Building the foundation
upon which successful
communities grow
2004 Annual Report
Table of Contents
Message to Shareholders ...........................................................2
Building Successful Communities ...............................................4
Affiliate Presidents .....................................................................10
Board of Directors ...................................................................... 11
Corporate Information/Market Area ...........................................12
Management’s Report on Internal Control
Over Financial Reporting ...........................................................13
Reports of Ernst & Young, LLP, Independent
Registered Public Accounting Firm ...........................................14
Report on Effectiveness of Internal
Control over Financial Reporting ...........................................14
Report on Consolidated Financial Statements .....................15
Consolidated Financial Statements ...........................................16
Notes to Consolidated Financial Statements ............................20
Quarterly Summary of Financial Data .......................................44
Selected Financial Data .............................................................45
Management’s Discussion and Analysis of
Financial Condition and Results of Operations .........................46
Common Stock Information .......................................................63
Shareholder Information ............................................................64
Golden Tower Awards and
Spirit of Community Awards ................................ inside back cover
A Message to Shareholders
T he year of 2004 was another year of progress for First
Commonwealth highlighted by growth of over $1 billion in assets
and substantial expansion of our community office network. This
growth has been balanced with a continued emphasis on improving our
corporate governance and risk management processes.
First Commonwealth Financial Corporation reported net income of $16.6
million for the fourth quarter of 2004 that translates into $0.24 basic and
diluted earnings per share for the quarter. This is compared to net income of
$12.7 million and basic and diluted earnings per share of $0.21 for the fourth
First Commonwealth enters 2005 with confidence in our strategic plan to
grow and improve the corporation. The continued support and confidence of
the First Commonwealth shareholders is greatly appreciated.
quarter of 2003. Fourth quarter 2004 earnings per share reflect an increase
of 14.29% over the same quarter of 2003. Return on equity was 12.31%
and return on assets was 1.06% for the fourth quarter of 2004 compared to
12.07% and 1.03% respectively for the related 2003 period.
Net income for the year ended December 31, 2004, was $38.7 million or
$0.59 basic and $0.58 diluted earnings per share compared to $53.3 million
net income and $0.90 basic and diluted earnings per share for the year ended
December 31, 2003. Return on equity was 7.82% and return on assets was
0.66% for the full year of 2004 compared to 12.95% and 1.12% respectively
for the year 2003.
The full year 2004 results included a previously disclosed charge of $29.5
million ($19.2 million after tax) representing a penalty for the prepayment of
$440 million of Federal Home Loan Bank (FHLB) long-term borrowings.
The refinancing expanded the maturity distribution of the company’s FHLB
advances in order to minimize the impact of maturities on any one year. This
action also improved net interest margin through lower interest cost on the
FHLB advances. The prepayment penalty, on an after-tax basis, reduced the
company’s earnings per share for year 2004 by $0.29. Results for the year 2003
included a $3.0 million (pre-tax) gain on the sale of two branches. The gain on
an after-tax basis added $2.0 million or $0.03 per share to the 2003 results.
2
First Commonwealth
strength
“First Commonwealth literally catapulted me to the next level by
allowing me to bid on larger contracts with confi dence. They
gave me the ability to grow my business.”
—Michael Dahma, President, MDA
Irwin, Pennsylvania
4
First Commonwealth
Successful communities—large and small—all have one thing in
common. They are built on a solid foundation. A strong economy.
A network of well-run civic and service organizations. Good
schools. People who care about each other. Successful communities allow
businesses to profit and grow. They employ people. They encourage
ideas and innovation. What provides the solid foundation for communities
that prosper? It is the people who invest in their success. And that’s what
First Commonwealth does every day.
In 2004, First Commonwealth was named the #1 Small Business
Administration lender in Western Pennsylvania. The bank is also
#1 in the state and #6 in the country in SBA CommunityExpress loans.
When September 11, 2001 hit,
businesses like Michael Dahma
Associates (MDA) took a hit
too. MDA, based in Irwin,
Pennsylvania, is a promotional
products distributor—everything
from coffee cups to gold
watches—for virtually any sized
organization. But promotional
products suddenly became low
priorities for businesses, and
Michael Dahma, MDA’s founder,
was receiving few orders.
What Michael needed was cash
flow to get him through until new
contracts came along. And that’s
what First Commonwealth vice
president for the Southwest Region
Alex Lima helped provide. A Small
Business Administration loan and
a subsequent line of credit kept
MDA on its feet and allowed it to
fulfill the biggest contract in its
history: 32,000 beach towels for the
Pittsburgh Pirates. “I can’t thank
First Commonwealth enough for
what they have helped our company
accomplish,” Michael said.
2004 Annual Report
5
community
“I had a dream and a shell of a restaurant that had a good reputation.
First Commonwealth became my guardian angel and allowed me to
renovate and reopen by St. Patrick’s Day!”
—Ann Bock, Owner, Coyne’s Pub
Indiana, Pennsylvania
6
First Commonwealth
P eople don’t necessarily think of banks as being at the core of
community success, but First Commonwealth thinks about it
all the time. First Commonwealth is behind the scenes when an
entrepreneur has a great idea for a new business but needs the capital to
get started. First Commonwealth is there to find creative ways to keep
a struggling business operating. First Commonwealth is committed to
offering strategies to help existing or well-established businesses grow.
A longstanding community establishment would have been sorely missed
had it closed its doors forever. Instead, First Commonwealth found a
creative financial solution for its owner, allowing her to fulfill her dream.
A staple in the Indiana community
for over 30 years, Coyne’s Pub was a
small Irish restaurant with a faithful
clientele and a reputation for good
food and good company. When the
Coynes decided it was time to close,
however, their daughter, Ann “wasn’t
ready for it to be over.” Coyne’s Pub
had not been remodeled since the
1970s; Ann was determined to bring
it up to par and use local materials
and contractors to do it. With the
help of First Commonwealth vice
president and market manager Bill
Staffen, and a creative commercial
loan, Ann found a way to give
Indiana its restaurant back.
Since Coyne’s Pub reopened on
St. Patrick’s Day 2004, its business
has increased both in numbers of
customers and employees.
2004 Annual Report
7
innovation
“First Commonwealth presented the best collection of options for
us and used creative fi nancing to help us establish our business.
We had hands-on guidance throughout the entire process.”
—Jay Marshall, Co-Founder, Treelady Enterprises, LLC
Turtle Creek, Pennsylvania
8
First Commonwealth
F irst Commonwealth is also there when individuals and families
need mortgages, home equity loans, insurance, and financial advice.
