FIRST COMMONWEALTH FINANCIAL CORP /PA/ - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 2015



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

For the transition period from to

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)



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

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

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

(Do not check if a smaller reporting company)

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

The number of shares outstanding of issuer’s common stock, $1.00 par value, as of August 7, 2015, was 88,961,268.

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 the Unaudited Condensed Consolidated Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	60

ITEM 4.	Controls and Procedures	60

PART II.	Other Information

ITEM 1.	Legal Proceedings	61

ITEM 1A.	Risk Factors	61

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

ITEM 3.	Defaults Upon Senior Securities	62

ITEM 4.	Mine Safety Disclosures	62

ITEM 5.	Other Information	62

ITEM 6.	Exhibits	63

	Signatures	64

Table of Contents

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)



	June 30, 2015			December 31, 2014
	(dollars in thousands, except share data)
Assets
Cash and due from banks	$	64,321		$	72,276
Interest-bearing bank deposits	3,120			2,262
Securities available for sale, at fair value	1,089,725			1,309,819
Securities held to maturity, at amortized cost (Fair value of $130,454 at June 30, 2015)	131,780			—
Other investments	53,347			44,545
Loans held for sale	9,817			2,502
Loans:
Portfolio loans	4,490,854			4,457,308
Allowance for credit losses	(45,344		)	(52,051		)
Net loans	4,445,510			4,405,257
Premises and equipment, net	63,404			64,989
Other real estate owned	6,539			7,197
Goodwill	161,429			161,429
Amortizing intangibles, net	1,352			1,665
Bank owned life insurance	180,005			177,567
Other assets	106,379			110,777
Total assets	$	6,316,728		$	6,360,285
Liabilities
Deposits (all domestic):
Noninterest-bearing	$	1,068,230		$	989,027
Interest-bearing	3,141,877			3,326,484
Total deposits	4,210,107			4,315,511
Short-term borrowings	1,231,917			1,105,876
Subordinated debentures	72,167			72,167
Other long-term debt	39,189			89,459
Total long-term debt	111,356			161,626
Other liabilities	52,142			61,127
Total liabilities	5,605,522			5,644,140
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued	—			—
Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at June 30, 2015 and December 31, 2014, and 88,960,268 and 91,723,028 shares outstanding at June 30, 2015 and December 31, 2014, respectively	105,563			105,563
Additional paid-in capital	365,933			365,615
Retained earnings	368,060			353,027
Accumulated other comprehensive loss, net	(140		)	(4,499		)
Treasury stock (16,603,187 and 13,840,427 shares at June 30, 2015 and December 31, 2014, respectively)	(128,210		)	(103,561		)
Total shareholders’ equity	711,206			716,145
Total liabilities and shareholders’ equity	$	6,316,728		$	6,360,285

