10-Q 1 d355062d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended June 30, 2012

Or

 

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

For the transition period from             to            

Commission File Number 001-11138

First Commonwealth Financial Corporation

(Exact name of registrant as specified in its charter)

 

Pennsylvania    25-1428528
(State or other jurisdiction of    (I.R.S. Employer
incorporation or organization)    Identification No.)
22 North Sixth Street, Indiana, PA    15701
(Address of principal executive offices)    (Zip Code)

724-349-7220

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

(Do not check if a smaller reporting company)

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

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


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      43   

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     66   

ITEM 4.

  

Controls and Procedures

     66   

PART II.

  

Other Information

  

ITEM 1.

  

Legal Proceedings

     67   

ITEM 1A.

  

Risk Factors

     67   

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     67   

ITEM 3.

  

Defaults Upon Senior Securities

     67   

ITEM 4.

  

Mine Safety Disclosures

     67   

ITEM 5.

  

Other Information

     67   

ITEM 6.

  

Exhibits

     68   
  

Signatures

     69   

 

2


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

 

     June 30,
2012
    December 31,
2011
 
    

(dollars in thousands,

except share data)

 

Assets

    

Cash and due from banks

   $ 82,659      $ 74,967   

Interest-bearing bank deposits

     3,839        3,511   

Securities available for sale, at fair value

     1,159,202        1,142,776   

Other investments

     35,916        39,796   

Loans held for sale

     0        13,412   

Loans:

    

Portfolio loans

     4,159,531        4,043,643   

Allowance for credit losses

     (61,676     (61,234
  

 

 

   

 

 

 

Net loans

     4,097,855        3,982,409   
  

 

 

   

 

 

 

Premises and equipment, net

     66,740        66,755   

Other real estate owned

     19,140        30,035   

Goodwill

     159,956        159,956   

Amortizing intangibles, net

     3,101        3,843   

Other assets

     318,408        323,662   
  

 

 

   

 

 

 

Total assets

   $ 5,946,816      $ 5,841,122   
  

 

 

   

 

 

 

Liabilities

    

Deposits (all domestic):

    

Noninterest-bearing

   $ 823,880      $ 780,377   

Interest-bearing

     3,638,082        3,724,307   
  

 

 

   

 

 

 

Total deposits

     4,461,962        4,504,684   

Short-term borrowings

     474,264        312,777   

Subordinated debentures

     105,750        105,750   

Other long-term debt

     75,370        101,664   
  

 

 

   

 

 

 

Total long-term debt

     181,120        207,414   

Other liabilities

     56,980        57,704   
  

 

 

   

 

 

 

Total liabilities

     5,174,326        5,082,579   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued

     0        0   

Common stock, $1 par value per share, 200,000,000 shares authorized; 105,563,455 shares issued at June 30, 2012 and December 31, 2011 and 104,728,846 and 104,916,994 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     105,563        105,563   

Additional paid-in capital

     365,541        365,868   

Retained earnings

     307,466        294,056   

Accumulated other comprehensive income, net

     2,834        2,001   

Treasury stock (834,609 and 646,461 shares at June 30, 2012 and December 31, 2011, respectively)

     (8,314     (7,345

Unearned ESOP shares

     (600     (1,600
  

 

 

   

 

 

 

Total shareholders’ equity

     772,490        758,543   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 5,946,816      $  5,841,122   
  

 

 

   

 

 

 

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

 

3


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

     For the Three-Months Ended
June 30,
    For the Six-Months Ended
June 30,
 
     2012     2011     2012     2011  
     (dollars in thousands, except share data)  

Interest Income

        

Interest and fees on loans

   $ 46,408      $ 49,379      $ 94,448      $ 100,262   

Interest and dividends on investments:

        

Taxable interest

     8,279        8,558        16,828        16,932   

Interest exempt from federal income taxes

     5        13        10        199   

Dividends

     19        12        40        29   

Interest on bank deposits

     1        27        2        36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     54,712        57,989        111,328        117,458   

Interest Expense

        

Interest on deposits

     5,643        9,093        11,890        18,629   

Interest on short-term borrowings

     279        178        506        363   

Interest on subordinated debentures

     1,422        1,386        2,855        2,769   

Interest on other long-term debt

     450        447        989        943   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest on long-term debt

     1,872        1,833        3,844        3,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     7,794        11,104        16,240        22,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     46,918        46,885        95,088        94,754   

Provision for credit losses

     4,297        9,112        8,084        22,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Credit Losses

     42,621        37,773        87,004        71,825   

Noninterest Income

        

Changes in fair value on impaired securities

     (1,323     448        175        2,317   

Non-credit related losses (gains) on securities not expected to be sold (recognized in other comprehensive income)

