FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2013 March (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 March 31, 2013



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



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

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

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

(Do not check if a smaller reporting company)

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

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of May 6, 2013, was 97,898,950.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX



		PAGE

PART I.	Financial Information

ITEM 1.	Financial Statements and Supplementary Data

	Included in Part I of this report:

	First Commonwealth Financial Corporation and Subsidiaries

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

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

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	50

ITEM 4.	Controls and Procedures	50

PART II.	Other Information

ITEM 1.	Legal Proceedings	51

ITEM 1A.	Risk Factors	51

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

ITEM 3.	Defaults Upon Senior Securities	52

ITEM 4.	Mine Safety Disclosures	52

ITEM 5.	Other Information	52

ITEM 6.	Exhibits	53

	Signatures	54

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)



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

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

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



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

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

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



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

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

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

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



	Shares Outstanding		Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Unearned ESOP Shares		Total Shareholders’ Equity
	(dollars in thousands, except per share data)
Balance at December 31, 2012	99,629,494		$	105,563	$	365,354		$	315,608		$	1,259		$	(41,777	)	$	—	$	746,007
Net income								10,553											10,553
Other comprehensive loss											(1,571		)						(1,571		)
Cash dividends declared ($0.05 per share)								(4,976		)									(4,976		)
Discount on dividend reinvestment plan purchases					(25		)												(25		)
Treasury stock acquired	(331,374	)												(2,381		)			(2,381		)
Restricted stock	—		—		25			—						96					121
Balance at March 31, 2013	99,298,120		$	105,563	$	365,354		$	321,185		$	(312	)	$	(44,062	)	$	—	$	747,728



	Shares Outstanding	Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net		Treasury Stock			Unearned ESOP Shares			Total Shareholders’ Equity
	(dollars in thousands, except per share data)
Balance at December 31, 2011	104,916,994	$	105,563	$	365,868		$	294,056		$	2,001	$	(7,345	)	$	(1,600	)	$	758,543
Net income							11,051											11,051
Other comprehensive income										1,039								1,039
Cash dividends declared ($0.03 per share)							(3,147		)									(3,147		)
Net decrease in unearned ESOP shares															500			500
ESOP market value adjustment ($242, net of $85 tax benefit)				(157		)												(157		)
Discount on dividend reinvestment plan purchases				(16		)												(16		)
Tax benefit of stock options exercised				1														1
Treasury stock reissued	33,024			—			(163		)			373						210
Restricted stock	100,000	—		11			(603		)			(74		)				(666		)
Balance at March 31, 2012	105,050,018	$	105,563	$	365,707		$	301,194		$	3,040	$	(7,046	)	$	(1,100	)	$	767,358

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

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

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

The results of operations for the three-months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year of 2013. These interim financial statements should be read in conjunction with First Commonwealth’s 2012 Annual Report on Form 10-K which is available on First Commonwealth’s website at http://www.fcbanking.com.

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

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line in the Condensed Consolidated Statements of Income. The non-credit related (losses) gains on securities not expected to be sold are included in the "Noninterest Income" section of the Condensed Consolidated Statements of Income.



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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



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

Note 3 Supplemental Cash Flow Disclosures

The following table presents information related to cash paid during the period for interest and income taxes as well as detail on non-cash investing and financing activities for the three-months ended March 31,:



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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4 Earnings per Share

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



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

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



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

Note 5 Variable Interest Entities

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

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

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



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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 Commitments and Contingent Liabilities

Commitments and letters of credit

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

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



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

The current notional amounts outstanding as of March 31, 2013 include financial standby letters of credit of $36 thousand, performance standby letters of credit of $0.1 million, and there were no commercial letters of credit issued during the first three months of 2013. A liability of $0.2 million and $0.2 million has been recorded as of March 31, 2013 and December 31, 2012, respectively, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk in these commitments resulted in the recording of a liability of $2.3 million as of March 31, 2013 and $2.4 million as of December 31, 2012. The credit risk evaluation incorporated probability of default, loss given default and estimated utilization for the next twelve months for each loan category and the letters of credit.

Legal proceedings

McGrogan v. First Commonwealth Bank is a class action that was filed on January 12, 2009, in the Court of Common Pleas of Allegheny County, Pennsylvania. The action alleges that First Commonwealth Bank (the “Bank”) promised class members a minimum interest rate of 8% on its IRA Market Rate Savings Account for as long as the class members kept their money on deposit in the IRA account. The class asserts that the Bank committed fraud, breached its modified contract with the class members, and violated the Pennsylvania Unfair Trade Practice and Consumer Protection Law when it resigned as custodian of the IRA Market Rate Savings Accounts in 2008 and offered the class members a roll-over IRA account with a 3.5% interest rate. At that time, there were 237 account holders with an average age of 64, and the aggregate balances in the IRA Market Rate Savings accounts totaled approximately $11.5 million. Plaintiffs seek monetary damages for the alleged breach of contract, punitive damages for the alleged fraud and Unfair Trade Practice and Consumer Protection Law violations and attorney’s fees. On July 27, 2011, the court granted class certification as to the breach of modified contract claim and denied class certification as to the fraud and Pennsylvania Unfair Trade Practice and Consumer Protection Law claims. The breach of contract claim is predicated upon a letter sent to customers in 1998 which reversed an earlier decision by the Bank to reduce the rate paid on the accounts. The letter stated, in relevant part, “This letter will serve as notification that a decision has been made to re-establish the rate on your account to eight percent (8)%. This rate will be retroactive to your most recent maturity date and will continue going forward on deposits presently in the account and on annual additions.” On August 30, 2012, the Court entered an order granting the Bank’s motion for summary judgment and dismissing the class action claims. The Court found that the Bank retained the right to resign as custodian of the accounts and that the act of resigning as custodian and closing the accounts did not breach the terms of the underlying IRA contract. The Plaintiffs have filed an appeal with the Pennsylvania Superior Court.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other matters

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

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

Note 7 Investment Securities

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



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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at March 31, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	25,081	$	25,332
Due after 1 but within 5 years	216,972		217,191
Due after 5 but within 10 years	—		—
Due after 10 years	57,778		31,485
	299,831		274,008
Mortgage-Backed Securities (a)	996,272		1,021,262
Total Debt Securities	$	1,296,103	$	1,295,270


(a)	Mortgage Backed Securities include an amortized cost of $26.5 million and a fair value of $30.5 million for Obligations of U.S. Government agencies issued by Ginnie Mae and Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac which had an amortized cost of $969.7 million and a fair value of $990.8 million.

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



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

Securities available for sale with an estimated fair value of $602.0 million and $631.0 million were pledged as of March 31, 2013 and December 31, 2012, respectively, to secure public deposits and for other purposes required or permitted by law.

Note 8 Other Investments

As a member of the Federal Home Loan Bank (“FHLB”), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of March 31, 2013 and December 31, 2012, our FHLB stock totaled $28.4 million and $28.2 million, respectively and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

During 2013 and 2012, the FHLB repurchased excess stock from its members by repurchasing the lessor of 5% of the members’ total capital stock outstanding or its total excess capital stock. As a result, during the three-months ended March 31, 2013 and 2012, $2.8 million and $2.0 million, respectively of the stock owned by First Commonwealth was repurchased. The

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FHLB repurchased stock and paid dividends in 2013 and 2012, however, decisions regarding any future repurchase of excess capital stock and dividend payments will be made by the FHLB on a quarterly basis. Management reviewed the FHLB’s Form 10-K for the period ended December 31, 2012 filed with the SEC on March 14, 2013.

FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. First Commonwealth evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:


•	its operating performance;


•	the severity and duration of declines in the fair value of its net assets related to its capital stock amount;


•	its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;


•	the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and


•	its liquidity and funding position.

After evaluating all of these considerations, First Commonwealth concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities for the three-months ended March 31, 2013. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 9 Impairment of Investment Securities

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit related other-than-temporary impairment on debt securities is recognized in earnings while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the three-months ended March 31, 2013 and 2012, no other-than-temporary impairment charges were recognized. For the three-months ended March 31, 2013, $1.9 million in non-credit related gains on our trust preferred collateralized debt obligations that were determined to be impaired in previous periods was recorded in OCI. For the same period in 2012, $1.5 million in non-credit related gains for the same pool of securities was recorded in OCI. All of the securities for which other-than-temporary impairment was recorded were classified as available for sale securities.

