income Taxes

At June 30, 2012 and December 31, 2011, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. If applicable, First Commonwealth will record interest and penalties as a component of noninterest expense. Federal and state tax years 2008 through 2011 were open for examination as of June 30, 2012.

Note 12 Fair Values of Assets and Liabilities

FASB ASC Topic 820, “Fair Value Measurements and Disclosures” requires disclosures for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). All non-financial assets are included either as a separate line item on the Condensed Consolidated Statements of Financial Condition or in the “Other assets” category of the Condensed Consolidated Statements of Financial Condition. Currently, First Commonwealth does not have any non-financial liabilities to disclose.

FASB ASC Topic 825, “Financial Instruments” permits entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The unrealized gains and losses are required to be included in earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in the future we may elect to adopt this guidance for select financial instruments.

In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. These levels are:

•

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange (“NYSE”). Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly traded bank stocks which were priced using quoted market prices.

•

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable levels of price transparency. Level 2 includes Obligations of U.S. Government securities issued by Agencies and Sponsored Enterprises, Obligations of States and Political Subdivisions, certain corporate securities, certain equity securities, FHLB stock, interest rate derivatives that include interest rate swaps and risk participation agreements, certain other real estate owned and certain impaired loans.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

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

The equity investments included in Level 2 are based on broker prices and are included in Level 2 because they are not traded on an active exchange market.

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

Interest rate derivatives are reported at an estimated fair value utilizing Level 2 inputs and are included in other assets and other liabilities and consist of interest rate swaps where there is no significant deterioration in the counterparties (loan customers) credit risk since origination of the interest rate swap. First Commonwealth values its interest rate swap positions using a yield curve by taking market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the U.S. Dollar yield curve includes cash LIBOR rates from overnight to three months, Eurodollar futures contracts and swap rates from three years to thirty years. These yield curves determine the valuations of interest rate swaps. Interest rate derivatives are further described in Note 13, “Derivatives.”

For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as the likelihood of default, expected loss given default, net exposures and remaining contractual life, among other things, in determining if any fair value adjustments related to credit risk are required. We review our counterparty exposure quarterly, and when necessary, appropriate adjustments are made to reflect the exposure.

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

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

•

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

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities since 2009; therefore it was more appropriate to determine fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 9, “Impairment of Investment Securities.” The discount rate applied to the cash flows is determined by evaluating the current market yields for comparable corporate and structured credit products along with an evaluation of the risks associated with the cash

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

flows of the comparable security. Due to the fact that there is no active market for the pooled trust preferred collateralized debt obligations, one key reference point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural differences between these two security types.

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

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

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

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

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

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


	Fair Value (dollars in thousands)	Valuation Technique	Unobservable Inputs	Range / (weighted average)
Pooled Trust Preferred Securities	$21,792	Discounted Cash Flow	Probability of default	0% -100% (22.29%)
			Prepayment rates	0% -100% (13.21%)
			Discount rates	7% - 20%(a)
Other Investments	1,420	Par Value	N/A	N/A

Interest Rate Swap	0	Option model	Counterparty credit risk	66.49% -132.21%(b)

Impaired Loans	20,745(c)	Discounted Cash Flow	Discount rate	8.42% - 21%

Other Real Estate Owned	353	Internal Valuation	N/A	N/A

(a)	incorporates premium related 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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

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.

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, 2012
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential	$	0	$	34,620	$	0	$	34,620
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential		0		845,739		0		845,739
Mortgage-Backed Securities—Commercial		0		177		0		177
Other Government-Sponsored Enterprises		0		242,566		0		242,566
Obligations of States and Political Subdivisions		0		449		0		449
Corporate Securities		0		11,999		0		11,999
Pooled Trust Preferred Collateralized Debt Obligations		0		0		21,792		21,792

Total Debt Securities		0		1,135,550		21,792		1,157,342
Equities		440		0		1,420		1,860

Total Securities Available for Sale		440		1,135,550		23,212		1,159,202
Other Investments		0		35,916		0		35,916
Other Assets^(a)		0		17,620		0		17,620

Total Assets	$	440	$	1,189,086	$	23,212	$	1,212,738

Other Liabilities^(a)	$	0	$	19,860	$	0	$	19,860

Total Liabilities	$	0	$	19,860	$	0	$	19,860

(a)	Non-hedging interest rate derivatives

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)


	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential	$	0	$	36,194	$	0	$	36,194
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential		0		801,031		0		801,031
Mortgage-Backed Securities—Commercial		0		193		0		193
Other Government-Sponsored Enterprises		0		268,648		0		268,648
Obligations of States and Political Subdivisions		0		459		0		459
Corporate Securities		0		11,411		0		11,411
Pooled Trust Preferred Collateralized Debt Obligations		0		0		22,980		22,980

Total Debt Securities		0		1,117,936		22,980		1,140,916
Equities		440		0		1,420		1,860

Total Securities Available for Sale		440		1,117,936		24,400		1,142,776
Other Investments		0		39,796		0		39,796
Loans Held for Sale		0		0		13,412		13,412
Other Assets^(a)		0		16,064		0		16,064

Total Assets	$	440	$	1,173,796	$	37,812	$	1,212,048

Other Liabilities^(a)	$	0	$	18,986	$	0	$	18,986

Total Liabilities	$	0	$	18,986	$	0	$	18,986

(a)	Non-hedging interest rate derivatives

For the six-month periods ended June 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	2012
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Loans Held for Sale			Other Assets			Total
	(dollars in thousands)
Balance, beginning of period	$	22,980		$	1,420	$	13,412		$	0		$	37,812
Total gains or losses
Included in earnings		0			0		2,870			(461	)		2,409
Included in other comprehensive income		1,580			0		0			0			1,580
Purchases, issuances, sales, and settlements
Purchases		0			0		0			0			0
Issuances		0			0		0			0			0
Sales		0			0		(15,981	)		0			(15,981	)
Settlements		(2,768	)		0		(301	)		0			(3,069	)
Transfers into Level 3		0			0		0			461			461

Balance, end of period	$	21,792		$	1,420	$	0		$	0		$	23,212

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)


	2011
	Obligations of States and Political Subdivisions			Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equities		Total
	(dollars in thousands)
Balance, beginning of period	$	343		$	21,376		$	26,352		$	1,570	$	49,641
Total gains or losses
Included in earnings		4			387			0			0		391
Included in other comprehensive income		(20	)		(98	)		3,020			0		2,902
Purchases, issuances, sales, and settlements
Purchases		0			0			0			0		0
Issuances		0			0			0			0		0
Sales		(327	)		(6,700	)		0			0		(7,027	)
Settlements		0			(3,000	)		(2,388	)		0		(5,388	)
Transfers from Level 3		0			(11,965	)		0			0		(11,965	)

Balance, end of period	$	0		$	0		$	26,984		$	1,570	$	28,554

For the six-months ended June 30, 2012, there were no transfers between fair value Levels 1 and 2. However, $0.5 million of interest rate swaps were transferred into Level 3 from Level 2 due to deterioration of the counterparty’s credit risk. Because the credit quality of the underlying counterparty declined below investment grade, the swaps were valued utilizing more than interest rate yield curves. For the six-months ended June 30, 2011, $12.0 million of corporate securities were transferred from Level 3 to Level 2. Corporate securities were transferred from Level 3 to Level 2 based on increased frequency in the volume of observable trades. Fair values on these securities at June 30, 2011 were determined based on market data, including trade and bid prices. 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, 2012 and 2011.