     1,323        (448     (175     (2,317
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses

     0        0        0        0   

Net securities gains

     0        1,608        0        2,185   

Trust income

     1,607        1,764        3,149        3,482   

Service charges on deposit accounts

     3,737        3,748        7,239        7,174   

Insurance and retail brokerage commissions

     1,670        1,616        3,094        3,178   

Income from bank owned life insurance

     1,459        1,390        2,904        2,747   

Gain on sale of assets

     1,444        1,251        3,559        1,482   

Card related interchange income

     3,285        3,042        6,399        5,842   

Other income

     2,894        2,645        7,132        5,302   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     16,096        17,064        33,476        31,392   

Noninterest Expense

        

Salaries and employee benefits

     22,363        21,546        44,121        42,674   

Net occupancy expense

     3,303        3,495        6,707        7,227   

Furniture and equipment expense

     3,024        3,135        6,208        6,315   

Data processing expense

     1,796        1,525        3,359        2,949   

Pennsylvania shares tax expense

     1,510        1,434        2,693        2,612   

Intangible amortization

     371        389        742        779   

Collection and repossession expense

     670        1,726        3,369        3,042   

Other professional fees and services

     940        1,099        2,139        2,224   

FDIC insurance

     1,262        1,248        2,499        3,083   

Loss on sale or write-down of assets

     500        4,214        3,789        4,515   

Other operating expenses

     6,109        5,889        12,974        11,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     41,848        45,700        88,600        87,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     16,869        9,137        31,880        16,088   

Income tax provision

     4,548        1,718        8,508        3,423   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

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

 

 

   

 

 

   

 

 

   

 

 

 

Average Shares Outstanding

     104,894,261        104,686,072        104,852,494        104,652,472   

Average Shares Outstanding Assuming Dilution

     104,901,239        104,686,072        104,855,543        104,653,604   

Per Share Data:

        

Basic Earnings per Share

   $ 0.12      $ 0.07      $ 0.22      $ 0.12   

Diluted Earnings per Share

   $ 0.12      $ 0.07      $ 0.22      $ 0.12   

Cash Dividends Declared per Common Share

   $ 0.05      $ 0.03      $ 0.08      $ 0.06   

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

 

4


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

     For the Three-Months
Ended June 30,
    For the Six-Months
Ended June 30,
 
     2012     2011     2012      2011  
     (dollars in thousands)  

Net Income

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

Other comprehensive (loss) income, before tax (benefit) expense:

         

Unrealized holding gains on securities arising during the period

     998        9,125        1,097         7,509   

Non-credit related (losses) gains on securities not expected to be sold

     (1,323     448        175         2,317   

Less: reclassification adjustment for (gains) losses on securities included in net income

     0        (1,608     0         (2,185
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive (loss) income, before tax (benefit) expense

     (325     7,965        1,272         7,641   

Income tax (benefit) expense related to items of other comprehensive (loss) income

     (119     2,787        439         2,674   
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive Income

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

 

 

   

 

 

   

 

 

    

 

 

 

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

 

5


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

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

 

    Shares
Outstanding
    Common
Stock
    Additional
Paid-in-

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
net
    Treasury
Stock
    Unearned
ESOP
Shares
    Total
Shareholders’
Equity
 
    (dollars in thousands, except share data)  

Balance at December 31, 2011

    104,916,994      $ 105,563      $ 365,868      $ 294,056      $ 2,001      $ (7,345   $ (1,600   $ 758,543   

Net income

          23,372              23,372   

Other comprehensive income

            833            833   

Cash dividends declared ($0.08 per share)

          (8,402           (8,402

Net decrease in unearned ESOP shares

                1,000        1,000   

ESOP market value adjustment ($477, net of $167 tax benefit)

        (310             (310

Discount on dividend reinvestment plan purchases

        (42             (42

Tax benefit of stock options exercised

        1                1   

Treasury stock acquired

    (469,700             (3,045       (3,045

Treasury stock reissued

    57,552          0        (296       650          354   

Restricted stock

    224,000          24        (1,264       1,426          186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    104,728,846      $ 105,563      $ 365,541      $ 307,466      $ 2,834      $ (8,314   $ (600   $ 772,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Shares
Outstanding
    Common
Stock
    Additional
Paid-in-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
net
    Treasury
Stock
    Unearned
ESOP
Shares
    Total
Shareholders’
Equity
 
    (dollars in thousands, except share data)  

Balance at December 31, 2010

    104,846,194      $ 105,515      $ 366,488      $ 291,492      $ (2,458   $ (7,660   $ (3,600   $ 749,777   

Net income

          12,665              12,665   

Other comprehensive income

            4,967            4,967   

Cash dividends declared ($0.06 per share)

