FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Loan Fees Other Real Estate Owned Mortgage Servicing Rights Allowance for Credit Losses 19 The allowance for primary watch list classified loans  addresses those loans maintained on the Corporation’s  primary watch list that are assigned a rating of substandard,  doubtful or loss. Substandard loans are those with a  well-defined weakness or a weakness that jeopardizes  the repayment of the debt. A loan may be classified as  substandard as a result of impairment 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 Corporation may also be classified  as substandard. Doubtful loans have 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. Although the possibility  of loss is extremely high for doubtful loans, the classification  of loss is deferred until pending factors, which might improve  the loan, have been determined. Loans rated as doubtful in  whole or in part are placed in nonaccrual status. Loans which  are classified as loss are considered uncollectible and are  charged to the allowance for credit losses at the next meeting  When the Corporation purchases or originates mortgage  loans with a definitive plan to sell or securitize those loans  and retain the mortgage servicing rights, the Corporation  measures the mortgage servicing rights at cost by allocating  the cost of the mortgage loans between the mortgage  servicing rights and the mortgage loans (without the  mortgage servicing rights) based on their relative fair values  at the date of purchase or origination. When the Corporation  does not have a definitive plan at the purchase or origination  date and later sells or securitizes the mortgage loans and  retains the mortgage servicing rights, the Corporation  allocates the amortized cost of the mortgage loans between  the mortgage servicing rights and the mortgage loans  (without mortgage servicing rights) based on their relative  fair values at the date of sale. The amount capitalized as the  right to service mortgage loans is recognized as a separate  asset and amortized in proportion to, and over the period of,  estimated net servicing income (servicing revenue in excess  of servicing cost). Mortgage servicing rights are periodically  evaluated for impairment based on fair values. Loans deemed uncollectible are charged off through the  allowance for credit losses. Factors considered in assessing  ultimate collectibility include past due status, financial  condition of the borrower, collateral values and debt covenants  including secondary sources of repayment by guarantors.  Payments received on previously charged off loans are  recorded as recoveries in the allowance for credit losses. Payments received on impaired loans are applied against the  recorded investment in the loan. For loans other than those  that the Corporation expects repayment through liquidation  of the collateral, when the remaining recorded investment in  the impaired loan is less than or equal to the present value of  the expected cash flows, income is recorded on a cash basis. The Corporation considers a loan to be impaired when, based  on current information and events, it is probable that the  Corporation will be unable to collect principal or interest  due according to the contractual terms of the loan. Impaired  loans include nonaccrual loans and renegotiated loans.  Loan impairment is measured based on the present value of  expected cash flows discounted at the loan’s effective interest  rate or, as a practical expedient, at the loan’s observable  market price or the fair value of the collateral if the loan is  collateral dependent. The Corporation considers a loan to be renegotiated when  the loan terms have been renegotiated to a below market  condition to provide a reduction or deferral of principal or  interest as a result of the deteriorating financial position  of the borrower and the loan is in compliance with the  restructured terms. contractual principal and interest, or when the loan otherwise  becomes well secured and in the process of collection.  Loan origination and commitment fees, net of associated  direct costs, are deferred and the net amount is amortized  as an adjustment to the related loan yield on the interest  method, generally over the contractual life of the related  loans or commitments. Real estate, other than bank premises, is recorded at the  lower of cost or fair value less selling costs at the time of  acquisition. Expenses related to holding the property, net of  rental income, are generally charged against earnings in the  current period. The Corporation maintains an allowance for credit losses at  a level deemed sufficient to absorb losses that are inherent  in the loan and lease portfolios at each balance sheet date.  Management and the Corporation’s Board of Directors review  the adequacy of the allowance on a quarterly basis to ensure  that the provision for credit losses has been charged against  earnings in an amount necessary to maintain the allowance at  a level that is appropriate based on management’s assessment  of probable estimated losses. The Corporation’s methodology  for assessing the appropriateness of the allowance for credit  losses consists of several key elements. These elements  include a specific allowance for primary watch list classified  loans, a formula allowance based on historical trends, an  additional allowance for special circumstances and an  unallocated allowance. While allocations are made to specific  loans and pools of loans, the total allowance is available  for all loan losses. The Corporation consistently applies the  following comprehensive methodology and procedure at the  subsidiary bank level.