First Commonwealth’s first priority has always been to serve
and strengthen the communities in which it has a presence. Through its
employees and its products, as well as its philosophy, First Commonwealth
builds relationships with people all over Pennsylvania, with the intent of
providing the impetus, the capital, and the service to promote success.
First Commonwealth is building the foundation upon which successful
communities grow.
First Commonwealth believes that new businesses are essential to
strengthening communities. Its officers listen to people with good ideas and
sound business plans, enabling them to start, and sustain, new companies.
Garrett Haines and Jay Marshall
were two friends who decided to
abandon their conventional careers
and pursue what they really loved
in life. Out of their passion for
music, sound, and technology,
Treelady Enterprises was born.
Treelady Enterprises is a three-
pronged company that includes a
recording studio for remastery work,
recording, and audio forensics;
a technical design division that
develops interactive media; and a
music academy that will provide
instrumental and vocal music lessons
for members of the community.
With a business plan in place,
Garrett and Jay needed to move their
ideas—and equipment—out of the
basement and into better spaces.
With help from First Commonwealth
vice president and market manager
David McNichol, Treelady Enterprises
received a loan from which they
could draw to renovate a building,
purchase more equipment, and
expand the business.
2004 Annual Report
9
First Commonwealth Affiliate Presidents
Front row (L to R): William A. Mrozowski, Richard R. Applegate, Sue A. McMurdy
Back row (L to R): Anthony S. Hewitt, Gerard M. Thomchick, Johnston A. Glass
Richard R. Applegate
President & Chief Executive Officer
First Commonwealth
Financial Advisors
1001 Village Run Road
Wexford, PA 15090
(724) 933-4515
Johnston A. Glass
President & Chief Executive Officer
First Commonwealth Bank
Central Offices
Philadelphia and Sixth Streets
Indiana, PA 15701
(724) 349-3400
10
First Commonwealth
Anthony S. Hewitt
President & Chief Executive Officer
First Commonwealth Insurance Agency
First Commonwealth Place
654 Philadelphia Street
Indiana, PA 15701
(724) 349-6056
Sue A. McMurdy
President & Chief Executive Officer
First Commonwealth
Systems Corporation
22 North Sixth Street
Indiana, PA 15701
(724) 349-4310
William A. Mrozowski
President & Chief Executive Officer
First Commonwealth Trust Company
614 Philadelphia Street
Indiana, PA 15701
(724) 465-3282
Gerard M. Thomchick
President & Chief Executive Officer
First Commonwealth Professional
Resources Inc.
22 North Sixth Street
Indiana, PA 15701
(724) 349-7220
President
Commonwealth Trust Credit Life
Insurance Company
2700 North Third Street, Suite 3050
Phoenix, AZ 85004
Chairman & President
FraMal Holdings Corporation
1105 North Market Street
Wilmington, DE 19899
Board of Directors
Front row (L to R): Johnston A. Glass, Laurie Stern Singer, James W. Newill
Middle row (L to R): Joseph E. O’Dell, Alan R. Fairman, David S. Dahlmann, E. James Trimarchi
Back row (L to R): Robert J. Ventura, Edward T. Côté, Ray T. Charley, David R. Tomb Jr., Esq.
Dale P. Latimer and John A. Robertshaw Jr. were unavailable for the photo.
Ray T. Charley
Greensburg
Chief Executive Officer,
Thomi Company
Edward T. Côté
Ligonier
Associate, Wakefield Associates, L.P.
David S. Dahlmann
Greensburg
Adjunct Professor, Saint Vincent College
Alan R. Fairman
Dubois
Partner, Fairman Drilling Company
Johnston A. Glass
Indiana
Vice Chairman, First Commonwealth
Financial Corporation, and President
and Chief Executive Officer,
First Commonwealth Bank
Dale P. Latimer
New Alexandria
Chairman of the Board and
Chief Executive Officer,
R & L Development Company
James W. Newill
Highland Beach, FL
Certified Public Accountant, Former
President, J.W. Newill Company
Joseph E. O’Dell
Indiana
President and Chief Executive Officer,
First Commonwealth
Financial Corporation
John A. Robertshaw Jr.
Greensburg
President, Robertshaw
Management, LTD
Laurie Stern Singer
Allison Park
President, Allegheny Valley
Development Corporation
David R. Tomb Jr., Esq.
Indiana
Attorney at Law
E. James Trimarchi
Indiana
Chairman of the Board,
First Commonwealth
Financial Corporation
Robert J. Ventura
Pittsburgh
Principal, Ventura Group, LLC
2004 Annual Report
11
Corporate Executive Offices
President
Corporate Information
Corporate Description
First Commonwealth Financial Corporation is a Pennsylvania business corporation
established in 1983, registered as a bank holding company by the Board of Governors
of the Federal Reserve System.
William R. Jarrett
Executive Vice President and
Chief Risk Officer
Sue A. McMurdy
Senior Vice President and
Chief Information Officer
David R. Tomb Jr., Esq.
Senior Vice President,
Secretary and Treasurer
Thaddeus J. Clements
Senior Vice President,
Human Resources
R. John Previte
Senior Vice President, Investments
For other information call our
Convenience Banking Center at
1-800-711-BANK (2265)
or visit our Web site:
www.fcbanking.com
Executive Offices
Old Courthouse Square,
22 North Sixth Street
Indiana, Pennsylvania
Mailing Address
Post Office Box 400
Indiana, Pennsylvania 15701-0400
Telephone (724) 349-7220
Executive Officers
E. James Trimarchi
Chairman of the Board
Joseph E. O’Dell
President and Chief
Executive Officer
Johnston A. Glass
Vice Chairman, Growth
Gerard M. Thomchick
Senior Executive Vice President and
Chief Operating Officer
John J. Dolan
Executive Vice President and Chief
Financial Officer
Market Area by County
Elk
Jefferson
Lawrence
Beaver
Butler
Armstrong
Indiana
✶
Clearfield
Centre
Allegheny
Cambria
Blair
Westmoreland
Huntingdon
Washington
Somerset
Bedford
12
First Commonwealth
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
First Commonwealth’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of management, including First Commonwealth’s
principal executive officer and principal financial officer, First Commonwealth conducted an
evaluation of the effectiveness of internal control over financial reporting based on the framework
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems, determined to be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation.