          (6,278           (6,278

Net decrease in unearned ESOP shares

                1,000        1,000   

ESOP market value adjustment ($472, net of $165 tax benefit)

        (307             (307

Discount on dividend reinvestment plan purchases

        (32             (32

Tax benefit of stock options exercised

        6                6   

Treasury stock acquired

    (1,336             (9       (9

Treasury stock reissued

    13,760          0        (83       155          72   

Restricted stock

    25,000        25        (10     0          56          71   

Common stock issuance

    23,376        23        121            0          144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

    104,906,994      $ 105,563      $ 366,266      $ 297,796      $ 2,509      $ (7,458   $ (2,600   $ 762,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     For the Six-Months Ended
June 30,
 
     2012     2011  
     (dollars in thousands)  

Operating Activities

    

Net income

   $ 23,372      $ 12,665   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for credit losses

     8,084        22,929   

Deferred tax expense

     1,934        211   

Depreciation and amortization

     3,800        4,827   

Net (gains) losses on securities and other assets

     (522     1,384   

Net amortization of premiums and discounts on securities

     717        460   

Net accretion of premiums and discounts on long-term debt

     (56     (69

Income from increase in cash surrender value of bank owned life insurance

     (2,904     (2,747

Decrease in interest receivable

     1,031        1,085   

Decrease in interest payable

     (951     (558

Increase (decrease) in income taxes payable

     7,042        (894

Other-net

     (3,945     (122
  

 

 

   

 

 

 

Net cash provided by operating activities

     37,602        39,171   

Investing Activities

    

Transactions with securities available for sale:

    

Proceeds from sales

     0        69,926   

Proceeds from maturities and redemptions

     276,167        229,515   

Purchases

     (292,056     (331,702

Proceeds from the redemption of FHLB stock

     3,880        4,764   

Proceeds from bank owned life insurance

     1,408        88   

Proceeds from sale of loans

     15,981        4,402   

Proceeds from sales of other assets

     10,971        5,513   

Net (increase) decrease in loans

     (125,567     181,216   

Purchases of premises and equipment

     (4,022     (4,230
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (113,238     159,492   

Financing Activities

    

Net decrease in federal funds purchased

     (26,300     (12,800

Net increase (decrease) in other short-term borrowings

     187,787        (13,126

Net decrease in deposits

     (42,692     (81,657

Repayments of other long-term debt

     (25,238     (24,328

Proceeds from issuance of common stock

     0        144   

Discount on dividend reinvestment plan purchases

     (42     (32

Dividends paid

     (8,402     (6,278

Proceeds from reissuance of treasury stock

     354        72   

Purchase of treasury stock

     (1,812     (9

Stock option tax benefit

     1        0   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     83,656        (138,014
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,020        60,649   

Cash and cash equivalents at January 1

     78,478        69,858   
  

 

 

   

 

 

 

Cash and cash equivalents at June 30

   $ 86,498      $ 130,507   
  

 

 

   

 

 

 

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

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

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

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

Note 2 Supplemental Comprehensive Income Disclosures

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

 

    For the Six-Months Ended June 30,  
    2012     2011  
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
 
    (dollars in thousands)  

Unrealized gains (losses) on securities:

 

Unrealized holding gains (losses) arising during the period

  $ 1,097      $ (378   $ 719      $ 7,509      $ (2,628   $ 4,881   

Non-credit related gains on securities not expected to be sold

    175        (61     114        2,317        (811     1,506   

Reclassification adjustment for (gains) losses on securities included in net income

    0        0        0        (2,185     765        (1,420
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

  $ 1,272      $ (439   $ 833      $ 7,641      $ (2,674   $ 4,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three-Months Ended June 30,  
    2012     2011  
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
    Pretax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
 
    (dollars in thousands)  

Unrealized gains on securities:

           

Unrealized holding gains on securities arising during the period

  $ 998      $ (344   $ 654      $ 9,125      $ (3,193   $ 5,932   

Non-credit related (losses) gains on securities not expected to be sold

    (1,323     463        (860     448        (157     291   

Reclassification adjustment for (gains) losses on securities included in net income

    0        0        0        (1,608     563        (1,045
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

  $ (325   $ 119      $ (206   $ 7,965      $ (2,787   $ 5,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 3 Supplemental Cash Flow Disclosures

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

 

     2012      2011  
     (dollars in thousands)  

Cash paid during the period for:

     

Interest

   $ 17,278       $ 23,377   

Income taxes

     5,700         3,900   

Non-cash investing and financing activities:

     

ESOP loan reductions

   $ 1,000       $ 1,000   

Loans transferred to other real estate owned and repossessed assets

     3,227         20,640   

Other real estate owned sold and settled out of period

     80         0   

Loans transferred from held to maturity to available for sale

     0         823   

Gross increase in market value adjustment to securities available for sale

     1,254         7,631   

Unsettled treasury stock repurchases

     1,233         0   

Note 4 Earnings per Share

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

 