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

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at March 31, 2013 by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More						Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses				Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	—	$	—		$	13	$	—		(a)	$	13	$	—
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	248,747	$	(2,153	)	$	20	$	—		(a)	$	248,767	$	(2,153	)
Other Government-Sponsored Enterprises	$	59,464	$	(113	)	$	—	$	—			$	59,464	$	(113	)
Corporate Securities	4,797		(30		)	—		—				4,797		(30		)
Pooled Trust Preferred Collateralized Debt Obligations	$	—	$	—		$	24,454	$	(26,566	)		$	24,454	$	(26,566	)
Total Securities Available for Sale	$	313,008	$	(2,296	)	$	24,487	$	(26,566	)		$	337,495	$	(28,862	)


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

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

The following table presents the gross unrealized losses and estimated fair values at December 31, 2012 by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More						Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses				Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	—	$	—		$	13	$	—		(a)	$	13	$	—
Obligations of U.S. Government- Sponsored Enterprises:
Mortgage-Backed Securities – Residential	76,296		(392		)	21		—			(a)	76,317		(392		)
Other Government-Sponsored Enterprises	59,303		(72		)	—		—				59,303		(72		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			23,316		(28,496		)		23,316		(28,496		)
Total Securities Available for Sale	$	135,599	$	(464	)	$	23,350	$	(28,496	)		$	158,949	$	(28,960	)


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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As of March 31, 2013, the book value of our pooled trust preferred collateralized debt obligations totaled $51.1 million with an estimated fair value of $24.5 million, which includes securities comprised of 319 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainders are mezzanine tranches, four of which have no senior class remaining in the issue. Two of the pooled issues, representing $1.2 million of the $51.1 million book value, remain above investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one institution. As of March 31, 2013, after taking into account management’s best estimates of future interest deferrals and defaults, seven of our securities had no excess subordination in the tranches we own and five of our securities had excess subordination which ranged from 11% to 631% of the current performing collateral.

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



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

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

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the three-months ended March 31, 2013 and 2012, there were no credit related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments we determine a credit related portion and a non-credit related portion of other-than-temporary impairment. The credit related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit related impairment. A discounted cash flow analysis provides the best estimate of credit related other-than-temporary impairment for these securities.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Additional information related to the discounted cash flow analysis follows:

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

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

•

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

•

Credit Analysis – A quarterly credit evaluation is performed for each of the 319 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

•

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of March 31, 2013, default probabilities for performing collateral ranged from 0.33% to 75%.

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

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

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

securities listed in that table, our analysis as of March 31, 2013 indicates it is probable that we will collect all contractual principal and interest payments.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL I, PreTSL IV and MMCap I-Senior. Our cash flow analysis as of March 31, 2013, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in our current book value being below the present value of estimated future principal and interest payments. The excess for each bond of the present value of future cash flows over our current book value ranges from 6% to 154% and will be recognized as an adjustment to yield over the remaining life of these securities. During the three-months ended March 31, 2013 and 2012, $0.3 million and $0.2 million, respectively, of the excess was recognized as an adjustment to yield on these securities.

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



	For the Three-Months Ended March 31,
	2013			2012
	(dollars in thousands)
Balance, beginning (a)	$	43,274		$	44,736
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—			—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—			—
Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)	(283		)	(235		)
Balance, ending	$	42,991		$	44,501


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


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

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

Note 10 Loans and Allowance for Credit Losses

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



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

Credit Quality Information

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



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



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



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

The use of creditworthiness categories to grade loans permits management’s use of migration analysis to estimate a portion of credit risk. The Company’s internal creditworthiness grading system provides a measurement of credit risk based primarily on an evaluation of the borrower’s cash flow and collateral. Movements between these rating categories provides a predictive measure of credit losses and therefore assists in determining the appropriate level for the loan loss reserves. Category ratings are reviewed each quarter, at which time management analyzes the results, as well as other external statistics and factors related to loan performance. Loans that migrate towards higher risk rating levels generally have an increased risk of default, whereas, loans that migrate toward lower risk ratings generally will result in a lower risk factor being applied to those related loan balances.

The following tables represent our credit risk profile by creditworthiness:



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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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

Portfolio Risks

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

Criticized loans have been evaluated when determining the appropriateness of the allowance for credit losses, which we believe is adequate at this time. However, changes in economic conditions, interest rates, borrower financial condition, delinquency trends or previously established fair values of collateral factors could significantly change those judgmental estimates.

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

Age Analysis of Past Due Loans by Segment

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



	March 31, 2013
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	3,054	$	2,380	$	1,108	$	28,666	$	35,208	$	1,022,455	$	1,057,663
Real estate construction	206		15		500		7,112		7,833		62,628		70,461
Residential real estate	6,282		2,420		963		9,740		19,405		1,236,110		1,255,515
Commercial real estate	9,903		921		279		18,456		29,559		1,214,117		1,243,676
Loans to individuals	2,565		576		1,077		167		4,385		587,110		591,495
Total	$	22,010	$	6,312	$	3,927	$	64,141	$	96,390	$	4,122,420	$	4,218,810

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2012
	30 - 59 days past due		60 - 89 days past due		90 days and greater and still accruing		Nonaccrual		Total past due and nonaccrual		Current		Total
	(dollars in thousands)
Commercial, financial, agricultural and other	$	991	$	620	$	288	$	29,258	$	31,157	$	988,665	$	1,019,822
Real estate construction	2		19		15		9,778		9,814		77,624		87,438
Residential real estate	6,597		2,357		730		9,283		18,967		1,222,598		1,241,565
Commercial real estate	3,339		1,389		195		46,023		50,946		1,222,715		1,273,661
Loans to individuals	3,140		934		1,219		176		5,469		576,749		582,218
Total	$	14,069	$	5,319	$	2,447	$	94,518	$	116,353	$	4,088,351	$	4,204,704

Nonaccrual Loans

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

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

Impaired Loans

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

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

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

A total of $2.7 million of loans were moved into nonaccrual status during the three-months ended March 31, 2013. Included in this total was the movement to nonaccrual status of $1.1 million in consumer loans which were 150 days or more past due. Beginning in the third quarter of 2012, consumer loans are moved to nonaccrual status once they reach 150 days past due, however, in prior periods, these loans were not placed in nonaccrual status if they were well secured and in the process of collection.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

•

$18.7 million, the remaining portion of a $44.1 million unsecured loan to a western Pennsylvania real estate developer. This loan was originated in 2004 and was placed in nonaccrual status in the fourth quarter of 2009. A settlement plan with the borrower and three other lenders was reached in the fourth quarter of 2010 and resulted in an $8.0 million principal payment and a $15.4 million partial charge-off.


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


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


•	$3.2 million, real estate secured loan to a western Pennsylvania nonprofit corporation. This loan was originated in 2008 and placed in nonaccrual status in the second quarter of 2012. The most recent appraisals for the various real estate collateral were completed in the fourth quarter of 2012 and the first quarter of 2013.

The following tables include the recorded investment and unpaid principal balance for impaired loans with the associated allowance amount, if applicable, as of March 31, 2013 and December 31, 2012. Also presented are the average recorded investment in impaired loans and the related amount of interest recognized while the loan was considered impaired. Average balances are calculated based on month-end balances of the loans for the period reported.