For the three-month periods ended June 30, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	2012
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Loans Held for Sale			Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	24,508		$	1,420	$	8,076		$	0	$	34,004
Total gains or losses
Included in earnings		0			0		1,102			0		1,102
Included in other comprehensive income		(688	)		0		0			0		(688	)
Purchases, issuances, sales, and settlements
Purchases		0			0		0			0		0
Issuances		0			0		0			0		0
Sales		0			0		(9,172	)		0		(9,172	)
Settlements		(2,028	)		0		(6	)		0		(2,034	)
Transfers from Level 3		0			0		0			0		0
Transfers into Level 3		0			0		0			0		0

Balance, end of period	$	21,792		$	1,420	$	0		$	0	$	23,212

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)


	2011
	Obligations of States and Political Subdivisions		Corporate Securities			Pooled Trust Preferred Collateralized Debt Obligations			Equities		Total
	(dollars in thousands)
Balance, beginning of period	$	0	$	14,815		$	27,665		$	1,570	$	44,050
Total gains or losses
Included in earnings		0		73			0			0		73
Included in other comprehensive income		0		77			898			0		975
Purchases, issuances, sales, and settlements
Purchases		0		0			0			0		0
Issuances		0		0			0			0		0
Sales		0		0			0			0		0
Settlements		0		(3,000	)		(1,579	)		0		(4,579	)
Transfers from Level 3		0		(11,965	)		0			0		(11,965	)

Balance, end of period	$	0	$	0		$	26,984		$	1,570	$	28,554

For the three-months ended June 30, 2012, there were no transfers of securities between Levels 1, 2 or 3. For the three-months ended June 30, 2011, $12.0 million of corporate securities were transferred from Level 3 to Level 2. Corporate securities were transferred from Level 3 to Level 2 based on increased frequency in the volume of observable trades. Fair values on these securities at June 30, 2011 were determined based on market data, including trade and bid prices. 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, 2012 and 2011.

The tables below present the balances of assets measured at fair value on a non-recurring basis at:


	June 30, 2012
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	0	$	50,473	$	22,736	$	73,209
Other real estate owned		0		19,250		353		19,603

Total Assets	$	0	$	69,723	$	23,089	$	92,812


	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	0	$	73,783	$	26,349	$	100,132
Other real estate owned		0		31,232		438		31,670

Total Assets	$	0	$	105,015	$	26,787	$	131,802

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

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,
	2012			2011			2012			2011
	(dollars in thousands)
Impaired loans	$	(3,086	)	$	(10,297	)	$	(3,742	)	$	(21,157	)
Other real estate owned		(163	)		(4,124	)		(3,017	)		(4,124	)

Total losses	$	(3,249	)	$	(14,421	)	$	(6,759	)	$	(25,281	)

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. 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.

The fair value for other real estate owned is determined by either an independent market based appraisal less costs to sell or an executed sales agreement and is classified as Level 2. Other real estate owned has a book cost of $19.1 million as of June 30, 2012 and consisted primarily of a manufacturing plant in northern Pennsylvania, residential real estate in eastern Pennsylvania and a hotel/resort in Illinois. During the first quarter of 2012, the sale of an office building in western Pennsylvania which was previously in OREO for $6.8 million was completed and resulted in a $0.3 million loss at the time of sale. 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 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 14, “Goodwill.” There were no other assets or liabilities measured at fair value on a non-recurring basis during the six-months ended June 30, 2012.

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 nonrecurring 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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

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 held for sale: The fair value of loans held for sale is estimated utilizing a present value of future discounted cash flows of the loan utilizing a risk based expected return to discount the value unless a sales agreement has been executed, in which case the sales price would equal 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 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, 2012 and December 31, 2011. See Note 6, “Commitments and Contingent Liabilities,” for additional information.

Deposit liabilities: Management estimates that the fair value of deposits is based on a market valuation of similar deposits. 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 estimated incremental borrowing rate for similar types of borrowing arrangements.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 12 Fair Values of Assets and Liabilities (Continued)

The following table presents carrying amounts and fair values of First Commonwealth’s financial instruments:


	June 30, 2012
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	82,659	$	82,659	$	82,659	$	0	$	0
Interest-bearing deposits		3,839		3,839		3,839		0		0
Securities available for sale		1,159,202		1,159,202		440		1,135,550		23,212
Other investments		35,916		35,916		0		35,916		0
Loans		4,159,531		4,220,966		0		50,473		4,170,493
Financial liabilities
Deposits		4,461,962		4,405,479		0		4,405,479		0
Short-term borrowings		474,264		474,255		0		474,255		0
Long-term debt		75,370		78,068		0		78,068		0
Subordinated debt		105,750		74,646		0		0		74,646


	December 31, 2011
	Carrying Amount		Estimated Fair Value
		(dollars in thousands)
Financial assets
Cash and due from banks	$	74,967	$	74,967
Interest-bearing deposits		3,511		3,511
Securities available for sale		1,142,776		1,142,776
Other investments		39,796		39,796
Loans held for sale		13,412		13,412
Loans		4,043,643		4,113,525
Financial liabilities
Deposits		4,504,684		4,452,235
Short-term borrowings		312,777		312,777
Long-term debt		101,664		103,749
Subordinated debt		105,750		75,310

Note 13 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 of given default for all counterparties.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 13 Derivatives (Continued)

We have nine 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.

The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.