    For the Three-Months Ended
June 30,
    For the Six-Months Ended
June 30,
 
    2012     2011     2012     2011  

Weighted average common shares issued

    105,563,455        105,558,574        105,563,455        105,536,947   

Average treasury shares

    (410,247     (656,461     (476,286     (660,206

Averaged unearned ESOP shares

    (50,170     (181,835     (67,580     (198,285

Average unearned nonvested shares

    (208,777     (34,206     (167,095     (25,984
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

    104,894,261        104,686,072        104,852,494        104,652,472   

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

    6,978        0        3,049        0   

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

    0        0        0        1,132   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share

    104,901,239        104,686,072        104,855,543        104,653,604   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     2012      2011  
            Price Range             Price Range  
     Shares      From      To      Shares      From      To  

Stock Options

     329,866       $ 6.36       $ 14.55         546,270       $ 6.36       $ 14.55   

Restricted Stock

     96,113         5.96         6.82         20,725         5.70         6.82   

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 5 Variable Interest Entities

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

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

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

 

     June 30,      December 31,  
     2012      2011  
     (dollars in thousands)  

Low Income Housing Limited Partnership Investments

   $ 510       $ 667   

Note 6 Commitments and Contingent Liabilities

Commitments and letters of credit

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

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

 

     June 30,      December 31,  
     2012      2011  
     (dollars in thousands)  

Financial instruments whose contract amounts represent credit risk:

     

Commitments to extend credit

   $ 1,480,490       $ 1,495,009   

Financial standby letters of credit

     48,641         53,689   

Performance standby letters of credit

     66,197         76,371   

Commercial letters of credit

     1,048         1,297   

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 6 Commitments and Contingent Liabilities (Continued)

Commitments and letters of credit (Continued)

 

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

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

Legal proceedings

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

Other matters

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 7 Investment Securities

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

 

    June 30, 2012     December 31, 2011  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
 
                      (dollars in thousands)                    

Obligations of U.S. Government Agencies:

               

Mortgage-Backed Securities – Residential

  $ 30,541      $ 4,079      $ 0      $ 34,620      $ 32,139      $ 4,061      $ (6   $ 36,194   

Obligations of U.S. Government- Sponsored Enterprises:

               

Mortgage-Backed Securities – Residential

    815,982        29,853        (96     845,739        771,196        29,835        0        801,031   

Mortgage-Backed Securities – Commercial

    175        2        0        177        193        1        (1     193   

Other Government – Sponsored Enterprises

    241,697        870        (1     242,566        267,807        973        (132     268,648   

Obligations of States and Political Subdivisions

    443        6        0        449        444        15        0        459   

Corporate Securities

    11,796        274        (71     11,999        11,811        162        (562     11,411   

Pooled Trust Preferred Collateralized Debt Obligations

    52,889        153        (31,250     21,792        54,762        3        (31,785     22,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Securities

    1,153,523        35,237        (31,418     1,157,342        1,138,352        35,050        (32,486     1,140,916   

Equities

    1,860        0        0        1,860        1,860        0        0        1,860   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities Available for Sale

  $ 1,155,383      $ 35,237      $ (31,418   $ 1,159,202      $ 1,140,212      $ 35,050      $ (32,486   $ 1,142,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Amortized
Cost
     Estimated
Fair Value
 
     (dollars in thousands)  

Due within 1 year

   $ 7,363       $ 7,373   

Due after 1 but within 5 years

     234,776         235,641   

Due after 5 but within 10 years

     0         0   

Due after 10 years

     64,686         33,792   
  

 

 

    

 

 

 
     306,825         276,806   

Mortgage-Backed Securities (a)

     846,698         880,536   
  

 

 

    

 

 

 

Total Debt Securities

   $ 1,153,523       $ 1,157,342   
  

 

 

    

 

 

 

 

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 7 Investment Securities (Continued)

 

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

 

     2012      2011  
     (dollars in thousands)  

Proceeds from sale

   $ 0       $ 69,926   
  

 

 

    

 

 

 

Gross gains (losses) realized:

     

Sales Transactions:

     

Gross gains

   $ 0       $ 2,368   

Gross losses

     0         (258
  

 

 

    

 

 

 
     0         2,110   

Maturities and impairment

     

Gross gains

     0         75   

Gross losses

     0         0   

Other-than-temporary impairment

     0         0   
  

 

 

    

 

 

 
     0         75   
  

 

 

    

 

 

 

Net gains and impairment

   $ 0       $ 2,185   
  

 

 

    

 

 

 

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

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

Note 8 Other Investments

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 8 Other Investments (Continued)

 

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

 

 

its operating performance;

 

 

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

 

 

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

 

 

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

 

 

its liquidity and funding position.