	March 31, 2013						December 31, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
	(dollars in thousands)
With no related allowance recorded:
Commercial, financial, agricultural and other	$	8,649	$	9,601	$	—	$	8,080	$	8,983	$	—
Real estate construction	6,122		27,005		—		8,491		35,555		—
Residential real estate	8,666		9,269		—		7,928		8,401		—
Commercial real estate	16,711		23,250		—		33,259		35,401		—
Loans to individuals	240		247		—		256		256		—
Subtotal	40,388		69,372		—		58,014		88,596		—
With an allowance recorded:
Commercial, financial, agricultural and other	25,702		26,655		9,846		26,532		27,412		10,331
Real estate construction	2,860		3,169		503		2,756		3,087		300
Residential real estate	2,663		2,666		1,091		2,695		2,696		780
Commercial real estate	6,668		7,263		1,249		17,558		17,896		6,367
Loans to individuals	—		—		—		—		—		—
Subtotal	37,893		39,753		12,689		49,541		51,091		17,778
Total	$	78,281	$	109,125	$	12,689	$	107,555	$	139,687	$	17,778

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three-Months Ended March 31,
	2013				2012
	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	$	8,592	$	51	$	3,258	$	18
Real estate construction	7,877		—		3,646		—
Residential real estate	8,516		37		3,354		5
Commercial real estate	33,978		11		24,275		23
Loans to individuals	247		1		—		—
Subtotal	59,210		100		34,533		46
With an allowance recorded:
Commercial, financial, agricultural and other	25,803		19		30,350		3
Real estate construction	2,685		13		10,432		—
Residential real estate	2,457		4		952		7
Commercial real estate	6,704		25		5,889		9
Loans to individuals	—		—		—		—
Subtotal	37,649		61		47,623		19
Total	$	96,859	$	161	$	82,156	$	65

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:



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Troubled debt restructured loans
Accrual status	$	14,140	$	13,037
Nonaccrual status	32,565		50,979
Total	$	46,705	$	64,016
Commitments
Letters of credit	$	—	$	1,574
Unused lines of credit	1,083		—
Total	$	1,083	$	1,574

At March 31, 2013, troubled debt restructured loans decreased $17.3 million compared to December 31, 2012 and commitments related to troubled debt restructured loans decreased $0.5 million for the same period. These decreases are primarily a result of the sale of a $17.2 million loan for a commercial real estate developer in eastern Pennsylvania.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	For the Three-Months Ended March 31, 2013
		Type of Modification
	Number of Contracts	Extend Maturity		Modify Rate		Modify Payments		Total Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Specific Reserve
	(dollars in thousands)
Commercial, financial, agricultural and other	2	$	426	$	—	$	12	$	438	$	377	$	—
Residential real estate	9	7		214		514		735		677		—
Commercial real estate	1	—		244		—		244		242		—
Loans to individuals	4	—		23		4		27		25
Total	16	$	433	$	481	$	530	$	1,444	$	1,321	$	—



	For the Three-Months Ended March 31, 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)
Residential real estate	2	$	—	$	97	$	—	$	97	$	53	$	—

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 March 31, 2013 and 2012, $0.5 million and $97 thousand, respectively, of total rate modifications represent loans with modifications to the rate as well as payment due to reamortization. For both 2013 and 2012 the changes in loan balances between the pre-modification balance and the post-modification balance are due to customer payments.

A troubled debt restructuring is considered to be in default when a restructured loan is 90 days or more past due. The following provides information related to restructured loans that were considered to default during the three-months ended March 31,:



	2013			2012
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(dollars in thousands)
Residential real estate	1	10		—	—
Commercial real estate	—	$	—	2	$	980
Loans to individuals	1	6		—	—
Total	2	$	16	2	$	980

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	For the Three-Months Ended March 31, 2013
	Commercial, financial, agricultural and other			Real estate construction			Residential real estate			Commercial real estate			Loans to individuals			Unallocated			Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	19,852		$	8,928		$	5,908		$	22,441		$	4,132		$	5,926		$	67,187
Charge-offs	(538		)	(84		)	(322		)	(8,544		)	(988		)	—			(10,476		)
Recoveries	128			12			723			97			94			—			1,054
Provision (credit)	833			(1,123		)	(560		)	4,476			901			(30		)	4,497
Ending Balance	$	20,275		$	7,733		$	5,749		$	18,470		$	4,139		$	5,896		$	62,262
Ending balance: individually evaluated for impaired	$	9,846		$	503		$	1,091		$	1,249		$	—		$	—		$	12,689
Ending balance: collectively evaluated for impaired	10,429			7,230			4,658			17,221			4,139			5,896			49,573
Loans:
Ending balance	1,057,663			70,461			1,255,515			1,243,676			591,495						4,218,810
Ending balance: individually evaluated for impaired	33,322			8,917			7,813			21,369			—						71,421
Ending balance: collectively evaluated for impaired	1,024,341			61,544			1,247,702			1,222,307			591,495						4,147,389

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three-Months Ended March 31, 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	(1,914		)	(190		)	(1,712		)	(235		)	(941		)	—		(4,992		)
Recoveries	238			56			133			158			118			—		703
Provision (credit)	1,619			(195		)	44			487			831			1,001		3,787
Ending Balance	$	18,143		$	6,427		$	6,702		$	19,371		$	4,252		$	5,837	$	60,732
Ending balance: individually evaluated for impaired	$	7,555		$	2,891		$	553		$	921		$	—		$	—	$	11,920
Ending balance: collectively evaluated for impaired	10,588			3,536			6,149			18,450			4,252			5,837		48,812
Loans:
Ending balance	1,051,209			64,158			1,174,572			1,264,060			574,589					4,128,588
Ending balance: individually evaluated for impaired	31,599			13,800			3,217			28,874			—					77,490
Ending balance: collectively evaluated for impaired	1,019,610			50,358			1,171,355			1,235,186			574,589					4,051,098

Note 11 Income Taxes

At March 31, 2013 and December 31, 2012, 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 2009 through 2012 were open for examination as of March 31, 2013.

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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 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.

Management validates the market values provided by the third party service by having another recognized pricing service price 100% of the securities on an annual basis and a random sample of securities each quarter, monthly monitoring of variances from prior period pricing and, on a monthly basis, evaluating pricing changes compared to expectations based on changes in the financial markets.

Other investments are comprised of FHLB stock whose estimated fair value is based on its par value. Additional information on FHLB stock is provided in Note 8, “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 2013, we have not realized any losses due to a counterparty's inability to pay any uncollateralized positions.

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

•

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

Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in these securities since 2009; therefore it was more appropriate to determine estimated fair value using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this analysis is provided in Note 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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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 2013, we experienced a $0.9 million credit loss as a result of a counterparty's inability to pay the net uncollaterlized position on an interest rate swap. The full amount of this credit loss was provided for in prior periods. Additionally, as the result of deterioration in other 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 2011-4, the following table provides information related to quantitative inputs and assumptions used in Level 3 fair value measurements.



	Fair Value (dollars in thousands)	Valuation Technique	Unobservable Inputs	Range / (weighted average)
Pooled Trust Preferred Securities	$24,512	Discounted Cash Flow	Probability of default	0% -100% (21.44%)
			Prepayment rates	0% - 81.75% (9.60%)
			Discount rates	6.25% - 18%(a)
Equities	1,420	Par Value	N/A	N/A
Interest Rate Swap	—	Option model	Counterparty credit risk	8.56% - 10.31% (b)
Impaired Loans	734 (c)	Reserve study	Discount rate	10.00%
			Gas per MCF	$3.67 - $7.60 (d)
			Oil per BBL/d	$90.97 - $106.00 (d)
			NGL per gallon	$1.54 (d)
Other Real Estate Owned	215	Internal Valuation	N/A	N/A


(a)	incorporates spread over risk free rate related primarily to credit quality and illiquidity of securities.


(b)	represents the range of the credit spread curve used in valuation.


(c)	the remainder of impaired loans valued using Level 3 inputs are not included in this disclosure as the values of those loans are based on bankruptcy agreement documentation.


(d)	unobservable inputs are defined as follows: MCF - million cubic feet; BBL/d - barrels per day; NGL - natural gas liquid.

The significant unobservable inputs used in the fair value measurement of pooled trust preferred securities are the probability of default, discount rates and prepayment rates. Significant increases in the probability of default or discount rate used would result in a decrease in the estimated fair value of these securities while decreases in these variables would result in higher fair

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

value measurements. In general, a change in the assumption of probability of default is accompanied by a directionally similar change in the discount rate. In most cases, increases in the prepayment rate assumptions would result in a higher estimated fair value for these securities while decreases would provide for a lower value. The direction of this change is somewhat dependent on the structure of the investment and the amount of the investment tranches senior to our position.

The discount rate is the significant unobservable input used in the fair value measurement of impaired loans. Significant increases in this rate would result in a decrease in the estimated fair value of the loans, while a decrease in this rate would result in higher fair value measurement. Other unobservable inputs in the fair value measurement of impaired loans relate to gas, oil and natural gas prices and increases in these rates would result in an increase in the estimated fair value of the loans, while a decrease in these prices would result in a lower fair value measurement.