Based on First Commonwealth’s evaluation under the framework in Internal Control-Integrated
Framework, management concluded that internal control over financial reporting was effective
as of December 31, 2004. Management’s assessment of the effectiveness of internal control
over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which is included herein.
First Commonwealth Financial Corporation
Indiana, Pennsylvania
March 10, 2005
Joseph E. O’Dell
John J. Dolan
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of First Commonwealth Financial Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over
Financial Reporting, that First Commonwealth Financial Corporation (the Company) maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion
on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report
dated March 10, 2005 expressed an unqualified opinion thereon.
Pittsburgh, Pennsylvania
March 10, 2005
14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of First Commonwealth Financial Corporation
We have audited the accompanying consolidated balance sheets of First Commonwealth Financial Corporation
and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements
of income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of the company for the year ended December 31,
2002 were audited by other auditors whose report dated January 22, 2003, expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 2002, the report of other auditors, the financial statements referred to
above present fairly, in all material respects, the consolidated financial position of the Company at December 31,
2004 and 2003, and the consolidated results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Company’s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005 expressed an
unqualified opinion thereon.
Pittsburgh, Pennsylvania
March 10, 2005
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
ASSETS
Cash and due from banks
Interest-bearing bank deposits
Securities available for sale, at market
Securities held to maturity, at amortized cost, (Market value
$81,886 in 2004 and $109,609 in 2003)
Loans
Unearned income
Allowance for credit losses
Net loans
Premises and equipment
Other real estate owned
Goodwill
Amortizing intangibles, net
Other assets
Total assets
LIABILITIES
Deposits (all domestic):
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Other liabilities
Subordinated debentures
Other long-term debt
Total long-term debt
Total liabilities
SHAREHOLDERS’ EQUITY
December 31,
2004
2003
$
79,591
2,403
2,162,313
$
82,510
5,362
1,969,176
78,164
104,254
$
$
3,515,085
(252)
(41,063)
3,473,770
56,965
1,814
123,607
17,513
202,338
6,198,478
480,843
3,363,632
3,844,475
946,474
35,977
108,250
731,324
839,574
5,666,500
2,825,337
(455)
(37,385)
2,787,497
46,538
1,866
29,854
3,256
158,882
$ 5,189,195
$
408,647
2,879,628
3,288,275
634,127
41,875
75,304
718,668
793,972
4,758,249
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
Common stock $1 par value per share, 100,000,000 shares authorized;
71,978,568 shares issued and 69,868,908 shares outstanding in 2004;
63,704,445 shares issued and 60,712,020 shares outstanding in 2003
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock (2,109,660 and 2,992,425 shares at December 31, 2004
and 2003, respectively at cost)
Unearned ESOP shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
-0-
-0-
71,978
175,453
307,363
10,002
(26,643)
(6,175)
531,978
6,198,478
$
63,704
79,581
312,261
15,173
(37,779)
(1,994)
430,946
$ 5,189,195
The accompanying notes are an integral part of these consolidated financial statements.
16
Interest Income
Interest and fees on loans
Interest and dividends on investments:
Taxable interest
Interest exempt from Federal income taxes
Dividends
Interest on Federal funds sold
Interest on bank deposits
Total interest income
Interest Expense
Interest on deposits
Interest on short-term borrowings
Interest on mandatorily redeemable capital securities
of subsidiary trust
Interest on subordinated debentures
Interest on other long-term debt
Total interest on long-term debt
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Other Income
Net securities gains
Trust income
Service charges on deposits
Gain on sale of branches
Insurance commissions
Income from bank owned life insurance
Merchant discount income
Card related interchange income
Other income
Total other income
Other Expenses
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Data processing expense
Pennsylvania shares tax expense
Intangible amortization
Litigation settlement
Restructuring charges
Merger and integration charges
Debt prepayment fees
Other operating expenses
Total other expenses
Income before income taxes
Applicable income taxes
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
2004
Years Ended December 31,
2003
2002
$
189,629
$
164,441
$
179,901
75,309
11,447
1,600
6
34
278,025
58,890
11,989
-0-
6,778
33,033
39,811
110,690
167,335
8,070
159,265
4,077
5,254
14,975
-0-
3,387
5,157
3,638
3,579
7,582
47,649
68,916
9,656
11,688
3,808
4,532
1,443
-0-
-0-
2,125
29,495
32,892
164,555
42,359
3,707
66,716
10,561
2,038
4
13
243,773
60,100
6,755
-0-
3,560
29,826
33,386
100,241
143,532
12,770
130,762
5,851
5,142
13,013
3,041
3,305
4,342
3,557
2,537
7,656
48,444
61,144
7,456
10,096
2,520
4,301
43
(610)
-0-
-0-
-0-
27,705
112,655
66,551
13,251
84,137
9,520
1,973
6
31
275,568
78,572
6,029
3,325
-0-
34,747
38,072
122,673
152,895
12,223
140,672
642
5,008
11,538
-0-
3,631
4,711
3,573
2,199
6,793
38,095
58,149
6,750
9,970
2,124
3,937
203
8,000
6,140
-0-
-0-
31,057
126,330
52,437
8,911
Net Income
$
38,652
$
53,300
$
43,526
Average Shares Outstanding
Average Shares Outstanding Assuming Dilution
65,887,611
66,487,516
59,002,277
59,387,055
58,409,614
58,742,018
Per Share Data:
Basic Earnings Per Share
Diluted Earnings Per Share
$
$
0.59
0.58
$
$
0.90
0.90
$
$
0.75
0.74
The accompanying notes are an integral part of these consolidated financial statements.