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
	(dollars in thousands, except share data)
Interest Income
Interest and fees on loans	$	42,650	$	42,192	$	85,251	$	85,290
Interest and dividends on investments:
Taxable interest	6,735		7,334		13,552		14,514
Interest exempt from federal income taxes	210		64		385		68
Dividends	553		574		2,042		796
Interest on bank deposits	2		2		5		4
Total interest income	50,150		50,166		101,235		100,672
Interest Expense
Interest on deposits	1,880		3,416		4,030		6,923
Interest on short-term borrowings	1,116		477		2,074		946
Interest on subordinated debentures	579		571		1,148		1,137
Interest on other long-term debt	205		319		441		692
Total interest expense	3,780		4,783		7,693		9,698
Net Interest Income	46,370		45,383		93,542		90,974
Provision for credit losses	3,038		3,317		4,197		6,548
Net Interest Income after Provision for Credit Losses	43,332		42,066		89,345		84,426
Noninterest Income
Net securities gains	20		2		125		2
Trust income	1,476		1,474		2,897		2,909
Service charges on deposit accounts	3,872		4,141		7,190		7,933
Insurance and retail brokerage commissions	2,178		1,600		4,373		2,995
Income from bank owned life insurance	1,378		1,432		2,732		2,801
Gain on sale of loans	627		76		1,066		76
Gain on sale of other assets	354		2,089		578		3,670
Card related interchange income	3,729		3,655		7,147		7,021
Other income	2,713		2,533		4,430		4,515
Total noninterest income	16,347		17,002		30,538		31,922
Noninterest Expense
Salaries and employee benefits	22,001		21,897		43,893		42,941
Net occupancy expense	3,316		3,283		7,227		6,789
Furniture and equipment expense	2,630		5,249		5,310		10,579
Data processing expense	1,509		1,542		2,947		3,010
Pennsylvania shares tax expense	1,110		1,038		1,904		1,749
Intangible amortization	156		178		312		356
Collection and repossession expense	917		449		1,428		1,158
Other professional fees and services	945		691		1,875		1,715
FDIC insurance	1,025		1,051		2,084		2,100
Loss on sale or write-down of assets	1,635		745		1,897		1,180
Operational losses (recoveries)	323		229		1,323		(460		)
Conversion related expenses	—		539		—		893
Other operating expenses	5,067		5,505		10,288		10,273
Total noninterest expense	40,634		42,396		80,488		82,283
Income Before Income Taxes	19,045		16,672		39,395		34,065
Income tax provision	5,598		4,744		11,727		9,837
Net Income	$	13,447	$	11,928	$	27,668	$	24,228
Average Shares Outstanding	88,922,392		93,794,589		89,893,662		94,166,936
Average Shares Outstanding Assuming Dilution	88,939,003		93,811,543		89,903,550		94,177,831
Per Share Data:
Basic Earnings per Share	$	0.15	$	0.13	$	0.31	$	0.26
Diluted Earnings per Share	$	0.15	$	0.13	$	0.31	$	0.26
Cash Dividends Declared per Common Share	$	0.07	$	0.07	$	0.14	$	0.14

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
	(dollars in thousands)
Net Income	$	13,447		$	11,928		$	27,668		$	24,228
Other comprehensive (loss) income, before tax benefit (expense):
Unrealized holding (losses) gains on securities arising during the period	(3,814		)	9,950			6,166			22,407
Less: reclassification adjustment for gains on securities included in net income	(20		)	(2		)	(125		)	(2		)
Unrealized holding (losses) gains on derivatives arising during the period	(527		)	—			668			—
Less: reclassification adjustment for gains on derivatives included in net income	(11		)	—			(6		)	—
Total other comprehensive (loss) income, before tax benefit (expense)	(4,372		)	9,948			6,703			22,405
Income tax benefit (expense) related to items of other comprehensive (loss) income	1,530			(3,478		)	(2,344		)	(7,839		)
Total other comprehensive (loss) income	(2,842		)	6,470			4,359			14,566
Comprehensive Income	$	10,605		$	18,398		$	32,027		$	38,794

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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



	Shares Outstanding		Common Stock		Additional Paid-in- Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2014	91,723,028		$	105,563	$	365,615	$	353,027		$	(4,499	)	$	(103,561	)	$	716,145
Net income							27,668									27,668
Other comprehensive income										4,359						4,359
Cash dividends declared ($0.14 per share)							(12,635		)							(12,635		)
Treasury stock acquired	(2,918,066	)											(25,383		)	(25,383		)
Treasury stock reissued	20,936				32		—						160			192
Restricted stock	134,370		—		286		—						574			860
Balance at June 30, 2015	88,960,268		$	105,563	$	365,933	$	368,060		$	(140	)	$	(128,210	)	$	711,206