After evaluating all of these considerations, First Commonwealth concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities for the six-months ended June 30, 2012. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 9 Impairment of Investment Securities

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

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

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

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

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

 

    Less Than 12 Months     12 Months or More     Total  
     Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
 
    (dollars in thousands)  

Obligations of U.S. Government Agencies:

           

Mortgage-Backed Securities – Residential

  $ 0      $ 0      $ 15      $ 0  (a)    $ 15      $ 0   

Obligations of U.S. Government – Sponsored Enterprises:

           

Mortgage-Backed Securities – Residential

    24,232        (96     0        0        24,232        (96

Other Government-Sponsored Enterprises

    2,999        (1     0        0        2,999        (1

Obligations of States and Political Subdivisions

    360        0  (a)      0        0        360        0   

Corporate Securities

    8,079        (71     0        0        8,079        (71

Pooled Trust Preferred Collateralized Debt Obligations

    0        0        21,437        (31,250     21,437        (31,250
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Securities

    35,670        (168     21,452        (31,250     57,122        (31,418

Equities

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities Available for Sale

  $ 35,670      $ (168   $ 21,452      $ (31,250   $ 57,122      $ (31,418
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

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

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

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

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

 

    Less Than 12 Months     12 Months or More     Total  
    Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Gross
Unrealized
Losses
 
    (dollars in thousands)  

Obligations of U.S. Government Agencies:

           

Mortgage-Backed Securities – Residential

  $ 1,086      $ (6   $ 16      $ (a)    $ 1,102      $ (6

Obligations of U.S. Government- Sponsored Enterprises:

           

Mortgage-Backed Securities – Residential

  $ 25      $ (a)      0      $ 0      $ 25      $ 0   

Mortgage-Backed Securities – Commercial

    151        (1     0        0        151        (1

Other Government-Sponsored Enterprises

    55,969        (132     0        0        55,969        (132

Corporate Securities

    4,536        (562     0        0        4,536        (562

Pooled Trust Preferred Collateralized Debt Obligations

    0        0        22,927        (31,785     22,927        (31,785
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Securities Available for Sale

  $ 61,767      $ (701   $ 22,943      $ (31,785   $ 84,710      $ (32,486
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

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

 

Deal

   Class    Book
Value
     Fair
Value
     Unrealized
Gain
(Loss)
    Moody’s/
Fitch
Ratings
   Number
of
Banks
     Deferrals
and
Defaults
as a % of
Current
Collateral
    Excess
Subordination
as a % of
Current
Performing
Collateral
 
(dollars in thousands)  

Pre TSL I

   Senior    $ 1,581       $ 1,545       $ (36   Aa3/BBB      20         39.50     217.29

Pre TSL IV

   Mezzanine      1,830         622         (1,208   Caa2/CCC      6         27.07        96.48   

Pre TSL V

   Mezzanine      51         54         3      C/D      3         100.00        0.00   

Pre TSL VI

   Mezzanine      152         302         150      Ca/D      5         12.27        205.63   

Pre TSL VII

   Mezzanine      4,062         2,939         (1,123   Ca/C      17         52.13        0.00   

Pre TSL VIII

   Mezzanine      1,735         981         (754   C/C      35         45.91        0.00   

Pre TSL IX

   Mezzanine      2,250         766         (1,484   Ca/C      47         25.88        8.19   

Pre TSL X

   Mezzanine      1,399         1,026         (373   C/C      51         38.24        0.00   

Pre TSL XII

   Mezzanine      5,486         2,698         (2,788   Ca/C      74         33.05        0.00   

Pre TSL XIII

   Mezzanine      12,258         3,820         (8,438   Ca/C      63         39.60        0.00   

Pre TSL XIV

   Mezzanine      12,942         4,158         (8,784   Ca/C      63         38.42        31.74   

MMCap I

   Senior      1,898         1,807         (91   A3/BBB      20         38.89        282.43   

MMCap I

   Mezzanine      844         448         (396   Ca/C      20         38.89        11.77   

MM Comm IX

   Mezzanine      6,401         626         (5,775   Ca/D      31         38.14        0.00   
     

 

 

    

 

 

    

 

 

           

Total

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

 

 

    

 

 

    

 

 

           

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

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

Additional information related to the discounted cash flow analysis follows:

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

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

 

 

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

 

 

Credit Analysis – A quarterly credit evaluation is performed for each of the 348 banks comprising the collateral across the various pooled trust preferred securities. Our credit evaluation considers all evidence available to us and includes the nature of the issuer’s business, its years of operating history, corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic footprint and local economic environment. Our analysis focuses on profitability, return on assets, shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy and liquidity.