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar Amounts in Thousands)
Common
Stock
Additional
Paid-in
Capital
Accumulated
Retained Other Comprehensive Treasury
Income (Loss)
Earnings
Stock
Unearned
ESOP
Shares
Total
Shareholders’
Equity
$ 62,525
$ 66,176
$ 288,219
$
8,703
$
(51,431)
$
(4,126)
$ 370,066
Balance at December 31, 2001
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding gains on
securities arising during the period
Less: reclassification adjustment
for gains on securities included
in net income
Total other comprehensive income
Total comprehensive income
Cash dividends declared
Decrease in unearned ESOP shares
Discount on dividend reinvestment
plan purchases
Treasury stock reissued
Tax benefit of stock options
Balance at December 31, 2002
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding losses on
securities arising during the period
Less: reclassification adjustment
for gains on securities included
in net income
Unrealized holding gains on derivatives
used in cash flow hedging relationship
arising during the period
Total other comprehensive income (loss)
Total comprehensive income
Cash dividends declared
Decrease in unearned ESOP shares
Discount on dividend reinvestment
plan purchases
Treasury stock reissued
Tax benefit of stock options
Stock issued for acquisition
Balance at December 31, 2003
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding losses on
securities arising during the period
Less: reclassification adjustment
for gains on securities included
in net income
Unrealized holding losses on
derivatives used in cash flow hedging
relationship arising during the period
Total other comprehensive income (loss)
Total comprehensive income
Cash dividends declared
Net increase in unearned ESOP shares
Discount on dividend reinvestment
plan purchases
Treasury stock acquired
Treasury stock reissued
Tax benefit of stock options
Stock issued for acquisition
Balance at December 31, 2004
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
43,526
-0-
-0-
17,542
-0-
-0-
-0-
-0-
-0-
86
-0-
-0-
43,526
(35,580)
-0-
-0-
-0-
-0-
62,525
(637)
(964)
224
64,885
-0-
-0-
-0-
296,165
-0-
53,300
-0-
-0-
-0-
-0-
1,179
63,704
(706)
(1,076)
535
15,823
79,581
-0-
-0-
-0-
-0-
312,261
-0-
38,652
-0-
-0-
-0-
-0-
-0-
-0-
-0-
120
-0-
-0-
-0-
-0-
53,300
(37,204)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
262
-0-
-0-
-0-
-0-
38,652
(43,550)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
6,450
-0-
(44,981)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
7,202
-0-
-0-
(37,779)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(514)
11,650
-0-
-0-
(26,643)
$
$
-0-
43,526
-0-
17,542
-0-
-0-
-0-
-0-
1,071
-0-
-0-
-0-
(3,055)
(394)
17,148
60,674
(35,580)
1,157
(637)
5,486
224
401,390
-0-
53,300
-0-
-0-
-0-
-0-
-0-
-0-
1,061
-0-
-0-
-0-
-0-
(1,994)
(6,951)
(3,734)
7
(10,678)
42,622
(37,204)
1,181
(706)
6,126
535
17,002
430,946
-0-
38,652
-0-
-0-
-0-
-0-
-0-
-0-
(4,181)
-0-
-0-
-0-
-0-
-0-
(6,175)
(2,420)
(2,633)
(118)
(5,171)
33,481
(43,550)
(3,919)
(816)
(514)
9,882
1,238
105,230
$ 531,978
(394)
17,148
17,148
-0-
-0-
-0-
-0-
-0-
25,851
(6,951)
(3,734)
7
(10,678)
(10,678)
-0-
-0-
-0-
-0-
-0-
-0-
15,173
(2,420)
(2,633)
(118)
(5,171)
(5,171)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
10,002
-0-
-0-
-0-
-0-
8,274
$ 71,978
(816)
-0-
(1,768)
1,238
96,956
$ 175,453
-0-
-0-
-0-
-0-
-0-
$ 307,363
$
The accompanying notes are an integral part of these consolidated financial statements.
18
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses
Depreciation and amortization
Net gains on sales of assets
Net gains on sales of branches
Income from increase in cash surrender value of
bank owned life insurance
Stock option tax benefit
Changes net of acquisition:
Decrease in interest receivable
Decrease in interest payable
Decrease in income taxes payable
Net decrease (increase) in loans held for sale
Change in deferred taxes
Other-net
Net cash provided by operating activities
Investing Activities
Changes net of acquisition:
Transactions with securities held to maturity:
Sales
Maturities and redemptions
Purchases of investment securities
Transactions with securities available for sale:
Sales
Maturities and redemptions
Purchases of investment securities
Proceeds from sales of other assets
Acquisition of affiliate, net of cash received
Investment in bank owned life insurance
Net decrease in interest-bearing bank deposits
Net (increase) decrease in loans
Purchases of premises and equipment
Net cash (used) provided by investing activities
Financing Activities
Changes net of acquisition:
Proceeds from issuance of other long-term debt
Repayments of other long-term debt
Proceeds from issuance of subordinated debentures
Repayments of subordinated debentures
Discount on dividend reinvestment plan purchases
Dividends paid
Net increase (decrease) in Federal funds purchased
Net increase in other short-term borrowings
Sale of branch and deposits, net of cash received
Reissuance of treasury stock
Net increase (decrease) in deposits
Net cash provided (used) by financing activities
Net (decrease) increase in cash and cash equivalents
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
2004
2003
2002
Years Ended December 31,
$
38,652
$
53,300
$
43,526
8,070
9,488
(4,197)
-0-
(5,157)
1,239
1,212
(39)
(1,976)
644
(1,858)
(6,855)
39,223
-0-
31,649
(5,542)
115,726
730,494
(755,364)
11,703
(70,872)
-0-
4,874
(179,939)
(12,041)
(129,312)
283,486
(482,150)
41,238
(8,292)
(816)
(41,736)
21,650
237,102
-0-
9,679
27,009
87,170
(2,919)
12,770
7,498
(6,483)
(3,034)
(4,342)
535
3,754
(1,120)
(843)
2,484
(2,235)
(2,525)
59,759
-0-
93,700
-0-
62,941
954,406
(1,414,519)
11,876
7,859
-0-
4,135
2,775
(5,227)
(282,054)
10,000
(12,500)
30,929
-0-
(706)
(36,630)
(37,500)
202,562
(21,288)
5,923
82,901
223,691
1,396
12,223
7,360
(498)
-0-
(4,711)
224
2,860
(2,280)
(2,754)
(5,439)
(594)
2,408
52,325
-0-
110,769
(15,266)
15,328
545,791
(547,799)
11,207
-0-
(5,000)
2,278
(58,157)
(6,382)
52,769
18,200
(101,425)
-0-
-0-
(637)
(35,208)
(56,650)
97,980
-0-
4,656
(49,026)
(122,110)
(17,016)
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
82,510
79,591
$
81,114
82,510
$
98,130
81,114
$
The accompanying notes are an integral part of these consolidated financial statements.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002
NOTE 1—Statement of Accounting Policies
General
The following summary of accounting and reporting
policies is presented to aid the reader in obtaining a better
understanding of the financial statements and related financial
data of First Commonwealth Financial Corporation and its
subsidiaries (the “Corporation”) contained in this report.
The financial information is presented in accordance with
generally accepted accounting principles and general practice
for financial institutions in the United States of America.