	Shares Outstanding		Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Treasury Stock			Total Shareholders’ Equity
	(dollars in thousands, except share and per share data)
Balance at December 31, 2013	95,245,215		$	105,563	$	365,333		$	334,748		$	(20,588	)	$	(73,359	)	$	711,697
Net income								24,228									24,228
Other comprehensive income											14,566						14,566
Cash dividends declared ($0.14 per share)								(13,205		)							(13,205		)
Discount on dividend reinvestment plan purchases					(65		)										(65		)
Treasury stock acquired	(1,603,350	)												(13,407		)	(13,407		)
Treasury stock reissued	21,960				35			—						157			192
Restricted stock	88,987		—		247			—						251			498
Balance at June 30, 2014	93,752,812		$	105,563	$	365,550		$	345,771		$	(6,022	)	$	(86,358	)	$	724,504

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

Table of Contents

ITEM 1. Financial Statements and Supplementary Data (Continued)

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	For the Six Months Ended
	June 30,
	2015			2014
Operating Activities	(dollars in thousands)
Net income	$	27,668		$	24,228
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses	4,197			6,548
Deferred tax expense	7,102			4,918
Depreciation and amortization	3,802			8,436
Net gains on securities and other assets	(235		)	(2,843		)
Net amortization of premiums and discounts on securities	1,151			1,000
Net accretion of premiums and discounts on long term debt	—			(37		)
Income from increase in cash surrender value of bank owned life insurance	(2,732		)	(2,576		)
Decrease in interest receivable	74			668
Mortgage loans originated for sale	(39,941		)	—
Proceeds from sale of mortgage loans	36,079			—
Decrease in interest payable	(200		)	(288		)
Increase in income taxes payable	503			998
Other-net	(14,817		)	5,685
Net cash provided by operating activities	22,651			46,737
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions	1,115			—
Purchases	(131,145		)	—
Transactions with securities available for sale:
Proceeds from maturities and redemptions	235,971			152,846
Purchases	(10,800		)	(153,310		)
Purchases of FHLB stock	(29,251		)	(18,659		)
Proceeds from the redemption of FHLB stock	20,449			10,025
Proceeds from bank owned life insurance	294			939
Proceeds from sale of loans	102			3,112
Proceeds from sale of other assets	2,282			9,500
Net increase in loans	(48,785		)	(66,085		)
Purchases of premises and equipment	(2,521		)	(6,229		)
Net cash provided by (used in) investing activities	37,711			(67,861		)
Financing Activities
Net increase in federal funds purchased	15,000			13,000
Net increase in other short-term borrowings	111,041			206,259
Net decrease in deposits	(105,404		)	(143,441		)
Repayments of other long-term debt	(50,270		)	(7,675		)
Discount on dividend reinvestment plan purchases	—			(65		)
Dividends paid	(12,635		)	(13,205		)
Proceeds from reissuance of treasury stock	192			192
Purchase of treasury stock	(25,383		)	(13,369		)
Net cash (used in) provided by financing activities	(67,459		)	41,696
Net (decrease) increase in cash and cash equivalents	(7,097		)	20,572
Cash and cash equivalents at January 1	74,538			77,439
Cash and cash equivalents at June 30	$	67,441		$	98,011

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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 the “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, comprehensive income, cash flows and changes in shareholders’ equity as of and for the periods presented.

The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year of 2015. These interim financial statements should be read in conjunction with First Commonwealth’s 2014 Annual Report on Form 10-K.

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

Note 2 Supplemental Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income (“OCI”) in the Condensed Consolidated Statements of Comprehensive Income. Reclassification adjustments related to securities available for sale are included in the "Net securities gains" line and reclassification adjustments related to losses on derivatives are included in the "Other operating expenses" line in the Condensed Consolidated Statements of Income.