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,			December 31,
	2012			2011
	(dollars in thousands)
Credit value adjustment	$	(2,211	)	$	(2,963	)
Notional Amount:
Interest rate derivatives		208,855			187,368
Risk participation agreements		53,741			128,098
Sold credit protection on risk participation agreements		0			(22,147	)

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,
	2012		2011			2012		2011
	(dollars in thousands)
Non-hedging interest rate derivatives:
Increase (decrease) in other income	$	144	$	(743	)	$	750	$	(535	)

During 2012, total credit risk income of $1.0 million was recognized, offset by $0.2 million in expense related to three interest rate swaps that were downgraded during the first quarter to a below investment grade rating. As a result of the deterioration of credit risk related to the counterparty, a larger mark-to-market adjustment was recorded. The fair value of our derivatives is included in a table in Note 12 “Fair Values of Assets and Liabilities,” in the line items other assets and other liabilities.

Note 14 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 2011-08 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, 2012 and December 31, 2011 was $159.9 million. No impairment charges on goodwill or other intangible assets were incurred in 2012 or 2011.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 14 Goodwill (Continued)

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, 2012 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 2 goodwill impairment test completed as of December 31, 2011 as well as macroeconomic factors, industry and market considerations, the company’s overall financial performance, and other company specific events occurring during the first six months of 2012.

As of June 30, 2012, 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.

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 six-months ended June 30, 2012 and 2011, 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 include statements relating to our anticipated future financial performance, projected growth and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from developments or events, our business and growth strategies.

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:

•

continued weakness in 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;

•

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;

•

increases in defaults by borrowers and other delinquencies, which could result in increases in our provision for credit losses and related expenses;

•

fluctuations in interest rates and market prices, which could reduce our net interest margin and asset valuations and increase our expenses;

•

further 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;

•

legislative and regulatory changes, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act 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;

•

changes in accounting standards and compliance requirements may have an adverse affect on our operating results and financial condition;

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Forward-Looking Statements (Continued)

•

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 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 46 for the six-months ended June 30, 2012 and 2011.

Results of Operations

Six-Months Ended June 30, 2012 Compared to Six-Months Ended June 30, 2011

Net Income

For the six-months ended June 30, 2012, First Commonwealth had net income of $23.4 million, or $0.22 per share, compared to net income of $12.7 million or $0.12 per share in the six-months ended June 30, 2011. The increase in net income is primarily the result of a lower provision for credit losses and higher gains recognized on the sale of assets offset by higher salaries and employee benefit expenses and other operating expenses and the absence of net gains on securities.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $97.4 million in the first half of 2012 compared to $97.7 million for the same period in 2011. 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, 2012 and 2011, respectively.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (Continued)

Net interest margin, on a fully taxable equivalent basis, was 3.68% for the six-months ended June 30, 2012 compared to 3.81% for the six-months ended June 30, 2011. The net interest margin is affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

During the six-months ended June 30, 2012, the net interest margin has been challenged by the continuing low interest rate environment and decreasing rates earned on interest bearing assets. Despite a disciplined approach to pricing which has provided for maintaining the level of new volume spreads, runoff of existing assets which are earning higher interest rates has continued to provide for a lower yield on earning assets. Growth in earning assets has helped to offset the impact of runoff, as average earning assets for the six months ended June 30, 2012 increased $160.1 million, or 3.1%, compared to the comparable period in 2011. It is expected that the challenges to the net interest margin will continue during 2012 as $2.4 billion in interest-sensitive assets either reprice or mature over the next six months.

The taxable equivalent yield on interest-earning assets was 4.29% for the six-months ended June 30, 2012, a decrease of 41 basis points from the 4.70% yield for the same period in 2011. This decline can be attributed to the repricing of our variable rate assets in a declining rate environment as well as lower 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 0.76% for the six-months ended June 30, 2012, compared to 1.08% for the same period in 2011. Also, impacting the net interest margin in the first half of 2012 was the recognition of $1.0 million in interest income related to the payoff of a loan that was previously in nonaccrual status. This contributed 4 basis points to the net interest margin for the six-months ended June 30, 2012.

Comparing the six-months ended June 30, 2012 with the same period in 2011, changes in interest rates negatively impacted net interest income by $4.9 million. The lower yield on interest-earning assets adversely impacted net interest income by $9.8 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $4.9 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 deposit and borrowed funds, disciplined pricing strategies and increasing our investment volumes within established interest rate risk management guidelines.

While decreases in interest rates and yields compressed the net interest rate, increases in average interest-earning assets and low cost average interest-bearing liabilities neutralized the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $4.6 million in the six-months ended June 30, 2012 compared to the same period in 2011. Higher levels of interest-earning assets resulted in an increase of $3.0 million in interest income, while volume changes primarily attributed to the mix of deposits reduced interest expense by $1.6 million.

Positively affecting net interest income was a $83.7 million increase in average net free funds at June 30, 2012 as compared to June 30, 2011. 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 as a result of marketing promotions aimed at attracting new and retaining existing customers. Additionally, higher costing time deposits continue to runoff and reprice to lower costing certificates or other deposit alternatives. Average

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (Continued)

time deposits for the six months ended June 30, 2012 decreased $246.8 million, or 17%, compared to the comparable period in 2011. The positive change in deposit mix is expected to continue during the remainder of 2012 as $345.4 million in certificates of deposits either mature or reprice over the next six months.

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:


	2012		2011
	(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	111,328	$	117,458
Adjustment to fully taxable equivalent basis		2,307		2,939

Interest income adjusted to fully taxable equivalent basis (non-GAAP)		113,635		120,397
Interest expense		16,240		22,704

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	97,395	$	97,693

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:


	2012								2011
	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	$	3,580		$	2		0.11	%	$	28,772		$	36		0.25	%
Tax-free investment securities		454			16		7.09			9,165			306		6.73
Taxable investment securities		1,192,914			16,868		2.84			1,014,015			16,961		3.37
Loans, net of unearned income (b)(c)		4,129,977			96,749		4.71			4,114,862			103,094		5.05

Total interest-earning assets		5,326,925			113,635		4.29			5,166,814			120,397		4.70

Noninterest-earning assets:
Cash		74,069								74,782
Allowance for credit losses		(64,203	)							(78,046	)
Other assets		586,509								588,787

Total noninterest-earning assets		596,375								585,523

Total Assets	$	5,923,300							$	5,752,337

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	636,382		$	158		0.05	%	$	600,631		$	269		0.09	%
Savings deposits (d)		1,928,454			2,299		0.24			1,867,509			3,929		0.42
Time deposits		1,184,338			9,433		1.60			1,431,108			14,431		2.03
Short-term borrowings		378,407			506		0.27			165,141			363		0.44
Long-term debt		195,614			3,844		3.95			182,393			3,712		4.10