 

 

Probability of Default – A probability of default is determined for each bank and is used to calculate the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the collateral pool is assigned a probability of default for each year until maturity. Currently, any bank that is in default is assigned a 100% probability of default and a 0% projected recovery rate. All other banks in the pool are assigned a probability of default based on their unique credit characteristics and market indicators with a 10% projected recovery rate. For the majority of banks currently in deferral we assume the bank continues to defer and will eventually default and, therefore, a 100% probability of default is assigned. However, for some deferring collateral there is the possibility that they become current on interest or principal payments at some point in the future and in those cases a probability that the deferral will ultimately cure is assigned. The probability of default is updated quarterly. As of June 30, 2012, default probabilities for performing collateral ranged from 0.33% to 75%.

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

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 9 Impairment of Investment Securities (Continued)

 

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

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

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

 

     For the Three-Months
Ended June 30,
     For the Six-Months
Ended June 30,
 
     2012     2011      2012     2011  
     (dollars in thousands)  

Balance, beginning (a)

   $ 44,501      $ 44,850       $ 44,736      $ 44,850   

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

     0        0         0        0   

Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized

     0        0         0        0   

Increases in cash flows expected to be collected, recognized over the remaining life of the security (b)

     (271     0         (506     0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, ending

   $ 44,230      $ 44,850       $ 44,230      $ 44,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) The beginning balance represents credit related losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.
(b) Represents the increase in cash flows recognized in interest income during the period.

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses

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

 

     June 30,
2012
     December 31,
2011
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 1,059,675       $ 996,739   

Real estate construction

     77,442         76,564   

Residential real estate

     1,213,610         1,137,059   

Commercial real estate

     1,232,270         1,267,432   

Loans to individuals

     576,534         565,849   
  

 

 

    

 

 

 

Total loans and leases net of unearned income

   $ 4,159,531       $ 4,043,643   
  

 

 

    

 

 

 

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

Credit Quality Information

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

 

Pass    Acceptable levels of risk exist in the relationship. Includes all loans not adversely classified as OAEM, substandard or doubtful.
Other Assets Especially Mentioned (OAEM)
   Potential weaknesses that deserve management’s close attention. The potential weaknesses may result in deterioration of the repayment prospects or weaken the Bank’s credit position at some future date. The credit risk may be relatively minor, yet constitute an undesirable risk in light of the circumstances surrounding the specific credit. No loss of principal or interest is expected.
Substandard    Well-defined weakness or a weakness that jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Company may also be classified as substandard.
Doubtful    Loans with the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable.

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Credit Quality Information (Continued)

 

The following tables represent our credit risk profile by creditworthiness:

 

     June 30, 2012  
     Commercial,
financial,
agricultural
and other
     Real estate
construction
     Residential
real estate
     Commercial
real estate
     Loans to
individuals
     Total  
     (dollars in thousands)  

Pass

   $ 955,231       $ 50,028       $ 1,202,163       $ 1,103,062       $ 576,530       $ 3,887,014   

Non-Pass

                 

OAEM

     27,384         699         5,668         68,925         4         102,680   

Substandard

     77,060         21,004         5,779         60,283         0         164,126   

Doubtful

     0         5,711         0         0         0         5,711   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Pass

     104,444         27,414         11,447         129,208         4         272,517   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Commercial,
financial,
agricultural
and other
     Real estate
construction
     Residential
real estate
     Commercial
real estate
     Loans to
individuals
     Total  
     (dollars in thousands)  

Pass

   $ 904,057       $ 44,914       $ 1,126,143       $ 1,110,664       $ 565,842       $ 3,751,620   

Non-Pass

                 

OAEM

     27,627         4,238         5,484         61,855         7         99,211   

Substandard

     60,114         21,701         5,432         94,913         0         182,160   

Doubtful

     4,941         5,711         0         0         0         10,652   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Pass

     92,682         31,650         10,916         156,768         7         292,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Portfolio Risks

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

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Portfolio Risks (Continued)

 

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

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

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

Age Analysis of Past Due Loans by Segment

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

 

    June 30, 2012  
    30 - 59
days
past due
    60 - 89
days
past
due
    90 days
and
greater
and still
accruing
    Nonaccrual     Total past
due and
nonaccrual
    Current     Total  
    (dollars in thousands)  

Commercial, financial, agricultural and other

  $ 9,148      $ 4,101      $ 3,604      $ 27,758      $ 44,611      $ 1,015,064      $ 1,059,675   

Real estate construction

    16        0        469        15,060        15,545        61,897        77,442   

Residential real estate

    6,555        1,852        4,961        3,923        17,291        1,196,319        1,213,610   