In preparing financial statements, management is required
to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements.
In addition, these estimates and assumptions affect revenues
and expenses in the financial statements and as such, actual
results could differ from those estimates.
Through its subsidiaries which include one commercial
bank, a nondepository trust company, insurance agency
and financial advisor, the Corporation provides a full range
of loan, deposit, trust, insurance and financial advisory
services primarily to individuals and small to middle-market
businesses in seventeen counties in central and western
Pennsylvania. Under current conditions, the Corporation is
reporting one business segment.
The Corporation is subject to regulations of certain state
and federal agencies. These regulatory agencies periodically
examine the Corporation for adherence to laws and regulations.
As a consequence, the cost of doing business may be affected.
Basis of Presentation
The accompanying consolidated financial statements include
the accounts of the Corporation and its wholly owned
subsidiaries. All material intercompany transactions have
been eliminated in consolidation.
The Corporation determines whether it should consolidate
other entities or account for them on the equity method
of accounting depending on whether it has a controlling
financial interest in an entity of less than 100% of the voting
interest of that entity by considering the provisions of
Accounting Research Bulletin 51 (“ARB 51”), “Consolidated
Financial Statements”, or a controlling financial interest in a
variable interest entity (“VIE”) by considering the provisions
of the Financial Accounting Standards Board (“FASB”)
Interpretation No. 46 (“FIN 46”), “Consolidation of Variable
Interest Entities,” issued in January 2003, and FIN 46
(Revised 2003) (“FIN 46R”) issued in December 2003.
Under FIN 46R, an entity that holds a variable interest in a
VIE is required to consolidate the VIE if the entity 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. Refer to the Recent Accounting Pronouncements
20
section of this Note for additional information related to
FIN 46 and FIN 46R.
The investment in non-consolidated VIE’s and investment in
corporations with voting interest of 20 to 50% are accounted
for using the equity method of accounting.
Reclassifications
Financial statement amounts in prior periods have been
reclassified to conform to the presentation format used in
2004. The reclassifications had no effect on the Corporation’s
financial condition or results of operations.
Securities
Debt securities that the Corporation has the positive intent
and ability to hold to maturity are classified as securities
held-to-maturity and are reported at amortized cost. Debt and
equity securities that are bought and held principally for the
purpose of selling them in the near term are to be classified as
trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity securities
or trading securities are classified as securities available-
for-sale and are reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate
component of shareholders’ equity, net of deferred taxes.
The Corporation has securities classified as either held-to-
maturity or available-for-sale. The Corporation does not
engage in trading activities. Effective January 1, 2003, the
Corporation changed the method it utilizes to determine
the net gain or loss on the sale of securities from the
specific identification method to the average cost method.
This change did not result in a material change to the
Corporation’s financial condition or results of operations.
Loans
Loans are carried at the principal amount outstanding.
Unearned income on installment loans and leases is taken
into income on a declining basis which results in an
approximately level rate of return over the life of the loan or
lease. Interest is accrued as earned on nondiscounted loans.
The Corporation considers a loan to be past due and still
accruing interest when payment of interest or principal is
contractually past due but the loan is well secured and in the
process of collection. For installment, mortgage, term and
other loans with amortizing payments that are scheduled
monthly, 90 days past due is reached when four monthly
payments are due and unpaid. For demand, time and other
multi-payment obligations with payments scheduled other
than monthly, delinquency status is calculated using number
of days instead of number of payments. Revolving credit
loans, including personal credit lines and home equity lines,
are considered to be 90 days past due when the borrower has
not made the minimum payment for four billing cycles.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
A loan is placed in nonaccrual status when based on current
information and events, it is probable that the Corporation will
be unable to fully collect principal or interest due according
to the contractual terms of the loan. A loan is also placed in
nonaccrual status when based on regulatory definitions, the
loan is maintained on a “cash basis” due to the weakened
financial condition of the borrower. When a determination
is made to place a loan in nonaccrual status, all accrued and
unpaid interest for the current year is reversed against interest
income and uncollected interest for previous years is charged
against the allowance for credit losses. Generally, consumer
and residential mortgage loans, which are well-secured
and/or in the process of collection, are not normally placed
in nonaccrual status. Nonaccrual loans are restored to accrual
status when, based on a sustained period of repayment by
the borrower in accordance with the contractual terms of the
loan, the Corporation expects repayment of the remaining
contractual principal and interest, or when the loan otherwise
becomes well-secured and in the process of collection.
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.
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 that is
due in accordance with 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.
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.
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.
Mortgage Servicing Rights
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). Generally, the Corporation sells mortgages with servicing
released. Mortgage servicing rights are periodically evaluated
for impairment based on fair values.
Loan Fees
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.
Other Real Estate Owned
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.
Allowance for Credit Losses
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
an assessment of individual problem loans, delinquency and
loss experience trends, and other relevant factors, all of which
may be susceptible to significant changes. While allocations are
made to specific loans and pools of loans, the total allowance is
available for all loan losses.
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
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1—Statement of Accounting Policies (continued)
Allowance for Credit Losses (continued)
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 of the Corporation’s Credit Committee after
placement in this category. There were no loans classified as
loss on the primary watch list as of December 31, 2004. The
Corporation consistently applies the following comprehensive
methodology and procedure for determining the allowance at
the subsidiary bank level.
Classified loans on the primary watch list are analyzed to
determine the level of potential loss in the credits under
current circumstances. The potential loss that is established
for these classified loans is based on careful analysis of the
loan’s performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor.
Primary watch list loans are managed and monitored
by assigned account officers within the Corporation in
conjunction with senior management.
A specific reserve is established for impaired loans that is
equal to the total amount of potential unconfirmed losses for
the impaired loans that are reviewed. All impaired credits
in excess of $100 are individually reviewed. Based on this
reserve as a percentage of reviewed loan balances, a reserve is
also established for the non-reviewed impaired loan balances.
A reserve is established for primary watch list loans that are
classified as substandard (and still accruing interest) and OAEM
(Other Assets Especially Mentioned). The reserve on these
substandard and OAEM loans is calculated as the historical
average amount of potential unconfirmed losses for the loans
similar to those that are reviewed. The historical percentage is
based on an eight quarter weighted average calculation.