Total interest-bearing liabilities		4,323,195			16,240		0.76			4,246,782			22,704		1.08

Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)		780,611								700,713
Other liabilities		50,519								47,304
Shareholders’ equity		768,975								757,538

Total noninterest-bearing funding sources		1,600,105								1,505,555

Total Liabilities and Shareholders’ Equity	$	5,923,300							$	5,752,337

Net Interest Income and Net Yield on Interest-Earning Assets				$	97,395		3.68	%				$	97,693		3.81	%

(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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (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, 2012 compared with June 30, 2011:


	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	$	(34	)	$	(31	)	$	(3	)
Tax-free investment securities		(290	)		(291	)		1
Taxable investment securities		(93	)		2,990			(3,083	)
Loans		(6,345	)		379			(6,724	)

Total interest income (b)		(6,762	)		3,047			(9,809	)
Interest-bearing liabilities:
Interest-bearing demand deposits		(111	)		16			(127	)
Savings deposits		(1,630	)		127			(1,757	)
Time deposits		(4,998	)		(2,484	)		(2,514	)
Short-term borrowings		143			465			(322	)
Long-term debt		132			269			(137	)

Total interest expense		(6,464	)		(1,607	)		(4,857	)

Net interest income	$	(298	)	$	4,654		$	(4,952	)

(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 to absorb 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Provision for Credit Losses (Continued)

The table below provides a breakout of the provision for credit losses by loan category for the six-months ended June 30:


	2012						2011
	Dollars			Percentage			Dollars			Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	4,495			56	%	$	4,171			18	%
Real estate construction		1,493			18			7,747			34
Residential real estate		554			7			3,020			13
Commercial real estate		(968	)		(12	)		7,278			32
Loans to individuals		1,439			18			888			4
Unallocated		1,071			13			(175	)		(1	)

Total	$	8,084			100	%	$	22,929			100	%

The provision for credit losses for the six-months ended June 30, 2012 decreased in comparison to the six-months ended June 30, 2011, by $14.8 million or 65%. The provision for credit losses for the six-months ended June 30, 2012, was slightly more than the $7.6 million in net credit losses for the period.

During the six-months ended June 30, 2012, there was no significant provision for credit losses related to any individual loan or loan category. The $1.1 million unallocated provision for credit losses is a result of management’s analysis of certain qualitative factors impacting the reserve for credit losses and concern over the impact of the continued difficult economic conditions being experienced by our borrowers. This analysis included factors related to portfolio risk, economic conditions and recent industry underwriting trends.

The allowance for credit losses was $61.7 million, or 1.48%, of total loans outstanding at June 30, 2012, compared to $61.2 million, or 1.51%, at December 31, 2011 and $75.2 million, or 1.88%, at June 30, 2011. The decline from 1.88% at June 30, 2011, can be attributed to a $188.1 million, or 41%, decline in criticized loans, which encompasses the $62.8 million, or 42%, decrease in nonperforming loans. Nonperforming loans as a percentage of total loans decreased to 2.04% at June 30, 2012 from 2.76% at December 31, 2011 and 3.70% as of June 30, 2011. The allowance to nonperforming loans is 73%, 62% and 51% as of June 30, 2012, December 31, 2011, and June 30, 2011, respectively. Improvement in these ratios contributed to the lower level of provision for credit losses for the six-months ended June 30, 2012.

Net credit losses were $7.6 million in the six-months ended June 30, 2012 compared to $19.0 million for the same period in 2011. The most significant credit loss recognized during the quarter was a $1.2 million partial charge-off of a commercial borrower in the shallow gas well business. Net credit losses during the six-month period did not include any other significant individual charge-offs.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Provision for Credit Losses (Continued)

Below is an analysis of the consolidated allowance for credit losses for the six-months ended:


	June 30, 2012			December 31, 2011			June 30, 2011
	(dollars in thousands)
Balance, beginning of period	$	61,234	(a)	$	75,166	(a)	$	71,229	(a)
Loans charged off:
Commercial, financial, agricultural and other		3,668			4,157			2,957
Real estate construction		340			20,838			8,048
Residential real estate		2,454			2,407			1,700
Commercial real estate		541			19,286			5,575
Loans to individuals		1,738			1,803			1,522

Total loans charged off		8,741			48,491			19,802

Recoveries of loans previously charged off:
Commercial, financial, agricultural and other		275			212			261
Real estate construction		92			955			0
Residential real estate		282			36			96
Commercial real estate		186			185			164
Loans to individuals		264			284			289

Total recoveries		1,099			1,672			810

Net credit losses		7,642			46,819			18,992
Provision charged to expense		8,084			32,887			22,929

Balance, end of period	$	61,676		$	61,234		$	75,166

(a)	The balance at the beginning of the period represents December 31, 2011, June 30, 2011 and December 31, 2010.

Noninterest Income

The following table presents the components of noninterest income for the six-months ended June 30:


	2012		2011		$ Change			% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	3,149	$	3,482	$	(333	)		(10	)%
Service charges on deposit accounts		7,239		7,174		65			1
Insurance and retail brokerage commissions		3,094		3,178		(84	)		(3	)
Income from bank owned life insurance		2,904		2,747		157			6
Card related interchange income		6,399		5,842		557			10
Other income		7,132		5,302		1,830			35

Subtotal		29,917		27,725		2,192			8
Net securities gains		0		2,185		(2,185	)		(100	)
Gain on sale of assets		3,559		1,482		2,077			140

Total noninterest income	$	33,476	$	31,392	$	2,084			7	%

Noninterest income, excluding net securities gains and gains on sale of assets increased $2.2 million, or 8%, for the first half of 2012 compared to 2011. The most notable change is the change in other income. This increase is

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Noninterest Income (Continued)

primarily the result of two components. During the first half of 2012, $0.8 million in income was recognized in relation to the mark-to-market adjustment on interest rate derivatives while $0.5 million in expense was recognized over the same time period in 2011. The increase in the mark-to-market adjustment recognized between the two periods is due to the change in the credit default curves over time as well as a change in counterparty credit risk related to the interest rate swaps during the two time periods. In addition, $0.8 million in swap fee income was earned during the six-months ended June 30, 2012, while only $0.2 million was earned during the same period of 2011. The fees earned on these swaps are based on the notional value of the initiated contracts. In comparison, eight swaps with a notional value of $77.9 million were entered into during the first half of 2012, while four swaps with a notional value of $17.7 million were entered into during the same period in 2011. These two items represent the $1.8 million dollar increase in other income.