Commercial real estate

    1,497        431        305        31,951        34,184        1,198,086        1,232,270   

Loans to individuals

    2,384        875        1,248        0        4,507        572,027        576,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2011  
    30 - 59
days
past due
    60 - 89
days
past
due
    90 days
and
greater
and still
accruing
    Nonaccrual     Total past
due and
nonaccrual
    Current     Total  
    (dollars in thousands)  

Commercial, financial, agricultural and other

  $ 5,433      $ 824      $ 287      $ 33,459      $ 40,003      $ 956,736      $ 996,739   

Real estate construction

    0        180        0        14,911        15,091        61,473        76,564   

Residential real estate

    7,144        2,100        8,767        3,153        21,164        1,115,895        1,137,059   

Commercial real estate

    3,671        1,241        157        26,953        32,022        1,235,410        1,267,432   

Loans to individuals

    2,952        962        1,804        0        5,718        560,131        565,849   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Age Analysis of Past Due Loans by Segment (Continued)

 

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

Nonaccrual Loans

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

Impaired Loans

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

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

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

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

 

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

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

Impaired Loans (Continued)

 

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

 

    June 30, 2012     December 31, 2011  
    Recorded
investment
    Unpaid
principal
balance
    Related
allowance
    Recorded
investment
    Unpaid
principal
balance
    Related
allowance
 
    (dollars in thousands)  

With no related allowance recorded:

           

Commercial, financial, agricultural and other

  $ 6,003      $ 7,034      $ 0      $ 2,010      $ 3,418      $ 0   

Real estate construction

    4,132        10,281        0        10,814        20,161        0   

Residential real estate

    3,050        3,498        0        3,125        3,513        0   

Commercial real estate

    30,303        31,888        0        36,777        41,974        0   

Loans to individuals

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    43,488        52,701        0        52,726        69,066        0   

With an allowance recorded:

           

Commercial, financial, agricultural and other

    25,972        26,685        8,046        34,056        34,341        9,069   

Real estate construction

    10,928        31,827        2,747        6,298        21,402        2,960   

Residential real estate

    1,820        1,820        431        955        955        93   

Commercial real estate

    2,735        2,939        510        4,717        4,863        1,114   

Loans to individuals

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the Six-Months Ended June 30,  
     2012      2011  
     Average
recorded
investment
     Interest
Income
Recognized
     Average
recorded
investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

           

Commercial, financial, agricultural and other

   $ 10,291       $ 21       $ 3,167       $ 5   

Real estate construction

     7,268         0         12,727         2   

Residential real estate

     9,219         11         2,005         2   

Commercial real estate

     26,529         53         29,407         18   

Loans to individuals

     0         0         16         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     53,307         85         47,322         27   

With an allowance recorded:

           

Commercial, financial, agricultural and other

     19,101         6         27,026         76   

Real estate construction

     6,865         0         31,124         2   

Residential real estate

     797         14         506         0   

Commercial real estate

     2,028         0         29,292         177   

Loans to individuals

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     28,791         20         87,948         255   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

     For the Three-Months Ended June 30,  
     2012      2011  
     Average
recorded
investment
     Interest
Income
Recognized
     Average
recorded
investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

           

Commercial, financial, agricultural and other

   $ 7,735       $ 3       $ 2,297       $ 2   

Real estate construction

     10,118         0         10,204         2   

Residential real estate

     15,082         6         1,987         1   

Commercial real estate

     25,696         19         26,255         7   

Loans to individuals

     0         0         7         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     58,631         28         40,750         12   

With an allowance recorded:

           

Commercial, financial, agricultural and other

     17,441         3         30,770         74   

Real estate construction

     4,068         0         31,701         1   

Residential real estate

     644         7         722         0   

Commercial real estate

     1,253         0         39,912         164   

Loans to individuals

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     23,406         10         103,105         239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.

 

The following table provides detail as to the total troubled debt restructured loans and total commitments outstanding on troubled debt restructured loans:

 

     June 30,
2012
     December 31,
2011
 
     (dollars in thousands)  

Troubled debt restructured loans

     

Accrual status

   $ 6,251       $ 20,276   

Nonaccrual status

     45,235         44,841   
  

 

 

    

 

 

 

Total

   $ 51,486       $ 65,117   
  

 

 

    

 

 

 

Commitments

     

Letters of credit

   $ 0       $ 12,580   

Unused lines of credit

     55         42   
  

 

 

    

 

 

 

Total

   $ 55       $ 12,622   
  

 

 

    

 

 

 

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

 

26


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

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

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

 

     For the Six-Months Ended June 30, 2012  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     4       $ 447       $ 18       $ 6,029       $ 6,494       $ 6,494       $ 2,760   