The allowance based on historical trends uses charge-off
experience of the Corporation to estimate potential
unconfirmed losses in the balances of the loan and lease
portfolios. The historical loss experience percentage is based
on the charge-off history for the greater of the eight most recent
quarters or the twenty most recent quarters. The historical
loss percentages are adjusted for loss emergence periods
based on the type of loan. Adjusted historical loss experience
percentages are applied to non-classified loans from the
primary watch list, as well as all other loans and leases which
are not on the watch list, to obtain the portion of the allowance
for credit losses which is based on historical trends. Before
applying the adjusted historical loss experience percentages,
22
loan balances are reduced by the portion of the loan balances
which are subject to guarantee by a government agency.
Each loan category’s most recent four-quarter average
delinquency percentage is compared to its twenty-quarter
average. A special allocation is made if the four-quarter
delinquency percentage is higher than its twenty-quarter average.
An additional allowance for special circumstances may be
made where a specific reserve is warranted. The additional
allowance provides management with the opportunity to
estimate additional potential allowance amounts which may
be needed to cover specific factors. The special factors that
management currently evaluates consist of portfolio risk or
concentrations of credit and economic conditions. Portfolio
risks include unusual changes or recent trends in specific
portfolios such as unexpected changes in the trends or levels
of delinquency, unusual repossession activities or large levels
of unsecured loans in a portfolio.
The Corporation also maintains an unallocated allowance.
The unallocated allowance is used to cover any factors or
conditions that may cause a potential credit loss but are not
specifically identifiable or considered in the methodology
that was defined above. These factors include, but are not
limited to potential judgment or data errors or factors not yet
considered in the Corporation’s methodology. No matter how
detailed an analysis of potential credit losses is performed
these estimates by definition lack precision. Management
must make estimates using assumptions and information that
is often subjective and changing rapidly.
Bank Owned Life Insurance
The Corporation purchased insurance on the lives of certain
groups of employees. The policies accumulate asset values
to meet future liabilities including the payment of employee
benefits such as health care. Increases in the cash surrender
value are recorded as “Other Income” in the Consolidated
Statements of Income. The cash surrender value of bank
owned life insurance is reflected in “Other Assets” on the
Consolidated Balance Sheets in the amount of $124,932 and
$103,625 at December 31, 2004 and 2003, respectively. The
increase in cash surrender value of bank owned life insurance
during 2004 includes $16,657 acquired as a result of a
business combination completed during 2004. For additional
information on the business combination, refer to NOTE 6
(Business Combinations).
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line and accelerated methods over the estimated useful
life of the asset. Accelerated depreciation methods are used for
furniture and equipment while straight-line depreciation is used
for buildings and improvements. Charges for maintenance and
repairs are expensed as incurred. Where a lease is involved,
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
amortization is charged over the term of the lease or the
estimated useful life of the improvement, whichever is shorter.
The Corporation records computer software in accordance with
the American Institute of Certified Public Accountants’ Statement
of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.”
The statement identifies the following three stages of software
development: the preliminary project stage, the application
development stage and the post-implementation stage. In
compliance with SOP 98-1, the Corporation expenses costs that
are incurred during the preliminary project stage and capitalizes
certain costs that are incurred during the application development
stage. Once software is in operation, maintenance costs are
expensed over the maintenance period while upgrades that result
in additional functionality or enhancements are capitalized.
Training and data conversion costs are expensed as incurred.
Capitalized costs are amortized on a straight-line basis over a
period of 3-7 years, depending on the life of the software license.
Business Combinations
The Corporation accounts for business combinations in
accordance with the FASB Statement No. 141 (“FAS No. 141”),
“Business Combinations,” which requires the purchase method
of accounting for business combinations initiated after June 30,
2001. Under the purchase method, net assets of the business
acquired are recorded at their estimated fair value as of the date
of acquisition with any excess of the cost of the acquisition over
the fair value of the net tangible and intangible assets that are
acquired recorded as goodwill. Results of the acquired business
are included in the Corporation’s income statement from the
date of the acquisition.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite useful
lives are tested for impairment at least annually and written
down and charged to results of operations in periods in which
their recorded value is more than their estimated fair value. No
impairment of goodwill or other intangibles has been identified
since the adoption of FASB Statement No. 142 (“FAS No.
142”), “Goodwill and Other Intangible Assets,” on January 1,
2002. Prior to the adoption of FAS No. 142, goodwill was
amortized on a straight-line basis over a period of 15-25 years.
Accounting for the Impairment of Long-Lived Assets
The Corporation reviews long-lived assets, such as premises
and equipment and intangibles for impairment whenever events
or changes in circumstances, such as a significant decrease
in the market value of an asset or the extent or manner in
which an asset is used, indicate that the carrying amount of an
asset may not be recoverable. If there is an indication that the
carrying amount of an asset may not be recoverable, future
undiscounted cash flows expected to result from the use of the
asset are estimated. If the sum of the expected cash flows is
less than the carrying value of the asset, a loss is recognized
for the difference between the carrying value and fair market
value of the asset. Long-lived assets classified as held for sale
are measured at the lower of their carrying amount or fair value
less cost to sell. Depreciation or amortization is discontinued
on long-lived assets classified as held for sale.
Income Taxes
The Corporation records taxes in accordance with the asset
and liability method utilized by FASB Statement No. 109
(“FAS No. 109”), “Accounting for Income Taxes,” whereby
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and
liabilities and their respective tax bases given the provisions
of the enacted tax laws. Deferred tax assets are reduced,
if necessary, by the amount of such benefits that are not
expected to be realized based upon available evidence.
Comprehensive Income Disclosures
“Other Comprehensive Income” (comprehensive income,
excluding net income), beginning with the 2003 period included
two components, the change in unrealized holding gains
and losses on available for sale securities and the change in
unrealized gains and losses on derivatives used in cashflow
hedging relationships. Both components of other comprehensive
income are reported net of related tax effects in the Statement
of Changes in Shareholders’ Equity. Prior to 2003, other
comprehensive income included only one component, which
was the change in unrealized holding gains and losses on
available for sale securities net of related tax effects.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and Federal funds
sold. Generally, Federal funds are sold for one-day periods.
Employee Stock Ownership Plan
Accounting treatment for the Corporation’s Employee Stock
Ownership Plan (“ESOP”) described in NOTE 23 (Unearned
ESOP Shares) follows Statement of Position 93-6 (“SOP 93-6”),
“Employers Accounting for Employee Stock Ownership
Plans,” for ESOP shares acquired after December 31, 1992
(“new shares”). The Corporation has elected, as permitted
under SOP 93-6, not to adopt this statement for ESOP shares
acquired on or before December 31, 1992 (“old shares”).