	For the Six Months Ended June 30,
	2015									2014
	Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount			Pretax Amount			Tax (Expense) Benefit			Net of Tax Amount
	(dollars in thousands)
Unrealized gains on securities:
Unrealized holding gains on securities arising during the period	$	6,166		$	(2,156	)	$	4,010		$	22,407		$	(7,840	)	$	14,567
Reclassification adjustment for gains on securities included in net income	(125		)	44			(81		)	(2		)	1			(1		)
Total unrealized gains on securities	6,041			(2,112		)	3,929			22,405			(7,839		)	14,566
Unrealized gains on derivatives:
Unrealized holding gains on derivatives arising during the period	668			(234		)	434			—			—			—
Reclassification adjustment for gains on derivatives included in net income	(6		)	2			(4		)	—			—			—
Total unrealized losses on derivatives	662			(232		)	430			—			—			—
Total other comprehensive income	$	6,703		$	(2,344	)	$	4,359		$	22,405		$	(7,839	)	$	14,566

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	For the Three Months Ended June 30,
	2015								2014
	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	$	(3,814	)	$	1,335	$	(2,479	)	$	9,950		$	(3,479	)	$	6,471
Reclassification adjustment for gains on securities included in net income	(20		)	7		(13		)	(2		)	1			(1		)
Total unrealized (losses) gains on securities	(3,834		)	1,342		(2,492		)	9,948			(3,478		)	6,470
Unrealized losses on derivatives:
Unrealized holding losses on derivatives arising during the period	(527		)	184		(343		)	—			—			—
Reclassification adjustment for gains on derivatives included in net income	(11		)	4		(7		)	—			—			—
Total unrealized losses on derivatives	(538		)	188		(350		)	—			—			—
Total other comprehensive (loss) income	$	(4,372	)	$	1,530	$	(2,842	)	$	9,948		$	(3,478	)	$	6,470

The following table details the change in components of OCI for the six months ended June 30:



	2015											2014
	Securities Available for Sale			Post-Retirement Obligation		Derivatives			Accumulated Other Comprehensive Income			Securities Available for Sale			Post-Retirement Obligation		Derivatives		Accumulated Other Comprehensive Income
	(dollars in thousands)
Balance at December 31	$	(4,875	)	$	76	$	300		$	(4,499	)	$	(20,868	)	$	280	$	—	$	(20,588	)
Other comprehensive income before reclassification adjustment	4,010			—		434			4,444			14,567			—		—		14,567
Amounts reclassified from accumulated other comprehensive (loss) income	(81		)	—		(4		)	(85		)	(1		)	—		—		(1		)
Net other comprehensive income during the period	3,929			—		430			4,359			14,566			—		—		14,566
Balance at June 30	$	(946	)	$	76	$	730		$	(140	)	$	(6,302	)	$	280	$	—	$	(6,022	)

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 Supplemental Cash Flow Disclosures

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



	2015		2014
	(dollars in thousands)
Cash paid during the period for:
Interest	$	7,893	$	10,024
Income taxes	4,000		3,700
Non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed assets	2,315		2,726
Loans transferred from held to maturity to held for sale	3,071		3,035
Gross increase in market value adjustment to securities available for sale	6,036		22,397
Gross increase in market value adjustment to derivatives	662		—
Investments committed to purchase, not settled	1,817		2,732
Unsettled treasury stock repurchases	—		38
Proceeds from death benefit on bank-owned life insurance not received	—		1,062

Note 4 Earnings per Share

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



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
Weighted average common shares issued	105,563,455		105,563,455		105,563,455		105,563,455
Average treasury stock shares	(16,445,760	)	(11,584,636	)	(15,480,232	)	(11,232,622	)
Average unearned nonvested shares	(195,303	)	(184,230	)	(189,561	)	(163,897	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share	88,922,392		93,794,589		89,893,662		94,166,936
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share	16,611		16,954		9,888		10,895
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	88,939,003		93,811,543		89,903,550		94,177,831

The following table shows the number of shares and the price per share related to common stock equivalents that were not included in the computation of diluted earnings per share for the six months ended June 30 because to do so would have been antidilutive.