Total noninterest income, including net securities gains and gains on sale of assets, increased $2.1 million in comparison to the six-months ended June 30, 2011. The most significant change in noninterest income, in addition to the aforementioned change due to interest rate swaps, was a $2.1 million increase in gain on sale of assets. This increase is primarily the result of the sale of three loans transferred to held for sale in the fourth quarter of 2011. The sales of these loans were completed in March, April, and June of 2012 and resulted in a $2.9 million gain. Offsetting this increase was the lack of sales of investment securities during the period compared to a $2.2 million gain in the same period of 2011.

Noninterest Expense

The following table presents the components of noninterest expense for the six-months ended June 30:


	2012		2011		$ Change			% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	44,121	$	42,674	$	1,447			3	%
Net occupancy expense		6,707		7,227		(520	)		(7	)
Furniture and equipment expense		6,208		6,315		(107	)		(2	)
Data processing expense		3,359		2,949		410			14
Pennsylvania shares tax expense		2,693		2,612		81			3
Intangible amortization		742		779		(37	)		(5	)
Collection and repossession expense		3,369		3,042		327			11
Other professional fees and services		2,139		2,224		(85	)		(4	)
FDIC insurance		2,499		3,083		(584	)		(19	)
Other operating expenses		12,974		11,709		1,265			11

Subtotal		84,811		82,614		2,197			3
Loss on sale or write-down of assets		3,789		4,515		(726	)		(16	)

Total noninterest expense	$	88,600	$	87,129	$	1,471			2	%

The 2012 increase in noninterest expense is largely attributable to expenses incurred in relation to incentives paid to employees for developing customer relationships and originating loans as well as expenses incurred for unfunded commitment reserves.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Noninterest Expense (Continued)

Salary and employee benefits expense reflects an increase compared to the first half of 2011 primarily due to normal merit increases, the hiring of additional business development professionals and a higher level of employee incentives as a result of increased loan and deposit volumes. New loans originated during the first half of 2012 totaled $737.2 million compared to $376.1 million in the first half of 2011. The number of full-time equivalent employees decreased 80 positions from 1,512 at June 30, 2011 to 1,432 at June 30, 2012.

FDIC insurance expense decreased due to the favorable effects of changes made by the FDIC in its assessment methodology effective April 1, 2011.

The unfunded commitment reserve for the period is based on a calculation using outstanding commitments at period end, expected loss and expected usage. During the first half of 2012, this expense was impacted by increased commitments and changes in expected utilization rates.

Income Tax

The provision for income taxes increased $5.1 million for the six-months ended June 30, 2012, compared to the corresponding period in 2011. The higher provision for income taxes was primarily due to the increase in net income before tax of $15.8 million as well as a decrease in tax-exempt income of $1.2 million due to the sale of tax-exempt investment securities during the first quarter of 2011.

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, 2012 and 2011.

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 26.7% and 21.3% for the six-months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012, our deferred tax assets totaled $63.9 million. Based on our evaluation as of June 30, 2012, 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Three-Months Ended June 30, 2012 Compared to Three-Months Ended June 30, 2011

Net Income

For the three-months ended June 30, 2012, First Commonwealth had net income of $12.3 million, or $0.12 per share, compared to net income of $7.4 million or $0.07 per share in the three-months ended June 30, 2011. The increase in net income is primarily the result of a lower provision for credit losses, lower collection and repossession expense, gains on sale of assets, loss on sale or write-down of assets, partially offset by a decrease in net securities gains.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $48.0 million in the second quarter of 2012 compared to $48.3 million for the same period in 2011. Net interest margin, on a fully taxable equivalent basis, was 3.61% for the three-months ended June 30, 2012 compared to 3.76% for the three-months ended June 30, 2011. The taxable equivalent yield on interest-earning assets was 4.19% for the three-months ended June 30, 2012, a decrease of 44 basis points from the 4.63% for the same period in 2011.

Comparing the three months ended June 30, 2012 with the same period in 2011, changes in interest rates negatively impacted net interest income by $3.4 million. The lower yield on interest-earning assets adversely impacted net interest income by $6.0 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $2.6 million. The cost of interest-bearing liabilities was 0.72% for the three months ended June 30, 2012, compared to 1.06% for the same period in 2011. 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 deposit and borrowed funds, disciplined pricing strategies and increasing our investment volumes within established interest rate risk management guidelines.

While decreases in interest rates and yields compressed the interest rate margin, increases in average interest-earning assets and low cost average interest-bearing liabilities neutralized the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $3.1 million in the three-months ended June 30, 2012 compared to the same period in 2011. Higher levels of interest-earning assets resulted in an increase of $2.3 million in interest income, while volume changes primarily attributed to the mix of deposits reduced interest expense by $0.8 million

Positively affecting net interest income was a $92.7 million increase in average net free funds at June 30, 2012 as compared to June 30, 2011.

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:


	2012		2011
	(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	54,712	$	57,989
Adjustment to fully taxable equivalent basis		1,090		1,409

Interest income adjusted to fully taxable equivalent basis (non-GAAP)		55,802		59,398
Interest expense		7,794		11,104

Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	48,008	$	48,294

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (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:


	2012								2011
	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	$	3,384		$	1		0.12	%	$	46,187		$	27		0.23	%
Tax-free investment securities		452			8		7.12			1,063			20		7.55
Taxable investment securities		1,207,053			8,298		2.76			1,044,340			8,570		3.29
Loans, net of unearned income (b)(c)		4,144,470			47,495		4.61			4,059,259			50,781		5.02

Total interest-earning assets		5,355,359			55,802		4.19			5,150,849			59,398		4.63

Noninterest-earning assets:
Cash		74,465								75,651
Allowance for credit losses		(63,948	)							(80,041	)
Other assets		579,371								586,388

Total noninterest-earning assets		589,888								581,998

Total Assets	$	5,945,247							$	5,732,847

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	648,244		$	61		0.04	%	$	615,279		$	134		0.09	%
Savings deposits (d)		1,905,168			994		0.21			1,868,862			1,963		0.42
Time deposits		1,165,009			4,588		1.58			1,391,168			6,996		2.02
Short-term borrowings		422,361			279		0.27			157,922			178		0.45
Long-term debt		183,890			1,872		4.09			179,675			1,833		4.09

Total interest-bearing liabilities		4,324,672			7,794		0.72			4,212,906			11,104		1.06

Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)		796,555								714,234
Other liabilities		50,724								46,036
Shareholders’ equity		773,296								759,671