ESOP shares purchased subject to debt guaranteed by
the Corporation are recorded as a reduction of common
shareholders’ equity by charging unearned ESOP shares.
As shares are committed to be released to the ESOP Trust
for allocation to plan participants, unearned ESOP shares
is credited for the average cost of the shares to the ESOP.
Compensation cost recognized for new shares in accordance
with the provisions of SOP 93-6 is based upon the fair
market value of the shares that are committed to be released.
Additional paid-in capital is charged or credited for the
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1—Statement of Accounting Policies (continued)
Employee Stock Ownership Plan (continued)
difference between the fair value of the shares committed
to be released and the cost of those shares to the ESOP.
Compensation cost recognized for old shares committed to be
released is recorded at the cost of those shares to the ESOP.
Dividends on both old and new unallocated ESOP shares are
used for debt service and are reported as a reduction of debt
and accrued interest payable. Dividends on allocated ESOP
shares are charged to retained earnings and allocated or paid
to the plan participants. The average number of common
shares outstanding used in calculating earnings per share
excludes all unallocated ESOP shares.
Employee Stock Option Plan
Prior accounting guidelines permit two alternate methods of
accounting for stock-based compensation, the intrinsic value
method of APB Opinion No. 25 (“APB 25”), “Accounting
for Stock Issued to Employees,” and the fair value method of
FASB Statement No. 123 (“FAS No. 123”), “Accounting for
Stock-Based Compensation.” In December 2002, the FASB
issued Statement No. 148 (“FAS No. 148”), “Accounting for
Stock-Based Compensation-Transition and Disclosure.” FAS
No. 148 did not amend FAS No. 123 to require companies
to account for employee stock options using the fair value
method but required all companies with stock-based
compensation to provide additional disclosures, regardless
of whether they account for that compensation using the fair
value method of FAS No. 123 or the intrinsic value method
of APB 25. As permitted under FAS No. 123, the Corporation
had elected to use the intrinsic value method to measure
stock based compensation under APB 25 and to disclose in a
footnote to the financial statements, net income and earnings
per share determined as if the fair value methodology of FAS
No. 123 had been implemented.
No stock-based employee compensation expense is reflected in
the Corporation’s net income as reported in the Consolidated
Statements of Income because all stock options granted under
the Corporation’s plan had an exercise price equal to the market
value of the underlying common stock on the date of the grant.
In December 2004, the FASB issued FASB Statement No.123
(Revised) (“FAS No. 123(R)”), “Share-Based Payment.” FAS
No. 123(R) replaces FAS No. 123 and supersedes APB 25. FAS
No. 123(R) will require companies to measure compensation
costs for all share-based payments including employee stock
options using the fair value method. FAS No. 123(R) applies
to new awards and to awards modified, repurchased or
cancelled after the required effective date. Public companies
that used the fair value based method for either recognition
or disclosure under FAS No. 123, will apply FAS No. 123(R)
using a modified prospective application. Under the modified
prospective application, compensation cost is recognized
24
on or after the required effective date for the portion of the
outstanding awards for which the requisite service has not
yet been rendered, based on the grant-date fair value of those
awards calculated under FAS No. 123 for either recognition or
pro forma disclosures. For periods before the required effective
date, those entities may elect to apply a modified retrospective
application. Under the modified retrospective application
method, financial statements for prior periods are adjusted on
a basis consistent with the pro forma disclosures required for
those periods by FAS No. 123. According to FAS No. 123(R),
the grant-date fair value of stock options will be recognized
as compensation expense in the company’s income statement
over the requisite service period or the vesting period. FAS No.
123(R) will become effective as of the beginning of the first
interim period that begins after June 15, 2005. The adoption of
FAS No. 123(R) is not expected to have a material impact on
the Corporation’s financial condition or results of operations.
See NOTE 24 (Stock Option Plan) for additional information
on the Employee Stock Option Plan.
The following table illustrates the effect on net income and
earnings per share if the Corporation had applied the fair
value recognition provisions of FAS No. 123 to stock-based
employee compensation:
Net income, as reported
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effect
Pro forma net income
Earnings per share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
2004
December 31,
2003
2002
$ 38,652
$
53,300
$
43,526
(38)
$ 38,614
$
$
$
$
0.59
0.59
0.58
0.58
$
$
$
$
$
(1,352)
51,948
0.90
0.88
0.90
0.87
(2,278)
41,248
0.75
0.71
0.74
0.70
$
$
$
$
$
Average shares outstanding
Average shares outstanding
assuming dilution
65,887,611
59,002,277
58,409,614
66,487,516
59,387,055
58,742,018
Derivative Instruments and Hedging Activities
The Corporation accounts for derivative instruments and hedging
activities utilizing guidelines established in FASB Statement
No. 133 (“FASB No. 133”), “Accounting for Derivative
Instruments and Hedging Activities,” as amended. The
Corporation recognizes all derivatives as either assets or liabilities
on the balance sheet and measures those instruments at fair value.
Changes in fair value of derivatives designated and accounted
for as cash flow hedges, to the extent they are effective as
hedges, are recorded in “Other Comprehensive Income,” net of
deferred taxes. Any hedge ineffectiveness would be recognized
in the income statement line item pertaining to the hedged item.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
Management periodically reviews contracts from various
functional areas of the Corporation to identify potential
derivatives embedded within selected contracts. Management
has identified potential embedded derivatives in certain
loan commitments for residential mortgages where the
Corporation has intent to sell to an outside investor. Due
to the short-term nature of these loan commitments and
the minimal historical dollar amount of commitments
outstanding, the corresponding impact on the Corporation’s
financial condition and results of operation has not been
material. The Corporation had no freestanding derivative or
hedging instruments prior to the third quarter of 2003 when
it entered into its first of three interest rate swaps, which
are described in NOTE 8 (Derivative Instruments) to the
Consolidated Financial Statements.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for
the period less unallocated ESOP shares.
Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared
in the earnings of the entity. For all periods presented, the
dilutive effect on average shares outstanding is the result of
compensatory stock options outstanding.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN 46 and in
December 2003, issued FIN 46R. FIN 46R clarified some of
the provisions of FIN 46 and exempted certain entities from
the original requirements of FIN 46. As defined by FIN 46 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 FIN 46R,
an entity that holds a variable interest in a VIE is required to
consolidate the VIE if the entity 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. FIN 46R was
implemented for the quarter ended March 31, 2004.