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:



	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential	$	—	$	30,462	$	—	$	30,462
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential	—		990,660		—		990,660
Mortgage-Backed Securities—Commercial	—		140		—		140
Other Government-Sponsored Enterprises	—		242,438		—		242,438
Obligations of States and Political Subdivisions	—		85		—		85
Corporate Securities	—		6,973		—		6,973
Pooled Trust Preferred Collateralized Debt Obligations	—		—		24,512		24,512
Total Debt Securities	—		1,270,758		24,512		1,295,270
Equities	513		—		1,420		1,933
Total Securities Available for Sale	513		1,270,758		25,932		1,297,203
Other Investments	—		28,357		—		28,357
Other Assets(a)	—		16,763		—		16,763
Total Assets	$	513	$	1,315,878	$	25,932	$	1,342,323
Other Liabilities(a)	$	—	$	17,086	$	—	$	17,086
Total Liabilities	$	—	$	17,086	$	—	$	17,086


(a)	Non-hedging interest rate derivatives

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities—Residential	$	—	$	31,664	$	—	$	31,664
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities—Residential	—		864,401		—		864,401
Mortgage-Backed Securities—Commercial	—		149		—		149
Other Government-Sponsored Enterprises	—		242,664		—		242,664
Obligations of States and Political Subdivisions	—		86		—		86
Corporate Securities	—		6,991		—		6,991
Pooled Trust Preferred Collateralized Debt Obligations	—		—		23,373		23,373
Total Debt Securities	—		1,145,955		23,373		1,169,328
Equities	555		—		1,420		1,975
Total Securities Available for Sale	555		1,145,955		24,793		1,171,303
Other Investments	—		28,228		—		28,228
Loans Held for Sale	—		—		—		—
Other Assets(a)	—		16,480		—		16,480
Total Assets	$	555	$	1,190,663	$	24,793	$	1,216,011
Other Liabilities(a)	$	—	$	18,726	$	—	$	18,726
Total Liabilities	$	—	$	18,726	$	—	$	18,726


(a)	Non-hedging interest rate derivatives

For the three-month periods ended March 31, changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:



	2013
	Pooled Trust Preferred Collateralized Debt Obligations			Equities		Loans Held for Sale			Other Assets		Total
	(dollars in thousands)
Balance, beginning of period	$	23,373		$	1,420	$	—		$	—	$	24,793
Total gains or losses
Included in earnings	—			—		126			—		126
Included in other comprehensive income	2,391			—		—			—		2,391
Purchases, issuances, sales, and settlements
Purchases	—			—		—			—		—
Issuances	—			—		—			—		—
Sales	—			—		(16,739		)	—		(16,739		)
Settlements	(1,252		)	—		—			—		(1,252		)
Transfers into Level 3	—			—		16,613			—		16,613
Balance, end of period	$	24,512		$	1,420	$	—		$	—	$	25,932

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	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		$	—		$	37,812
Total gains or losses
Included in earnings	—			—		1,768			(461		)	1,307
Included in other comprehensive income	2,268			—		—			—			2,268
Purchases, issuances, sales, and settlements
Purchases	—			—		—			—			—
Issuances	—			—		—			—			—
Sales	—			—		(6,809		)	—			(6,809		)
Settlements	(740		)	—		(295		)	—			(1,035		)
Transfers into Level 3	—			—		—			461			461
Balance, end of period	$	24,508		$	1,420	$	8,076		$	—		$	34,004

For the three-months ended March 31, 2013 and 2012, there were no transfers between fair value Levels 1 and 2. However, $16.6 million of loans were transferred into Level 3 from Level 2 during the three-months ended March 31, 2013 due to the loans being transferred to a held for sale status. The loan sales related to two nonperforming relationships for which this was determined to be the appropriate exit strategy. Completion of the loan sales resulted in a $0.1 million gain for the period. For the three-months ended March 31, 2012, $0.5 million of interest rate swaps were transferred into Level 3 from Level 2 due to deterioration of the counterparty’s credit risk below investment grade. 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 March 31, 2013 and 2012.

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



	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	57,636	$	7,956	$	65,592
Other real estate owned	—		11,389		215		11,604
Total Assets	$	—	$	69,025	$	8,171	$	77,196



	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Impaired loans	$	—	$	82,949	$	6,827	$	89,776
Other real estate owned	—		11,981		247		12,228
Total Assets	$	—	$	94,930	$	7,074	$	102,004

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following losses were realized on the assets measured on a nonrecurring basis:



	For the Three-Months Ended March 31,
	2013			2012
	(dollars in thousands)
Impaired loans	$	(503	)	$	(376	)
Other real estate owned	(131		)	(2,909		)
Total losses	$	(634	)	$	(3,285	)

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. For balances under $250 thousand, we rely on a broker-priced opinion.

The fair value for other real estate owned is determined by either an independent market based appraisal less estimated costs to sell or an executed sales agreement and is classified as Level 2. Other real estate owned has a book cost of $10.9 million as of March 31, 2013 and consisted primarily of a manufacturing plant in northern Pennsylvania, residential real estate in eastern Pennsylvania and a commercial real estate property in eastern Pennsylvania. We review whether events and circumstances subsequent to a transfer to other real estate owned have occurred that indicate the balance of those assets may not be recoverable. If events and circumstances indicate further impairment we will record a charge to the extent that the carrying value of the assets exceed their fair values, less estimated cost to sell, as determined by valuation techniques appropriate in the circumstances.

Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Additional information related to goodwill is provided in Note 14, “Goodwill.” There were no other assets or liabilities measured at fair value on a non-recurring basis during the three-months ended March 31, 2013.

FASB ASC 825-10, “Transition Related to FSP FAS 107-1” and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are as discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

Cash and due from banks and interest-bearing bank deposits: The carrying amounts for cash and due from banks and interest-bearing bank deposits approximate the estimated fair values of such assets.

Securities: Fair values for securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. These valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument. The carrying value of other investments, which includes FHLB stock, is considered a reasonable estimate of fair value.

Loans 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.”

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $0.2 million and $0.2 million at March 31, 2013 and December 31, 2012, respectively. 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 or an announced redemption price.

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



	March 31, 2013
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	53,991	$	53,991	$	53,991	$	—	$	—
Interest-bearing deposits	1,780		1,780		1,780		—		—
Securities available for sale	1,297,203		1,297,203		513		1,270,758		25,932
Other investments	28,357		28,357		—		28,357		—
Loans	4,218,810		4,291,687		—		57,636		4,234,051
Financial liabilities
Deposits	4,711,578		4,645,967		—		4,645,967		—
Short-term borrowings	308,100		308,092		—		308,092		—
Long-term debt	174,318		176,295		—		176,295		—
Subordinated debt	105,750		79,539		—		34,699		44,840

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2012
			Fair Value Measurements Using:
	Carrying Amount		Total		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	98,724	$	98,724	$	98,724	$	—	$	—
Interest-bearing deposits	4,258		4,258		4,258		—		—
Securities available for sale	1,171,303		1,171,303		555		1,145,955		24,793
Other investments	28,228		28,228		—		28,228		—
Loans	4,204,704		4,245,114		—		82,949		4,162,165
Financial liabilities
Deposits	4,557,881		4,493,764		—		4,493,764		—
Short-term borrowings	356,227		356,221		—		356,221		—
Long-term debt	174,471		176,178		—		176,178		—
Subordinated debt	105,750		76,735		—		—		76,735

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.

We have eleven risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.

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:



	March 31, 2013			December 31, 2012
	(dollars in thousands)
Credit value adjustment	$	(362	)	$	(2,207	)
Notional Amount:
Interest rate derivatives	279,002			223,448
Risk participation agreements	72,774			71,390

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 March 31,
	2013		2012
	(dollars in thousands)
Non-hedging interest rate derivatives:
Increase in other income	$	989	$	606

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 2011-8 provides that if an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two step goodwill impairment test is not required.

First Commonwealth is considered to be one reporting unit. The carrying amount of goodwill as of March 31, 2013 and December 31, 2012 was $159.9 million. No impairment charges on goodwill or other intangible assets were incurred in 2013 or 2012.