Total noninterest-bearing funding sources		1,620,575								1,519,941

Total Liabilities and Shareholders’ Equity	$	5,945,247							$	5,732,847

Net Interest Income and Net Yield on Interest-Earning Assets				$	48,008		3.61	%				$	48,294		3.76	%

(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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Net Interest Income (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, 2012 compared with June 30, 2011:


	Analysis of Quarter-to-Quarter 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	$	(26	)	$	(25	)	$	(1	)
Tax-free investment securities		(12	)		(12	)		0
Taxable investment securities		(272	)		1,335			(1,607	)
Loans		(3,286	)		1,066			(4,352	)

Total interest income (b)		(3,596	)		2,364			(5,960	)
Interest-bearing liabilities:
Interest-bearing demand deposits		(73	)		7			(80	)
Savings deposits		(969	)		38			(1,007	)
Time deposits		(2,408	)		(1,139	)		(1,269	)
Short-term borrowings		101			297			(196	)
Long-term debt		39			43			(4	)

Total interest expense		(3,310	)		(754	)		(2,556	)

Net interest income	$	(286	)	$	3,118		$	(3,404	)

(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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Provision for Credit Losses (Continued)

The table below provides a breakout of the provision for credit losses by loan category for the three-months ended June 30:


	2012						2011
	Dollars			Percentage			Dollars			Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	2,876			67	%	$	2,579			28	%
Real estate construction		1,688			39			1,971			22
Residential real estate		510			12			707			8
Commercial real estate		(1,455	)		(34	)		3,327			36
Loans to individuals		608			14			618			7
Unallocated		70			2			(90	)		(1	)

Total	$	4,297			100	%	$	9,112			100	%

The provision for credit losses for the three-months ended June 30, 2012 decreased in comparison to the three-months ended June 30, 2011, by $4.8 million or 53%. The provision for credit losses for the three-months ended June 30, 2012, was slightly more than the $3.4 million in net credit losses for the period.

Net credit losses were $3.4 million in the three-months ended June 30, 2012 compared to $10.7 million for the same period in 2011. Net credit losses during the three-month period did not include any significant individual charge-offs.

Below is an analysis of the consolidated allowance for credit losses for the three-months ended:


	June 30,			March 31,			June 30,
	2012			2012			2011
	(dollars in thousands)
Balance, beginning of period	$	60,732	(a)	$	61,234	(a)	$	76,792	(a)
Loans charged off:
Commercial, financial, agricultural and other		1,754			1,914			1,997
Real estate construction		150			190			3,049
Residential real estate		742			1,712			596
Commercial real estate		306			235			4,809
Loans to individuals		797			941			743

Total loans charged off		3,749			4,992			11,194

Recoveries of loans previously charged off:
Commercial, financial, agricultural and other		37			238			157
Real estate construction		36			56			0
Residential real estate		149			133			77
Commercial real estate		28			158			88
Loans to individuals		146			118			134

Total recoveries		396			703			456

Net credit losses		3,353			4,289			10,738
Provision charged to expense		4,297			3,787			9,112

Balance, end of period	$	61,676		$	60,732		$	75,166

(a)	The balance at the beginning of the period represents March 31, 2012, December 31, 2011 and March 31, 2011.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Provision for Credit Losses (Continued)

Noninterest Income

The following table presents the components of noninterest income for the three-months ended June 30:


	2012		2011		$ Change			% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	1,607	$	1,764	$	(157	)		(9	)%
Service charges on deposit accounts		3,737		3,748		(11	)		(0	)
Insurance and retail brokerage commissions		1,670		1,616		54			3
Income from bank owned life insurance		1,459		1,390		69			5
Card related interchange income		3,285		3,042		243			8
Other income		2,894		2,645		249			9

Subtotal		14,652		14,205		447			3
Net securities gains		0		1,608		(1,608	)		(100	)
Gain on sale of assets		1,444		1,251		193			15

Total noninterest income	$	16,096	$	17,064	$	(968	)		(6	)%

Noninterest income, excluding net securities gains and gains on sale of assets, increased $0.5 million or 3% for the second quarter of 2012 compared to 2011. Total noninterest income decreased $1.0 million primarily due to the lack of net securities gains during the three-months ended June 30, 2012. During the same period in 2011, a majority of our state and municipal securities portfolio was sold resulting in net security gains of $1.6 million. There was no similar activity during the current period.

Noninterest Expense

The following table presents the components of noninterest expense for the three-months ended June 30:


	2012		2011		$ Change			% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	22,363	$	21,546	$	817			4	%
Net occupancy expense		3,303		3,495		(192	)		(5	)
Furniture and equipment expense		3,024		3,135		(111	)		(4	)
Data processing expense		1,796		1,525		271			18
Pennsylvania shares tax expense		1,510		1,434		76			5
Intangible amortization		371		389		(18	)		(5	)
Collection and repossession expense		670		1,726		(1,056	)		(61	)
Other professional fees and services		940		1,099		(159	)		(14	)
FDIC insurance		1,262		1,248		14			1
Other operating expenses		6,109		5,889		220			4

Subtotal		41,348		41,486		(138	)		(0	)
Loss on sale or write-down of assets		500		4,214		(3,714	)		(88	)

Total noninterest expense	$	41,848	$	45,700	$	(3,852	)		(8	)%

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Results of Operations (Continued)

Noninterest Expense (Continued)

The 2012 decrease in noninterest expense is largely attributable to a reduced level of expenses related to resolving problem commercial credits. Compared to the second quarter of 2011, credit collection costs decreased $1.1 million and loss on sale or write-down of assets decreased $3.7 million.

Salary and employee benefits expense reflects an increase compared to the second quarter of 2011 primarily due to normal merit increases, the hiring of additional business development professionals and a higher level of employee incentives as a result of increased loan and deposit volumes. New loans originated during the second quarter of 2012 totaled $316.0 million compared to $212.5 million in the second quarter of 2011.

Collection and repossession expense decreased when comparing second quarter 2012 to the same period in 2011, primarily as a result of expenses recognized in the prior period to maintain one OREO property.

The most significant decrease in noninterest expense is the decrease on loss on sale or write-down of assets. In June 2011, an updated appraisal was received for one OREO property in central Pennsylvania resulting in a $4.1 million write-down. There were no comparable expenses in the current quarter.

Income Tax

The provision for income taxes increased $2.8 million for the three-months ended June 30, 2012, compared to the corresponding period in 2011. The higher provision for income taxes was primarily due to the increase in net income before tax of $7.7 million as well as a decrease in tax-exempt income of $0.6 million due to the sale of tax-exempt investment securities during the first quarter of 2011.