	2015					2014
		Price Range					Price Range
	Shares	From		To		Shares	From		To
Stock Options	—	$	—	$	—	15,000	$	14.55	$	14.55
Restricted Stock	146,933	5.26		9.26		93,268	5.96		9.18

Note 5 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.

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



	June 30, 2015		December 31, 2014
	(dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,610,767	$	1,635,948
Financial standby letters of credit	26,287		36,075
Performance standby letters of credit	25,878		25,915
Commercial letters of credit	2,146		2,611

The notional amounts outstanding as of June 30, 2015 include amounts issued in 2015 of $7.8 million in financial standby letters of credit and $1.8 million in performance standby letters of credit. There have been no commercial letters of credit issued during 2015. A liability of $0.2 million has been recorded as of June 30, 2015 and December 31, 2014, which represents the estimated fair value of letters of credit issued. The fair value of letters of credit is estimated based on the unrecognized portion of fees received at the time the commitment was issued.

Unused commitments and letters of credit provide exposure to future credit loss in the event of nonperformance by the borrower or guaranteed parties. Management’s evaluation of the credit risk related to these commitments resulted in the recording of a liability of $3.8 million as of June 30, 2015 and $3.1 million as of December 31, 2014. This liability is reflected in "Other liabilities" in the Condensed Consolidated Statements of Financial Condition. 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

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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 Investment Securities

Securities Available for Sale

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



	June 30, 2015									December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	21,846	$	2,516	$	(24	)	$	24,338	$	23,344	$	2,595	$	(3	)	$	25,936
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	860,816		10,799		(8,715		)	862,900		947,635		13,076		(9,830		)	950,881
Mortgage-Backed Securities – Commercial	58		1		—			59		72		2		—			74
Other Government-Sponsored Enterprises	135,852		5		(228		)	135,629		269,181		4		(1,308		)	267,877
Obligations of States and Political Subdivisions	27,062		176		(173		)	27,065		27,058		362		(43		)	27,377
Corporate Securities	1,892		401		—			2,293		6,682		573		—			7,255
Pooled Trust Preferred Collateralized Debt Obligations	41,745		1,055		(7,279		)	35,521		41,926		309		(13,236		)	28,999
Total Debt Securities	1,089,271		14,953		(16,419		)	1,087,805		1,315,898		16,921		(24,420		)	1,308,399
Equities	1,920		—		—			1,920		1,420		—		—			1,420
Total Securities Available for Sale	$	1,091,191	$	14,953	$	(16,419	)	$	1,089,725	$	1,317,318	$	16,921	$	(24,420	)	$	1,309,819

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

Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties. Other fixed income securities within the portfolio also contain prepayment risk.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities available for sale at June 30, 2015, by contractual maturity, are shown below.



	Amortized Cost		Estimated Fair Value
	(dollars in thousands)
Due within 1 year	$	3,000	$	2,999
Due after 1 but within 5 years	132,852		132,629
Due after 5 but within 10 years	25,655		25,676
Due after 10 years	45,044		39,204
	206,551		200,508
Mortgage-Backed Securities (a)	882,720		887,297
Total Debt Securities	$	1,089,271	$	1,087,805


(a)	Mortgage Backed Securities include an amortized cost of $21.8 million and a fair value of $24.3 million for Obligations of U.S. Government agencies issued by Ginnie Mae and an amortized cost of $860.9 million and a fair value of $863.0 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

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



	2015		2014
	(dollars in thousands)
Proceeds from sales	$	—	$	—
Gross gains (losses) realized:
Sales Transactions:
Gross gains	$	105	$	—
Gross losses	—		—
	105		—
Maturities and impairment
Gross gains	20		2
Gross losses	—		—
Other-than-temporary impairment	—		—
	20		2
Net gains and impairment	$	125	$	2

Securities available for sale with an estimated fair value of $530.5 million and $563.2 million were pledged as of June 30, 2015 and December 31, 2014, respectively, to secure public deposits and for other purposes required or permitted by law.