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 March 31, 2013 and indicated that it is more likely than not that the fair value of First Commonwealth exceeds its carrying amount, therefore the two step goodwill impairment test was not considered necessary. The assessment of qualitative factors incorporated the results of the Step 1 goodwill impairment test completed as of November 30, 2012 as well as macroeconomic factors, industry and market considerations, the company’s overall financial performance, and other company specific events occurring since the completion of the November 30, 2012 test.

As of March 31, 2013, 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.

Note 15 New Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This amendment addresses the previously deferred portions of ASU 2011-05 related to reclassifications out of accumulated other comprehensive income. This amendment requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of this ASU did not have a material impact on First Commonwealth’s financial condition or results of operations.

Note 16 Subsequent Event

On April 1, 2013, the Company redeemed $32.5 million in issued and outstanding 9.50% mandatorily redeemable capital securities and $1.1 million in common securities issued by First Commonwealth Capital Trust I at a price of 103.32% . In the second quarter of 2013, the redemption of these securities will result in the recognition of a $1.1 million prepayment penalty and $0.5 million in remaining deferred issuance costs.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations

This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three-months ended March 31, 2013 and 2012, and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q.

Forward-Looking Statements

Certain statements contained in this report that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements:


•	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;


•	prolonged low interest rates, which could reduce our net interest margin;


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


•	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;


•	cyber-attacks and fraud, which could disrupt our systems and services, breach the privacy of our customer and business information or result in loss of client assets;


•	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;


•	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.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

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 38 for the three-months ended March 31, 2013 and 2012.

Results of Operations

Three-Months Ended March 31, 2013 Compared to Three-Months Ended March 31, 2012

Net Income

For the three-months ended March 31, 2013, First Commonwealth had net income of $10.6 million, or $0.11 per share, compared to net income of $11.1 million or $0.11 per share in the three-months ended March 31, 2012. The slight decrease in net income was caused by declines in net interest and noninterest income as well as a slightly higher provision for credit losses all of which were partially offset by reductions in noninterest expense.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, was $46.4 million in the first three months of 2013 compared to $49.4 million for the same period in 2012. Net interest income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at 75% and 73% for the three-months ended March 31, 2013 and 2012, respectively.

Net interest margin, on a fully taxable equivalent basis, was 3.45% for the three-months ended March 31, 2013 compared to 3.75% for the three-months ended March 31, 2012. Contributing to this 30 basis point decline was the recognition in 2012 of $1.0 million in interest income related to the payoff of a loan that was previously in nonaccrual status. This contributed 8 basis points to the net interest margin for the three months ended March 31, 2012. The net interest margin was also affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The low interest rate environment and resulting decline in rates earned on interest-earning assets continued to challenge the net interest margin during the three-months ended March 31, 2013. 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 lower yields on earning assets. Growth in earning assets has helped to offset the impact of runoff, as average earning assets for the three-months ended March 31, 2013 increased $162.1 million, or 3%, compared to the comparable period in 2012. However, approximately one third of the growth in earning assets relates to the investment portfolio, which earns approximately 200 basis points less than if the funds were used to fund the loan portfolio. It is expected that the challenges to the net interest margin will continue as $2.8 billion in interest-sensitive assets either reprice or mature over the next twelve months.

The taxable equivalent yield on interest-earning assets was 3.92% for the three-months ended March 31, 2013, a decrease of 47 basis points from the 4.39% yield for the same period in 2012. 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 0.59% for the three-months ended March 31, 2013, compared to 0.79% for the same period in 2012.

Comparing the three-months ended March 31, 2013 with the same period in 2012, changes in interest rates negatively impacted net interest income by $4.2 million. The lower yield on interest-earning assets adversely impacted net interest income by $6.7 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $2.6 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, loan growth and increasing our investment volumes within established interest rate risk management guidelines. As part of these strategies, on April 1, 2013, the Company redeemed $32.5 million in issued and outstanding 9.50% mandatorily redeemable capital securities and $1.1 million in common securities issued by First Commonwealth Capital Trust I and replaced the funds with lower cost funding alternatives.

While decreases in interest rates and yields compressed the net interest margin, increases in average interest-earning assets tempered the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $1.2 million in the three-months ended March 31, 2013 compared to the same period in 2012. Higher levels of interest-earning assets resulted in an increase of $1.7 million million in interest income, while volume changes primarily attributed to the mix of deposits increased interest expense by $0.5 million.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Positively affecting net interest income was a $99.5 million increase in average net free funds at March 31, 2013 as compared to March 31, 2012. 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 mature and reprice to lower costing certificates or other deposit alternatives. Average time deposits for the three-months ended March 31, 2013 decreased $62.1 million, or 5%, compared to the comparable period in 2012. The positive change in deposit mix is expected to continue as $729.7 million in certificates of deposits either mature or reprice over the next twelve 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 three-months ended March 31,:



	2013		2012
	(dollars in thousands)
Interest income per Condensed Consolidated Statements of Income	$	51,761	$	56,616
Adjustment to fully taxable equivalent basis	1,029		1,217
Interest income adjusted to fully taxable equivalent basis (non-GAAP)	52,790		57,833
Interest expense	6,343		8,446
Net interest income adjusted to fully taxable equivalent basis (non-GAAP)	$	46,447	$	49,387

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

The following is an analysis of the average balance sheets and net interest income on a fully taxable equivalent basis, for the three-months ended March 31,:



	2013							2012
	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	$	3,346		$	1	0.12	%	$	3,776		$	1	0.11	%
Tax-free investment securities (e)	85			2		7.39		457			8		7.04
Taxable investment securities	1,234,589			7,145		2.35		1,178,774			8,570		2.92
Loans, net of unearned income (b)(c)	4,222,606			45,642		4.38		4,115,483			49,254		4.81
Total interest-earning assets	5,460,626			52,790		3.92		5,298,490			57,833		4.39
Noninterest-earning assets:
Cash	70,629							73,673
Allowance for credit losses	(68,837		)					(64,458		)
Other assets	567,485							593,648
Total noninterest-earning assets	569,277							602,863
Total Assets	$	6,029,903						$	5,901,353
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)	$	665,984		$	65	0.04	%	$	624,519		$	96	0.06	%
Savings deposits (d)	1,940,711			920		0.19		1,951,740			1,305		0.27
Time deposits	1,141,576			3,206		1.14		1,203,668			4,846		1.62
Short-term borrowings	355,912			220		0.25		334,454			227		0.27
Long-term debt	280,152			1,932		2.80		207,338			1,972		3.83
Total interest-bearing liabilities	4,384,335			6,343		0.59		4,321,719			8,446		0.79
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits (d)	849,007							764,667
Other liabilities	49,295							50,312
Shareholders’ equity	747,266							764,655
Total noninterest-bearing funding sources	1,645,568							1,579,634
Total Liabilities and Shareholders’ Equity	$	6,029,903						$	5,901,353
Net Interest Income and Net Yield on Interest-Earning Assets				$	46,447	3.45	%				$	49,387	3.75	%


(a)	Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.


(b)	Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.


(c)	Loan income includes loan fees earned.


(d)	Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.


(e)	Yield for three months ended March 31, 2013 calculated using fully taxable equivalent interest income of $1,557.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

The following table shows the effect of changes in volumes and rates on interest income and interest expense for the three-months ended March 31, 2013 compared with March 31, 2012:



	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	$	—		$	—		$	—
Tax-free investment securities	(6		)	(7		)	1
Taxable investment securities	(1,425		)	405			(1,830		)
Loans	(3,612		)	1,281			(4,893		)
Total interest income (b)	(5,043		)	1,679			(6,722		)
Interest-bearing liabilities:
Interest-bearing demand deposits	(31		)	6			(37		)
Savings deposits	(385		)	(7		)	(378		)
Time deposits	(1,640		)	(250		)	(1,390		)
Short-term borrowings	(7		)	14			(21		)
Long-term debt	(40		)	693			(733		)
Total interest expense	(2,103		)	456			(2,559		)
Net interest income	$	(2,940	)	$	1,223		$	(4,163	)


(a)	Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.


(b)	Changes in interest income have been computed on a fully taxable equivalent basis using the 35% federal income tax statutory rate.

Provision for Credit Losses

The provision for credit losses is determined based on management’s estimates of the appropriate level of allowance for credit losses needed or probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.