The level of tax benefits that reduce our tax rate below the 35% statutory rate produced an annual effective tax rate of 27.0% and 18.8% for the three-months ended June 30, 2012 and 2011, 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 2012, liquidity provided from the $136.2 million increase in short-term and long-term borrowings and the net decrease of $15.9 million in investment securities provided funds to originate loans. 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, 2012, our maximum borrowing capacity under this program was $885.5 million and as of that date there was $15.2 million outstanding. We also participate in 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, 2012, our outstanding certificates of deposits from this program have an average weighted rate of 0.55% and an average original term of 277 days.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Liquidity (Continued)

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, 2012, the borrowing capacity under this program totaled $788.1 million and there were no amounts outstanding.

Additionally, as of June 30, 2012, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.2 billion and as of that date amounts used against this capacity included $339.3 million in outstanding borrowings and $19.5 million in letter of credit commitments used for pledging public funds.

First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution and as of June 30, 2012 there are no amounts outstanding on this line. Additionally, we guarantee a $0.6 million ESOP loan. For this loan we are currently not meeting the debt covenant related to return on average assets. We are working with the lender and expect to obtain a waiver or modification for this covenant.

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. During the first six months of 2012, total deposits decreased $42.7 million. The following table shows a breakdown of the components of First Commonwealth’s deposits:


	June 30,		December 31,
	2012		2011
	(dollars in thousands)
Noninterest-bearing demand deposits	$	823,880	$	780,377
Interest-bearing demand deposits		98,937		95,945
Savings deposits		2,415,860		2,430,802
Time deposits		1,123,285		1,197,560

Total	$	4,461,962	$	4,504,684

At June 30, 2012, noninterest-bearing demand deposits increased by $43.5 million and interest-bearing deposits decreased $86.2 million compared to December 31, 2011. The growth in interest-bearing deposits is consistent across deposit types and represents positive results of marketing promotions aimed at attracting new and retaining existing customers.

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 0.77 at June 30, 2012 and 0.76 at December 31, 2011. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Market Risk (Continued)

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. Rate sensitive assets to rate sensitive liabilities repricing in one year would indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. Following is the gap analysis as of June 30, 2012 and December 31, 2011:


	June 30, 2012
	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	$	1,893,364		$	188,808		$	384,352		$	2,466,524		$	1,422,828		$	192,796
Investments		120,470			139,300			122,760			382,530			475,239			331,480
Other interest-earning assets		3,839			0			0			3,839			0			0

Total interest-sensitive assets (ISA)		2,017,673			328,108			507,112			2,852,893			1,898,067			524,276

Certificates of Deposit		271,507			152,035			209,326			632,868			480,337			10,080
Other deposits		2,514,797			0			0			2,514,797			0			0
Borrowings		547,180			150			29,855			577,185			38,682			39,517

Total interest-sensitive liabilitites (ISL)		3,333,484			152,185			239,181			3,724,850			519,019			49,597

Gap	$	(1,315,811	)	$	175,923		$	267,931		$	(871,957	)	$	1,379,048		$	474,679

ISA/ISL		0.61			2.16			2.12			0.77			3.66			10.57
Gap/Total assets		22.13	%		2.96	%		4.51	%		14.66	%		23.19	%		7.98	%

	December 31, 2011
	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	$	1,859,623		$	156,447		$	287,873		$	2,303,943		$	1,486,729		$	174,495
Investments		125,112			107,723			205,335			438,170			418,413			320,739
Other interest-earning assets		3,511			0			0			3,511			0			0

Total interest-sensitive assets (ISA)		1,988,246			264,170			493,208			2,745,624			1,905,142			495,234

Certificates of Deposit		154,218			192,154			323,085			669,457			517,572			10,531
Other deposits		2,526,747			0			0			2,526,747			0			0
Borrowings		386,683			25,147			299			412,129			68,334			39,728

Total interest-sensitive liabilitites (ISL)		3,067,648			217,301			323,384			3,608,333			585,906			50,259

Gap	$	(1,079,402	)	$	46,869		$	169,824		$	(862,709	)	$	1,319,236		$	444,975

ISA/ISL		0.65			1.22			1.53			0.76			3.25			9.85
Gap/Total assets		18.48	%		0.80	%		2.91	%		14.77	%		22.59	%		7.62	%

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Market Risk (Continued)

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 versus if rates remained unchanged utilizing a flat balance sheet.


	Net interest income change (12 months)
	-200			-100			+100		+200
	(dollars in thousands)
June 30, 2012	$	(8,551	)	$	(5,135	)	$	381	$	1,737
December 31, 2011		(7,787	)		(3,997	)		704		2,324

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-month period ended June 30, 2012 and 2011, the cost of our interest-bearing liabilities averaged 0.76% and 1.08%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 4.29% and 4.70%, respectively.

The ALCO is responsible for the identification and management of interest rate risk exposure. As such, the ALCO continuously evaluates strategies to manage our exposure to interest rate fluctuations.

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.

Credit Risk

First Commonwealth maintains an allowance for credit losses at a level deemed sufficient to absorb 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. While allocations are made to specific loans and pools of loans, the total allowance is available for all loan losses.

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 half of 2012, five relationship totaling $7.5 million was identified as troubled debt restructuring. Please refer to Note 10 “Loans and Allowance for Credit Losses” for additional information on troubled debt restructuring.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Credit Risk (Continued)

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 in nonaccrual status when, based on regulatory definitions, the loan is maintained on a “cash basis” due to the weakened financial condition of the borrower. The bank excludes from nonaccrual status any loans contractually past due 90 days or more as to interest or principal payments if they are well secured and in the process of collection.

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.

The allowance for credit losses was $61.7 million at June 30, 2012 or 1.48% of total loans outstanding compared to 1.51% reported at December 31, 2011 and 1.88% at June 30, 2011. The stability in the June 30, 2012 ratio when compared to December 31, 2011 can be primarily attributable to a $1.5 million decrease in specific reserves resulting from a $13.8 million decrease in nonperforming loans coupled with $115.9 million in loan growth, particularly in commercial loans. Complementing the decrease in nonaccrual loans is a decrease in other credits measures. The level of criticized loans improved as of June 30, 2012 compared to December 31, 2011, as criticized loans decreased $19.5 million, or 7% and delinquency on accruing loans for the same period declined $1.9 million, or 5%.