Securities Held to Maturity

Below is an analysis of the amortized cost and fair values of debt securities held to maturity at June 30, 2015. There were no held to maturity securities at December 31, 2014.



	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(dollars in thousands)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	$	118,762	$	—	$	(1,117	)	$	117,645
Obligations of States and Political Subdivisions	13,018		5		(214		)	12,809
Total Securities Held to Maturity	$	131,780	$	5	$	(1,331	)	$	130,454

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amortized cost and estimated fair value of debt securities held to maturity at June 30, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers 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	$	—	$	—
Due after 1 but within 5 years	—		—
Due after 5 but within 10 years	8,061		7,964
Due after 10 years	4,957		4,845
	13,018		12,809
Mortgage-Backed Securities (a)	118,762		117,645
Total Debt Securities	$	131,780	$	130,454


(a)	Mortgage Backed Securities include an amortized cost of $118.8 million and a fair value of $117.6 million for Obligations of U.S. Government-sponsored enterprises issued by Fannie Mae and Freddie Mac.

Securities held to maturity with an amortized cost of $11.2 million were pledged as of June 30, 2015 to secure public deposits and for other purposes required or permitted by law.

Note 7 Impairment of Investment Securities

Securities Available for Sale and Held to Maturity

As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit related other-than-temporary impairment on debt securities is recognized in earnings, while non-credit related other-than-temporary impairment on debt securities not expected to be sold is recognized in OCI. During the six months ended June 30, 2015 and 2014, no other-than-temporary impairment charges were recognized.

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

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and whether we are more likely than not to sell the security. We evaluate whether we are more likely than not to sell debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy, tax position and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, weakness in the U.S. economy, changes in real estate values and additional interest deferrals in our pooled trust preferred collateralized debt obligations. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these estimated cash flows indicate that it is probable that an adverse change in cash flows has occurred, then other-than-temporary impairment would be 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 10, “Fair Values of Assets and Liabilities,” for additional information.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the gross unrealized losses and estimated fair values at June 30, 2015 for both available for sale and held to maturity securities by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	2,243	$	(24	)	$	—	$	—		$	2,243	$	(24	)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	225,033		(2,057		)	287,128		(7,775		)	512,161		(9,832		)
Other Government-Sponsored Enterprises	6,793		(7		)	119,429		(221		)	126,222		(228		)
Obligations of States and Political Subdivisions	21,116		(387		)	—		—			21,116		(387		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			29,859		(7,279		)	29,859		(7,279		)
Total Securities	$	255,185	$	(2,475	)	$	436,416	$	(15,275	)	$	691,601	$	(17,750	)

At June 30, 2015, fixed income securities issued by U.S. Government-sponsored enterprises comprised 57% of total unrealized losses due to changes in market interest rates. Pooled trust preferred collateralized debt obligations accounted for 41% of the unrealized losses primarily due to the illiquid market for this investment type. Obligations of U.S. Government agencies and obligations of state and political subdivisions account for the remaining 2% of total unrealized losses as a result of changes in market interest rates. At June 30, 2015, there are 70 debt securities in an unrealized loss position.

The following table presents the gross unrealized losses and estimated fair values at December 31, 2014 by investment category and time frame for which securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or More					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(dollars in thousands)
Obligations of U.S. Government Agencies:
Mortgage-Backed Securities – Residential	$	2,318	$	(3	)	$	—	$	—		$	2,318	$	(3	)
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage-Backed Securities – Residential	111,646		(419		)	368,706		(9,411		)	480,352		(9,830		)
Other Government-Sponsored Enterprises	112,473		(229		)	130,401		(1,079		)	242,874		(1,308		)
Obligation of States and Political Subdivisions	3,146		(43		)	—		—			3,146		(43		)
Pooled Trust Preferred Collateralized Debt Obligations	—		—			24,356		(13,236		)	24,356		(13,236		)
Total Securities	$	229,583	$	(694	)	$	523,463	$	(23,726	)	$	753,046	$	(24,420	)