The table below provides a breakout of the provision for credit losses by loan category for the three-months ended March 31,:



	2013					2012
	Dollars			Percentage		Dollars			Percentage
	(dollars in thousands)
Commercial, financial, agricultural and other	$	833		19	%	$	1,619		43	%
Real estate construction	(1,123		)	(25	)	(195		)	(5	)
Residential real estate	(560		)	(12	)	44			1
Commercial real estate	4,476			99		487			13
Loans to individuals	901			20		831			22
Unallocated	(30		)	(1	)	1,001			26
Total	$	4,497		100	%	$	3,787		100	%

The provision for credit losses for the three-months ended March 31, 2013 increased in comparison to the three-months ended March 31, 2012, by $0.7 million or 19%. The majority of the provision for credit losses during the three-months ended March 31, 2013, resulted from two non-accrual commercial real estate loans which were sold during the quarter. The sale of

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

the loans required a combined charge-off and related provision expense of $3.1 million for a $15.5 million loan secured by an apartment building in eastern Pennsylvania and a $1.7 million loan secured by mixed use property in eastern Pennsylvania. Credit losses in the first quarter exceeded the provision for credit losses due to charge-offs taken on two nonaccrual loans for which the specific reserves were provided for in 2012. This includes a $2.8 million charge-off taken on a loan to a western Pennsylvania non-profit healthcare facility who recently filed for bankruptcy and a $2.5 million charge-off for a western Pennsylvania student housing project for which the bank has begun the foreclosure process.

The negative provision for real estate construction loans can be attributed to the decline in principal balance in that loan category. Compared to December 31, 2012, outstanding real estate construction loans decreased $17.0 million, or 19%.

The allowance for credit losses was $62.3 million, or 1.48%, of total loans outstanding at March 31, 2013, compared to $67.2 million, or 1.60%, at December 31, 2012 and $60.7 million, or 1.47%, at March 31, 2012. The decline compared to December 31, 2012, can be attributed to a $33.6 million, or 12%, decline in criticized loans, which encompasses the $29.3 million, or 27%, decrease in nonperforming loans. Nonperforming loans as a percentage of total loans decreased to 1.86% at March 31, 2013 from 2.56% at December 31, 2012 and 2.17% as of March 31, 2012. The allowance to nonperforming loan ratio was 80%, 62% and 74% as of March 31, 2013, December 31, 2012, and March 31, 2012, respectively.

Below is an analysis of the consolidated allowance for credit losses for the three-months ended March 31, 2013 and 2012 and the year-ended December 31, 2012:



	March 31, 2013		March 31, 2012		December 31, 2012
	(dollars in thousands)
Balance, beginning of period	$	67,187	$	61,234	$	61,234
Loans charged off:
Commercial, financial, agricultural and other	538		1,914		5,207
Real estate construction	84		190		3,601
Residential real estate	322		1,712		3,828
Commercial real estate	8,544		235		851
Loans to individuals	988		941		3,482
Total loans charged off	10,476		4,992		16,969
Recoveries of loans previously charged off:
Commercial, financial, agricultural and other	128		238		443
Real estate construction	12		56		582
Residential real estate	723		133		422
Commercial real estate	97		158		410
Loans to individuals	94		118		521
Total recoveries	1,054		703		2,378
Net credit losses	9,422		4,289		14,591
Provision charged to expense	4,497		3,787		20,544
Balance, end of period	$	62,262	$	60,732	$	67,187

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

Noninterest Income

The following table presents the components of noninterest income for the three-months ended March 31,:



	2013		2012		$ Change			% Change
	(dollars in thousands)
Noninterest Income:
Trust income	$	1,663	$	1,542	$	121		8	%
Service charges on deposit accounts	3,401		3,502		(101		)	(3	)
Insurance and retail brokerage commissions	1,417		1,424		(7		)	—
Income from bank owned life insurance	1,428		1,445		(17		)	(1	)
Card related interchange income	3,188		3,114		74			2
Other income	2,520		3,632		(1,112		)	(31	)
Subtotal	13,617		14,659		(1,042		)	(7	)
Net securities gains	4		—		4			N/A
Gain on sale of assets	275		2,115		(1,840		)	(87	)
Derivatives mark to market	989		606		383			63
Total noninterest income	$	14,885	$	17,380	$	(2,495	)	(14	)%

Noninterest income, excluding net securities gains, gain on sale of assets and the derivative mark to market adjustment decreased $1.0 million, or 7%, for the first three months of 2013 compared to 2012. The most notable change in this total is the $1.1 million decrease in the other income category, which is largely attributable to a $0.9 million decline in income from other real estate owned. The change in other real estate owned income is primarily the result of rental income received in 2012 from a western Pennsylvania office complex foreclosed on at the end of the first quarter of 2011 and sold in March 2012.

Total noninterest income decreased $2.5 million in comparison to the three-months ended March 31, 2012. The most significant changes in noninterest income, in addition to the aforementioned changes, were a $1.8 million decrease in gain on sale of assets. The higher level of gains in 2012 is primarily the result of a $1.7 million gain recognized on the sale of a loan in March 2012.

Noninterest Expense

The following table presents the components of noninterest expense for the three-months ended March 31,:



	2013		2012		$ Change			% Change
	(dollars in thousands)
Noninterest Expense:
Salaries and employee benefits	$	21,793	$	21,758	$	35		—	%
Net occupancy expense	3,635		3,404		231			7
Furniture and equipment expense	3,272		3,184		88			3
Data processing expense	1,516		1,563		(47		)	(3	)
Pennsylvania shares tax expense	1,190		1,183		7			1
Intangible amortization	358		371		(13		)	(4	)
Collection and repossession expense	1,151		2,699		(1,548		)	(57	)
Other professional fees and services	969		1,199		(230		)	(19	)
FDIC insurance	1,050		1,237		(187		)	(15	)
Other operating expenses	6,333		6,865		(532		)	(8	)
Subtotal	41,267		43,463		(2,196		)	(5	)
Loss on sale or write-down of assets	187		3,289		(3,102		)	(94	)
Total noninterest expense	$	41,454	$	46,752	$	(5,298	)	(11	)%

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

The 2013 decrease in noninterest expense is largely attributable to lower levels of expenses related to problem credits. Specifically, collection and repossession expense was $1.5 million, or 57%, lower as we resolved several large credits over the past twelve months. Additionally, the decline in loss on sale or write-down of assets is primarily attributable to the $2.8 million writedown on one OREO property recognized in the first quarter of 2012. There were no material OREO write-downs recognized in the first quarter of 2013.

Income Tax

The provision for income taxes decreased $0.2 million for the three-months ended March 31, 2013, compared to the corresponding period in 2012. The lower provision for income taxes was primarily the result of a $0.7 million decline in the level of net income before tax.

We applied the “annual effective tax rate approach” to determine the provision for income taxes, which applies an annual forecast of tax expense as a percentage of expected full year income for the three-months ended March 31, 2013 and 2012.

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 26.5% and 26.4% for the three-months ended March 31, 2013 and 2012, respectively.

As of March 31, 2013, our deferred tax assets totaled $62.2 million. Based on our evaluation as of March 31, 2013, 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.

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 three months of 2013, liquidity provided from the $153.7 million increase in deposits and proceeds of $14.1 million from the sale of loans provided funds to originate loans and purchase investment securities. We also have available unused wholesale sources of liquidity, including overnight federal funds and repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the Federal Reserve Bank (“FRB”) of Cleveland and access to certificates of deposit through brokers.

In order to increase and diversify our funding sources, we participate in the Certificate of Deposit Account Registry Services (“CDARS”) program as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources. As of March 31, 2013, our maximum borrowing capacity under this program was $908.4 million and as of that date there was $297.9 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 March 31, 2013, our outstanding certificates of deposits from this program have an average weighted rate of 0.26% and an average original term of 174 days.

An additional source of liquidity is the FRB Borrower-in-Custody of Collateral program which enables us to pledge certain loans, not being used as collateral at the FHLB, as collateral for borrowings at the FRB. At March 31, 2013, the borrowing capacity under this program totaled $811.4 million and there were no amounts outstanding.