Real estate construction

     1         823         0         0         823         815         0   

Residential real estate

     3         0         97         83         180         133         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six-Months Ended June 30, 2011  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     9       $ 100       $ 105       $ 2,168       $ 2,373       $ 2,370       $ 720   

Real estate construction

     4         354         0         0         354         371         15   

Residential real estate

     3         0         27         75         102         101         0   

Commercial real estate

     15         17,163         199         1,497         18,859         18,758         1,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

27


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

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

 

     For the Three-Months Ended June 30, 2012  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     4       $ 447       $ 18       $ 6,029       $ 6,494       $ 6,494       $ 2,760   

Real estate construction

     1         823         0         0         823         815         0   

Residential real estate

     1         0         0         83         83         82         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Three-Months Ended June 30, 2011  
            Type of Modification                       
     Number
of
Contracts
     Extend
Maturity
     Modify
Rate
     Modify
Payments
     Total
Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Specific
Reserve
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Real estate construction

     1         0         0         0         0         0         0   

Residential real estate

     2         0         15         75         90         90         0   

Commercial real estate

     4         10,033         0         849         10,882         10,839         250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

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

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

 

     2012      2011  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

     0       $ 0         1       $ 150   

Real estate construction

     0         0         1         88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 0         2       $ 238   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

    For the Six-Months Ended June 30, 2012  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 18,200      $ 6,756      $ 8,237      $ 18,961      $ 4,244      $ 4,836      $ 61,234   

Charge-offs

    (3,668     (340     (2,454     (541     (1,738     0        (8,741

Recoveries

    275        92        282        186        264        0        1,099   

Provision

    4,495        1,493        554        (968     1,439        1,071        8,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impaired

  $ 8,046      $ 2,747      $ 431      $ 510      $ 0      $ 0      $ 11,734   

Ending balance: collectively evaluated for impaired

    11,256        5,254        6,188        17,128        4,209        5,907        49,942   

Loans:

             

Ending balance

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

Ending balance: individually evaluated for impaired

    31,271        14,915        2,911        31,493        0          80,590   

Ending balance: collectively evaluated for impaired

    1,028,404        62,527        1,210,699        1,200,777        576,534          4,078,941   

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 10 Loans and Allowance for Credit Losses (Continued)

 

Impaired Loans (Continued)

 

    For the Six-Months Ended June 30, 2011  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 21,700      $ 18,002      $ 5,454      $ 16,913      $ 4,215      $ 4,945      $ 71,229   

Charge-offs

    (2,957     (8,048     (1,700     (5,575     (1,522     0        (19,802

Recoveries

    261        0        96        164        289        0        810   

Provision

    4,171        7,747        3,020        7,278        888        (175     22,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impaired

  $ 12,717      $ 14,222      $ 216      $ 7,711      $ 0      $ 0      $ 34,866   

Ending balance: collectively evaluated for impaired

    10,458        3,479        6,654        11,069        3,870        4,770        40,300   

Loans:

             

Ending balance

    943,186        146,113        1,101,859        1,270,797        530,103          3,992,058   

Ending balance: individually evaluated for impaired

    40,447        37,087        2,174        63,743        0          143,451   

Ending balance: collectively evaluated for impaired

    902,739        109,026        1,099,685        1,207,054        530,103          3,848,607   

 

    For the Three-Months Ended June 30, 2012  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 18,143      $  6,427      $  6,702      $  19,371      $  4,252      $  5,837      $ 60,732   

Charge-offs

    (1,754     (150     (742     (306     (797     0        (3,749

Recoveries

    37        36        149        28        146        0        396   

Provision

    2,876        1,688        510        (1,455     608        70        4,297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Three-Months Ended June 30, 2011  
    Commercial,
financial,
agricultural
and other
    Real estate
construction
    Residential
real estate
    Commercial
real estate
    Loans to
individuals
    Unallocated     Total  
    (dollars in thousands)  

Allowance for credit losses:

             

Beginning Balance

  $ 22,436      $ 18,779      $ 6,682      $ 20,174      $ 3,861      $ 4,860      $ 76,792   

Charge-offs

    (1,997     (3,049     (596     (4,809     (743     0        (11,194

Recoveries

    157        0        77        88        134        0        456   

Provision

    2,579        1,971        707        3,327        618        (90     9,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 11 Income Taxes

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

Note 12 Fair Values of Assets and Liabilities

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

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

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

 

 

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

 

 

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

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

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

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

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

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

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

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

 

 

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

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

 

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Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Financial Statements and Supplementary Data (Continued)

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Note 12 Fair Values of Assets and Liabilities (Continued)

 

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

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

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

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

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

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

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

 

    Fair Value (dollars
in thousands)
  Valuation
Technique
   Unobservable Inputs <