The allowance for credit losses as a percentage of nonperforming loans was 73% as of June 30, 2012 compared to 62% at December 31, 2011 and 51% at June 30, 2011. 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 $11.7 million related to nonperforming loans covering 14% of the total nonperforming balance. 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, 2012.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Credit Risk (Continued)

The following table provides information related to nonperforming assets, the allowance for credit losses and other credit-related measures;


	June 30,						December 31, 2011
	2012			2011			December 31, 2011
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	33,457		$	89,974		$	33,635
Loans held for sale on a nonaccrual basis		0			823			13,412
Troubled debt restructured loans on nonaccrual basis		45,235			22,693			44,841
Troubled debt restructured loans on accrual basis		6,251			34,208			20,276

Total nonperforming loans	$	84,943		$	147,698		$	112,164

Loans past due in excess of 90 days and still accruing	$	10,587		$	12,960		$	11,015
Other real estate owned	$	19,140		$	36,507		$	30,035
Loans outstanding at end of period	$	4,159,531		$	3,992,058		$	4,057,055
Average loans outstanding	$	4,129,977	(a)	$	4,114,862	(a)	$	4,061,822	(b)
Nonperforming loans as a percentage of total loans		2.04	%		3.70	%		2.76	%
Provision for credit losses	$	8,084	(a)	$	22,929	(a)	$	55,816	(b)
Allowance for credit losses	$	61,676		$	75,166		$	61,234
Net charge-offs	$	7,642	(a)	$	18,992	(a)	$	65,811	(b)
Net charge-offs as a percentage of averge loans outstanding (annualized)		0.37	%		0.93	%		1.62	%
Provision for credit losses as a percentage of net charge-offs		105.78	%(a)		120.73	%(a)		84.81	%(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)		1.48	%		1.88	%		1.51	%
Allowance for credit losses as a percentage of nonperforming loans (c)		72.61	%		51.18	%		62.01	%

(a)	For the three-month period ended.

(b)	For the twelve-month period ended.

(c)	End of period loans and nonperforming loans exclude loans held for sale.

During the first half of 2012, accruing troubled debt restructured loans decreased $14.0 million from December 31, 2011. During the first quarter of 2012, an $11.3 million loan to a waste management company in Pennsylvania paid off due to the sale of the business. In addition, a $2.2 million loan to a retail development company in western Pennsylvania paid off during the first quarter.

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, 2012					December 31, 2011
	Amount		%			Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,059,675		25	%	$	996,739		25	%
Real estate construction		77,442		2			76,564		2
Residential real estate		1,213,610		29			1,137,059		28
Commercial real estate		1,232,270		30			1,267,432		31
Loans to individuals		576,534		14			565,849		14

Total loans and leases net of unearned income	$	4,159,531		100	%	$	4,043,643		100	%

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Credit Risk (Continued)


	For the Six-Months Ending
	June 30, 2012								As of June 30, 2012
	Net Charge- offs		% of Total Net Charge-offs			Net Charge- offs as a% of Average Loans			Nonperforming Loans (a)		% of Total Nonperforming Loans			Nonperforming Loans as a% of Total Loans
	(dollars in thousands)
Commercial, financial, agricultural and other	$	3,393		44.40	%		0.16	%	$	31,975		37.64	%		0.77	%
Real estate construction		248		3.24			0.01			15,060		17.73			0.36
Residential real estate		2,172		28.42			0.11			4,870		5.73			0.12
Commercial real estate		355		4.65			0.02			33,038		38.90			0.79
Loans to individuals		1,474		19.29			0.07			0		0.00			0.00

Total loans, net of unearned income	$	7,642		100.00	%		0.37	%	$	84,943		100.00	%		2.04	%

(a)	Nonperforming loan balances do not include loans held for sale.

As the above table illustrates, three categories of loans—commercial, financial, agricultural and other, real estate construction and commercial real estate—were a significant portion of the nonperforming loans as of June 30, 2012. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At June 30, 2012, shareholders’ equity was $772.5 million, an increase of $13.9 million from December 31, 2011. The increase was primarily the result of $23.4 million net income offset by $8.4 million of dividends paid to shareholders. Additionally, other comprehensive income increased $0.8 million due to changes in the fair value of available for sale investments and unearned ESOP shares decreased $1.0 million. Cash dividends declared per common share were $0.08 and $0.06 for the six-months ended June 30, 2012 and 2011, 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.

Quantitative measures established by regulation 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, 2012, First Commonwealth and its banking subsidiary met all capital adequacy requirements to which they are subject.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Capital Resources (Continued)

The table below presents First Commonwealth’s capital position at June 30, 2012.


	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	$	735,759		15.2	%	$	388,295		8.0	%
First Commonwealth Bank		703,004		14.5			387,436		8.0		$	484,295		10.0	%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	675,049		13.9	%	$	194,147		4.0	%
First Commonwealth Bank		642,427		13.3			193,718		4.0		$	290,577		6.0	%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	675,049		11.8	%	$	229,702		4.0	%
First Commonwealth Bank		642,427		11.3			227,823		4.0		$	284,779		5.0	%

On June 19, 2012, the company announced a $50 million common stock repurchase program effective until December 31, 2012. As of June 30, 2012, 469,700 shares were repurchased at an average price of $6.48 per share.

On July 24, 2012, First Commonwealth Financial Corporation declared a quarterly dividend of $0.05 per share payable on August 17, 2012.

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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION



ITEM 1.		LEGAL PROCEEDINGS

		The information required by this Item is set forth in the “Legal proceedings” section in Part I, Item 1, Note 6 “Commitments and Contingent Liabilities” which is incorporated herein by reference in response to this item.

ITEM 1A.		RISK FACTORS

		For a discussion of certain risk factors affecting the Company, see Part I, Item 1A: Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and Forward-Looking Statements on page 42 of this Form 10-Q..

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. At the close price of $6.22 on June 18, 2012, the authorized program represents approximately 8.0 million shares of common stock. The following table details the amount of shares repurchased under this program during the second quarter of 2012:


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, 2012		0	$	0.00		0		0
May 31, 2012		0		0.00		0		0
June 30, 2012		469,700		6.48		469,700		6,977,027	*

Total		469,700	$	6.48		469,700


		* Remaining number of shares approved under the Plan is estimated based on the market value of the Company’s common stock of $6.73 at June 30, 2012.

ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

		None

ITEM 4.		MINE SAFETY DISCLOSURES

		Not applicable

ITEM 5.		OTHER INFORMATION

		None

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	Interactive Data File (XBRL)	Furnished herewith

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, 2012		/s/ T. Michael Price
		T. Michael Price President and Chief Executive Officer

DATED: August 7, 2012		/s/ Robert E. Rout
		Robert E. Rout Executive Vice President and Chief Financial Officer