As of March 31, 2013, our maximum borrowing capacity at the FHLB of Pittsburgh was $1.4 billion and as of that date amounts used against this capacity included $347.2 million in outstanding borrowings and $26.0 million in letter of credit commitments used for pledging public funds and other non-deposit purposes.

First Commonwealth Financial Corporation has an unsecured $15.0 million line of credit with another financial institution and as of March 31, 2013 there are no amounts outstanding on this line.

First Commonwealth’s long-term liquidity source is its core deposit base. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The level of deposits during any period is influenced

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

by factors outside of management’s control, such as the level of short-term and long-term market interest rates and yields offered on competing investments, such as money market mutual funds. The following table shows a breakdown of the components of First Commonwealth’s deposits:



	March 31, 2013		December 31, 2012
	(dollars in thousands)
Noninterest-bearing demand deposits	$	883,307	$	883,269
Interest-bearing demand deposits	90,276		97,963
Savings deposits	2,510,615		2,543,990
Time deposits	1,227,380		1,032,659
Total	$	4,711,578	$	4,557,881

During the first three months of 2013, total deposits increased $153.7 million due to a $194.7 million increase in time deposits, offset by a decrease of $41.1 million in interest-bearing and savings deposits. The increase in time deposits is due to growth in wholesale and retail certificates of deposits of $227.7 million. These deposits offer a more attractive source of funding as they generally have a lower cost of funds than traditional certificates of deposit.

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 0.76 at both March 31, 2013 and December 31, 2012. A ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve months. The level of First Commonwealth's ratio is largely driven by the modeling of interest-bearing non-maturity deposits, which are included in the analysis as repricing within one year.

Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors constant in all economic and interest rate scenarios. Rate sensitive assets to rate sensitive liabilities repricing in one year could indicate reduced net interest income in a rising interest rate scenario, and conversely, increased net interest income in a declining interest rate scenario. However, the gap analysis incorporates only the level of interest-earning assets and interest-bearing liabilities and not the sensitivity each has to changes in interest rates. The impact of the sensitivity to changes in interest rates is provided in the table below the gap analysis. Following is the gap analysis as of March 31, 2013 and December 31, 2012:



	March 31, 2013
	0-90 Days			91-180 Days			181-365 Days			Cumulative 0-365 Days			Over 1 Year Through 5 Years			Over 5 Years
	(dollars in thousands)
Loans	$	2,029,196		$	146,053		$	301,393		$	2,476,642		$	1,394,227		$	282,635
Investments	89,572			82,449			197,414			369,435			561,798			385,123
Other interest-earning assets	1,780			—			—			1,780			—			—
Total interest-sensitive assets (ISA)	2,120,548			228,502			498,807			2,847,857			1,956,025			667,758
Certificates of Deposit	479,785			92,380			157,544			729,709			488,610			9,061
Other deposits	2,600,891			—			—			2,600,891			—			—
Borrowings	409,970			114			232			410,316			138,639			39,213
Total interest-sensitive liabilitites (ISL)	3,490,646			92,494			157,776			3,740,916			627,249			48,274
Gap	$	(1,370,098	)	$	136,008		$	341,031		$	(893,059	)	$	1,328,776		$	619,484
ISA/ISL	0.61			2.47			3.16			0.76			3.12			13.83
Gap/Total assets	22.46		%	2.23		%	5.59		%	14.64		%	21.79		%	10.16		%

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)



	December 31, 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	$	1,950,002		$	222,705		$	297,530		$	2,470,237		$	1,436,472		$	203,477
Investments	61,914			78,904			142,411			283,229			579,320			328,546
Other interest-earning assets	4,258			—			—			4,258			—			—
Total interest-sensitive assets (ISA)	2,016,174			301,609			439,941			2,757,724			2,015,792			532,023
Certificates of Deposit	208,096			176,556			126,490			511,142			512,040			9,477
Other deposits	2,641,953			—			—			2,641,953			—			—
Borrowings	428,545			29,703			230			458,478			138,652			39,318
Total interest-sensitive liabilitites (ISL)	3,278,594			206,259			126,720			3,611,573			650,692			48,795
Gap	$	(1,262,420	)	$	95,350		$	313,221		$	(853,849	)	$	1,365,100		$	483,228
ISA/ISL	0.61			1.46			3.47			0.76			3.10			10.90
Gap/Total assets	21.06		%	1.59		%	5.23		%	14.24		%	22.77		%	8.06		%

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)
March 31, 2013	$	(7,428	)	$	(4,047	)	$	(341	)	$	138
December 31, 2012	(8,204		)	(4,767		)	459			2,153

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 three-months ended March 31, 2013 and 2012, the cost of our interest-bearing liabilities averaged 0.59% and 0.79%, respectively, and the yield on our average interest-earning assets, on a fully taxable equivalent basis, averaged 3.92% and 4.39%, 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 for losses inherent in the loan portfolio at the date of each statement of financial condition. Management reviews the adequacy of the allowance on a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable estimated losses.

First Commonwealth’s methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include an assessment of individual impaired loans with a balance greater than $0.1 million, loss experience trends, delinquency and other relevant factors. While allocations are made to specific loans and pools of loans, the total allowance is available for all loan losses.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

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 three months of 2013, sixteen loans totaling $1.4 million were identified as troubled debt restructuring. Please refer to Note 10, “Loans and Allowance for Credit Losses,” for additional information on troubled debt restructuring.

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. Generally, loans 90 days or more past due are placed on nonaccrual status, except for consumer loans which are placed in nonaccrual status at 150 days past due.

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 $62.3 million at March 31, 2013 or 1.48% of total loans outstanding compared to 1.60% reported at December 31, 2012 and 1.47% at March 31, 2012. The decline in the March 31, 2013 ratio when compared to December 31, 2012 can be attributed to a $5.1 million decline in specific reserves on nonperforming loans, primarily due to charge-offs taken during quarter. In addition, nonperforming balances decreased $29.3 million during the first quarter of 2013. Criticized loans totaled $254.9 million at March 31, 2013 and represented 6% of the loan portfolio. The level of criticized loans decreased as of March 31, 2013 when compared to December 31, 2012, by $33.6 million, or 12%. Delinquency on accruing loans for the same period increased $10.4 million, or 48%. The delinquency category of 30 - 59 days and over accounted for the majority of this change with an increase of $7.9 million, or 56% compared to December 31, 2012. This increase is related to a $7.7 million commercial real estate loan which had a balloon payment due in February 2013.

The allowance for credit losses as a percentage of nonperforming loans was 79.54% as of March 31, 2013 compared to 62.47% at December 31, 2012 and 74.45% at March 31, 2012. 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 $12.7 million related to nonperforming loans covering 16% 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 March 31, 2013.

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

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



	March 31,								December 31, 2012
	2013				2012				December 31, 2012
	(dollars in thousands)
Nonperforming Loans:
Loans on nonaccrual basis	$	31,576			$	36,405		(c)	$	43,539
Loans held for sale on a nonaccrual basis	—				8,076				—
Troubled debt restructured loans on nonaccrual basis	32,565				41,690				50,979
Troubled debt restructured loans on accrual basis	14,140				3,482				13,037
Total nonperforming loans	$	78,281			$	89,653			$	107,555
Loans past due in excess of 90 days and still accruing	$	3,927			$	8,126			$	2,447
Other real estate owned	$	10,933			$	21,335			$	11,262
Loans outstanding at end of period	$	4,218,810			$	4,128,588		(c)	$	4,204,704
Average loans outstanding	$	4,222,606		(a)	$	4,115,483		(a)	$	4,165,292		(b)
Nonperforming loans as a percentage of total loans	1.86		%		2.17		%		2.56		%
Provision for credit losses	$	4,497		(a)	$	3,787		(a)	$	20,544		(b)
Allowance for credit losses	$	62,262			$	60,732			$	67,187
Net charge-offs	$	9,422		(a)	$	4,289		(a)	$	14,591		(b)
Net charge-offs as a percentage of average loans outstanding (annualized)	0.90		%		0.42		%		0.35		%
Provision for credit losses as a percentage of net charge-offs	47.73		%	(a)	88.30		%	(a)	140.80		%	(b)
Allowance for credit losses as a percentage of end-of-period loans outstanding (c)	1.48		%		1.47		%		1.60		%
Allowance for credit losses as a percentage of nonperforming loans (c)	79.54		%		74.45		%		62.47		%


(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.