As of June 30, 2015, our corporate securities had an amortized cost and an estimated fair value of $1.9 million and $2.3 million, respectively. As of December 31, 2014, our corporate securities had an amortized cost and estimated fair value of $6.7 million and $7.3 million, respectively. Corporate securities are comprised of single issue trust preferred securities issued primarily by large regional banks. There were no corporate securities in an unrealized loss position as of June 30, 2015 and December 31, 2014. When unrealized losses exist on these investments, management reviews each of the issuer’s asset quality, earnings trends and capital position, to determine whether issues in an unrealized loss position were other-than-temporarily impaired. All interest payments on the corporate securities are being made as contractually required.

As of June 30, 2015, the book value of our pooled trust preferred collateralized debt obligations totaled $41.7 million with an estimated fair value of $35.5 million, which includes securities comprised of 275 banks and other financial institutions. All of our pooled securities are mezzanine tranches, three of which now have no senior class remaining in the issue. The credit rating on all of our issues are below investment grade. At the time of initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount of the respective securities and no more than 5% of any pooled security

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

consisted of a security issued by any one institution. As of June 30, 2015, after taking into account management’s best estimates of future interest deferrals and defaults, four 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 84% of the current performing collateral.

The following table provides information related to our pooled trust preferred collateralized debt obligations as of June 30, 2015:



Deal	Class	Book Value		Estimated Fair Value		Unrealized Gain (Loss)			Moody’s/ Fitch Ratings	Number of Banks	Deferrals and Defaults as a % of Current Collateral		Excess Subordination as a % of Current Performing Collateral
(dollars in thousands)
Pre TSL IV	Mezzanine	$	1,830	$	1,331	$	(499	)	B1/BB	6	18.05	%	57.14	%
Pre TSL VII	Mezzanine	2,847		3,478		631			Ca/-	14	49.68		—
Pre TSL VIII	Mezzanine	1,982		1,791		(191		)	C/C	29	58.01		—
Pre TSL IX	Mezzanine	2,358		1,906		(452		)	B1/C	38	28.14		10.73
Pre TSL X	Mezzanine	1,553		1,889		336			Caa1/C	43	31.60		—
Pre TSL XII	Mezzanine	5,599		4,502		(1,097		)	B3/C	66	23.76		—
Pre TSL XIII	Mezzanine	12,585		10,638		(1,947		)	B3/C	56	25.64		37.87
Pre TSL XIV	Mezzanine	12,784		9,691		(3,093		)	Caa1/CC	56	23.17		47.33
MMCap I	Mezzanine	207		295		88			Ca/C	8	58.11		84.18
Total		$	41,745	$	35,521	$	(6,224	)

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

All of the Company's pooled trust preferred securities are included in the non-exclusive list issued by the regulatory agencies and therefore are not considered covered funds under the Volcker Rule.

On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. During the six months ended June 30, 2015 and 2014, there were no credit related other-than-temporary impairment charges recognized on our pooled trust preferred collateralized debt obligations. When evaluating these investments, we determine a credit-related portion and a non-credit related portion of other-than-temporary impairment. The credit related portion is recognized in earnings and represents the difference between book value and the present value of future cash flows. The non-credit related portion is recognized in OCI and represents the difference between the fair value of the security and the amount of credit-related impairment. A discounted cash flow analysis provides the best estimate of credit-related other-than-temporary impairment for these securities.

Additional information related to the discounted cash flow analysis follows:

Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows from the cash flows previously projected involves comparing the present value of remaining cash flows previously projected against the present value of the cash flows estimated at June 30, 2015. 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

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

•

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of June 30, 2015, 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 that results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security. The results of the stress test allow management to identify those pools that are at a greater risk for a future break in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit quality.