Nonperforming loans decreased $29.3 million to $78.3 million at March 31, 2013 compared to $107.6 million at December 31, 2012. Contributing to this decrease was the transfer and sale of $17.2 million of loans related to a real estate developer in eastern Pennsylvania as well as a $2.5 million commercial real estate loan in Nevada. At the time of transfer, $3.1 million in charge-offs were recognized on the $19.7 million in loans in order to reflect the loans at the lower of cost or fair market value. Also, a $3.8 million hotel resort syndication loan in the state of Washington was transferred to accrual status during the first quarter of 2013. This loan also received a $754 thousand partial paydown during the first quarter of 2013. In addition, $5.3 million in charge-offs were recognized on two commercial real estate loans during the quarter, including $2.8 million for a loan to a western Pennsylvania non-profit healthcare facility who recently filed for bankruptcy and $2.5 million for a western Pennsylvania student housing project for which the foreclosure process has begun.

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:

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)



	March 31, 2013				December 31, 2012
	Amount		%		Amount		%
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,057,663	25	%	$	1,019,822	24	%
Real estate construction	70,461		2		87,438		2
Residential real estate	1,255,515		30		1,241,565		30
Commercial real estate	1,243,676		29		1,273,661		30
Loans to individuals	591,495		14		582,218		14
Total loans and leases net of unearned income	$	4,218,810	100	%	$	4,204,704	100	%

During the three-months ended March 31, 2013, loans increased $14.1 million or 0.34% compared to balances outstanding at December 31, 2012. A majority of the loan growth was recognized in the commercial, financial, agricultural and other portfolio and can be attributed to growth in direct middle market lending, syndications in Pennsylvania and contiguous states as well as lending to local municipalities. Increases in the residential real estate portfolio are the result of continued success with our home equity installment product, while loans to individuals increased due to growth in indirect auto lending.

Net charge-offs for the three-months ended March 31, 2013 totaled $9.4 million compared to $4.3 million for the three-months ended March 31, 2012. As previously noted, the most significant charge-offs during the three-months ended March 31, 2013 were a $5.3 million charge-offs recognized on two commercial real estate loans and a $3.1 million charge-off recognized upon transfer of two loans to held for sale. During the three-months ended March 31, 2012, the most significant charge-off was a $1.2 million charge taken on a $2.0 million commercial loan.



	For the Three-Months Ended March 31, 2013							As of March 31, 2013
	Net Charge- offs			% of Total Net Charge-offs		Net Charge- offs as a % of Average Loans (annualized)		Nonperforming Loans		% of Total Nonperforming Loans		Nonperforming Loans as a % of Total Loans
	(dollars in thousands)
Commercial, financial, agricultural and other	$	410		4.35	%	0.04	%	$	34,351	43.88	%	0.81	%
Real estate construction	72			0.77		0.01		8,982		11.47		0.22
Residential real estate	(401		)	(4.26	)	(0.04	)	11,329		14.47		0.27
Commercial real estate	8,447			89.65		0.81		23,379		29.87		0.55
Loans to individuals	894			9.49		0.08		240		0.31		0.01
Total loans, net of unearned income	$	9,422		100.00	%	0.90	%	$	78,281	100.00	%	1.86	%

As the above table illustrates, commercial real estate loans represented a significant portion of the nonperforming loans as of March 31, 2013. See discussions related to the provision for credit losses and loans for more information.

Capital Resources

At March 31, 2013, shareholders’ equity was $747.7 million, an increase of $1.7 million from December 31, 2012. The increase was primarily the result of $10.6 million net income offset by $5.0 million of dividends paid to shareholders, decreases of $1.6 million due to changes in the fair value of available for sale investments, and $2.4 million of common stock repurchases. Cash dividends declared per common share were $0.05 and $0.03 for the three-months ended March 31, 2013 and 2012, 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

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Results of Operations (Continued)

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 March 31, 2013, First Commonwealth and its banking subsidiary met all capital adequacy requirements to which they are subject.

As of March 31, 2013, First Commonwealth was considered well-capitalized under the regulatory framework for prompt corrective action. To be considered well capitalized, the Company must maintain minimum Total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the table below:



	Actual				Regulatory Minumum				Well Capitalized Regulatory
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	(dollars in thousands)
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	711,651	14.52	%	$	392,155	8.00	%
First Commonwealth Bank	635,673		13.01		390,999		8.00		$	488,749	10.00	%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation	$	650,285	13.27	%	$	196,077	4.00	%
First Commonwealth Bank	574,536		11.76		195,499		4.00		$	293,249	6.00	%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation	$	650,285	11.15	%	$	233,220	4.00	%
First Commonwealth Bank	574,536		9.94		231,279		4.00		$	289,098	5.00	%

On June 19, 2012, the company announced a $50.0 million common stock repurchase program and on January 29, 2013, an additional share repurchase program was authorized for up to $25.0 million in shares of the Company’s common stock. As of March 31, 2013, 5,984,775 shares were repurchased under these programs at an average price of $6.65 per share.

On April 1, 2013, First Commonwealth Financial Corporation redeemed $32.5 million in outstanding 9.50% mandatorily redeemable capital securities issued by First Commonwealth Capital Trust I.

On April 23, 2013, First Commonwealth Financial Corporation declared a quarterly dividend of $0.06 per share payable on May 17, 2013 to shareholders of record as of May 3, 2013. This dividend represents a 20% increase over the previous quarterly dividend of $0.05 per share. The timing and amount of future dividends are at the discretion of First Commonwealth's Board of Directors based upon, among other factors, capital levels, asset quality, liquidity and current and projected earnings.

Table of Contents

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.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

McGrogan v. First Commonwealth Bank

For a description of McGrogan v. First Commonwealth Bank, refer to the "Legal proceedings" section in Part I, Item 1, Note 6, "Commitments and Contingent Liabilities," which is incorporated herein by reference to this item.

Other Legal Proceedings

First Commonwealth and certain of its subsidiaries have been named as defendants in various legal actions arising out of the normal course of business. In the opinion of management, the ultimate resolution of these lawsuits should not have a material adverse effect on First Commonwealth's business, consolidated financial position or results of operations. It is possible, however, that future developments could result in an unfavorable ultimate outcome for or resolution of any one or more of the lawsuits in which First Commonwealth or its subsidiaries are defendants, which may be material to First Commonwealth's results of operations for a particular quarterly reporting period. Litigation is inherently uncertain, and management cannot make assurances that First Commonwealth will prevail in any of these actions, nor can management reasonably estimate the amount of damages that First Commonwealth might incur.


ITEM 1A.	RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 19, 2012, the Company announced a share repurchase program through which the Board of Directors authorized management to repurchase up to $50.0 million of the Company’s common stock. On January 29, 2013, an additional share repurchase program was authorized for up to $25.0 million in shares of the Company’s common stock. The following table details the amount of shares repurchased under this program during the first quarter of 2013:



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*
January 31, 2013	106,574	$	7.01	97,892	5,212,517
February 28, 2013	208,200	7.27		208,200	4,860,813
March 31, 2013	16,600	7.24		16,600	4,720,891
Total	331,374	$	7.19	322,692

* Remaining number of shares approved under the Plan is estimated based on the market value of the Company's common stock of $7.07 at January 31, 2013, $7.27 at February 28, 2013 and $7.46 at March 31, 2013.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable


ITEM 5.	OTHER INFORMATION

None

Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS



Exhibit Number	Description	Incorporated by Reference to

10.1	2013 Annual Incentive Plan	Filed herewith

10.2	2013-2015 Long-Term Incentive Plan	Filed herewith

10.3	Change of Control Agreement dated March 1, 2013 between First Commonwealth Financial Corporation and Norman J. Montgomery	Filed herewith

10.4	Change of Control Agreement dated March 1, 2013 between First Commonwealth Financial Corporation and Carrie L. Riggle	Filed herewith

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

Table of Contents

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: May 8, 2013		/s/ T. Michael Price
		T. Michael Price President and Chief Executive Officer

DATED: May 8, 2013		/s/ Robert E. Rout
		Robert E. Rout Executive Vice President and Chief Financial Officer