Our cash flow analysis as of June 30, 2015, indicates that no credit-related other-than-temporary impairment has occurred on our pooled trust preferred securities during the six months ended June 30, 2015. Based upon the analysis performed by management, it is probable that four of our pooled trust preferred securities will experience principal and interest shortfalls and therefore appropriate other-than-temporary charges were recorded in prior periods. These securities are identified in the table on page 16 with 0% “Excess Subordination as a Percentage of Current Performing Collateral.” For the remaining securities listed in that table, our analysis as of June 30, 2015 indicates it is probable that we will collect all contractual principal and interest payments. For four of those securities, PreTSL IX, PreTSL XIII, PreTSL XIV and MMCap I, other-than-temporary impairment charges were recorded in prior periods; however, due to improvement in the expected cash flows of these securities, it is now probable that all contractual payments will be received.

During 2008, 2009 and 2010, other-than-temporary impairment charges were recognized on all of our pooled trust preferred securities, except for PreTSL IV. Our cash flow analysis as of June 30, 2015, for all of these impaired securities indicates that it is now probable we will collect principal and interest in excess of what was estimated at the time other-than-temporary impairment charges were recorded. This change can be attributed to improvement in the underlying collateral for these securities and has resulted in the present value of estimated future principal and interest payments exceeding the securities' current book value. The excess for each bond of the present value of future cash flows over our current book value ranges from 21% to 141% and will be recognized as an adjustment to yield over the remaining life of these securities. The excess subordination recognized as an adjustment to yield is reflected in the following table as increases in cash flows expected to be collected.

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(dollars in thousands)
Balance, beginning (a)	$	25,707		$	27,254		$	26,246		$	27,543
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)	(341		)	(412		)	(662		)	(701		)
Reduction for debt securities called during the period	—			—			(218		)	—
Balance, ending	$	25,366		$	26,842		$	25,366		$	26,842


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


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

In the first six months of 2015 and 2014, no other-than-temporary impairment charges were recorded on equity securities. On a quarterly basis, management evaluates equity securities for other-than-temporary impairment by reviewing the severity and duration of decline in estimated fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate changes and other relevant information. As of June 30, 2015 and 2014, there were no equity securities in an unrealized loss position.

Other Investments

As a member of the Federal Home Loan Bank ("FHLB"), First Commonwealth is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The level of stock required to be held is dependent on the amount of First Commonwealth's mortgage-related assets and outstanding borrowings with the FHLB. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of June 30, 2015 and December 31, 2014, our FHLB stock totaled $53.3 million and $44.5 million, respectively, and is included in “Other investments” on the Condensed Consolidated Statements of Financial Condition.

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 and has concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities during the six months ended June 30, 2015.

Note 8 Loans and Allowance for Credit Losses

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



	June 30, 2015		December 31, 2014
	(dollars in thousands)
Commercial, financial, agricultural and other	$	1,098,019	$	1,052,109
Real estate construction	125,010		120,785
Residential real estate	1,204,499		1,226,344
Commercial real estate	1,416,841		1,405,256
Loans to individuals	646,485		652,814
Total loans and leases net of unearned income	$	4,490,854	$	4,457,308

ITEM 1. Financial Statements and Supplementary Data

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Credit Quality Information

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



Pass		Acceptable levels of risk exist in the relationship. Includes all loans not 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 Company’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.



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



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

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

The following tables represent our credit risk profile by creditworthiness:



	June 30, 2015
	Commercial, financial, agricultural and other		Real estate construction		Residential real estate		Commercial real estate		Loans to individuals		Total
	(dollars in thousands)
Pass	$	1,034,313	$	124,518	$	1,192,296	$	1,372,966	$	646,255	$	4,370,348
Non-Pass
OAEM	7,902		458		2,228		29,994		—		40,582
Substandard	55,804		34		9,975		13,881		230		79,924
Doubtful	—		—		—

FIRST COMMONWEALTH FINANCIAL CORP /PA/ - FORM 10-Q - August 7, 2015

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