Based on the criteria established in FIN 46 as interpreted by
the Securities and Exchange Commission, the Corporation
deconsolidated its investment in First Commonwealth Capital
Trust I, a Delaware business trust (the “Trust”) during the fourth
quarter of 2003. The Trust was established in 1999 to issue
capital securities through a private offering to qualified investors
and to issue common securities to the Corporation. The Trust
used the proceeds from the sale of the capital securities to buy
junior subordinated debentures from the Corporation with
the same economic terms as the capital securities. The Trust
distributes the cash payments it receives from the Corporation
on the debentures to the holders of the capital securities and the
common securities. The Trust will redeem all of the outstanding
capital securities when the debentures are paid at maturity on
September 1, 2029. The deconsolidation of the Trust resulted
in an increase in long-term debt during the fourth quarter of
2003 of approximately $1,083 as a result of the subordinated
debentures no longer being eliminated in consolidation and the
capital securities no longer being included in the Consolidated
Balance Sheet at December 31, 2003.
The Consolidated Balance Sheet at December 31, 2003,
also reflects an increase in “Other Assets” in the same
amount, which represents the Corporation’s investment in
the Trust. Although net income did not change as a result
of the deconsolidation of the Trust, “Other Revenue” was
increased by the income generated by the Trust, which represents
the difference between the Trust’s interest income from the
subordinated debentures and the Trust’s interest expense from the
capital securities. The Consolidated Statement of Income for
the year ended December 31, 2003, also reflected an increase
in “Interest Expense on Long-term Debt” of approximately
$103 as a result of the interest expense on the subordinated
debentures no longer being eliminated in consolidation and
the interest expense on the capital securities no longer being
included in the Consolidated Statement of Income.
As part of its community reinvestment initiatives, the
Corporation invests in qualified affordable housing projects
as a limited partner. The Corporation receives federal
affordable housing tax credits and rehabilitation tax credits
for these limited partnership investments. The Corporation’s
maximum potential exposure to these partnerships is $4,792,
consisting of the limited partnership investments as of
December 31, 2004. The Corporation has determined that
these investments will not be consolidated but continue to
be accounted for under the equity method of accounting
whereby the Corporation’s portion of partnership losses are
recognized as incurred. The adoption of FIN 46 or FIN 46R
has not had a material impact on the Corporation’s financial
condition or results of operation.
In December 2003, the FASB issued Statement No. 132(R)
(“FAS No. 132(R)”), “Employers’ Disclosures about Pensions
and Other Postretirement Benefits.” The FASB’s revision
of Statement No. 132 retained all of the disclosure items
that were provided in FAS No. 132 and requires new annual
disclosures about the types of plan assets, investment strategy,
measurement date, plan obligations and cash flows as well
as the expanded disclosures of assumptions used in various
calculations. The statement also requires interim reporting of
the components of the net periodic benefit cost recognized.
FAS No. 132(R) does not change the measurement or
recognition for pension or other postretirement benefit plans.
This statement was effective for financial statements with
fiscal years ending after December 15, 2003. Disclosure
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1—Statement of Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
requirements for future benefit payments are effective for
fiscal years ending after June 15, 2004.
In March 2004, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin No. 105 (“SAB
105”), “Application of Accounting Principles to Loan
Commitments.” SAB 105 was issued to inform the SEC’s
registrants of the SEC staff’s view that the fair value of
the recorded loan commitments that are required to follow
derivative accounting under FASB Statement No. 133 (“FAS
No. 133”), “Accounting for Derivative Instruments and
Hedging Activities,” should not consider the expected future
cash flows related to the associated servicing of the future
loan. The SEC staff believes that incorporating expected
future cash flows related to the associated servicing of the loan
essentially results in the immediate recognition of a servicing
asset, which is only appropriate once the servicing asset has
been contractually separated from the underlying loan by sale
or by securitization of the loan with servicing retained. The
provisions of SAB 105 were to be applied to loan commitments
accounted for as derivatives that were entered into after March 31,
2004; and therefore, was implemented during the second
quarter of 2004. The adoption of SAB 105 has not and is
not expected to have a material impact on the Corporation’s
financial condition or results of operations.
In May 2004, the FASB issued FASB Staff Position No.
FAS 106-2 (“FSP FAS 106-2”), “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003.” FSP FAS 106-
2 supersedes the FASB Staff Position No. FAS 106-1,
which has the same title as FSP FAS 106-2. FSP FAS 106-2
provides guidance on the accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (“the Act”) for employers that sponsor
postretirement health care plans that provide prescription drug
benefits. FSP FAS 106-2 also requires employers to provide
certain disclosures regarding the effect of the federal subsidy
provided by the Act. This FSP is effective for the first interim
or annual period beginning after June 15, 2004. For additional
information, refer to NOTE 22 (Retirement Plans).
In March 2004, the Emerging Issues Task Force (“EITF”)
reached a consensus on the remaining issues related to
Emerging Issues Task Force Issue 03-1 (“EITF 03-1”),
“The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.” This guidance is
applicable to debt and equity securities that are within the
scope of FASB Statement No. 115 (“FAS No. 115”) and
certain other investments. EITF 03-1 provides clarification
guidance to determine when an investment is considered
impaired, whether the impairment is other-than-temporary,
and the measurement of an impairment loss. The guidance
26
also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments.
The Corporation conducts a comprehensive review of the
investment portfolio quarterly to determine whether an
other-than-temporary impairment has occurred. Securities
whose market values have fallen below their book values
are initially selected for more in depth analysis based on
the percentage decline in value and duration of the decline.
Further analysis could include a review of research reports,
analysts’ recommendations, credit rating changes, news
stories, annual reports, impact of interest rate changes and
any other relevant information pertaining to the affected
security. Based on this review, a determination is made on a
case by case basis as to a potential impairment.
In September 2004, the FASB issued FASB Staff Position
No. EITF Issue 03-1-1 (“FSP EITF 03-1-1”), “Effective Date
of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments”.” FSP EITF 03-1-1 delays the effective
date for the measurement and recognition guidance contained in
paragraphs 10-20 of EITF 03-1 from reporting periods beginning
after June 15, 2004, until implementation guidance is issued.
This delay does not suspend the requirement to recognize other-
than-temporary impairments as required by existing authoritative
literature. Once additional guidance has been released, the
Corporation will evaluate the impact of implementation on the
Corporation’s financial condition and results of operations.
In December 2003, the American Institute of Certified Public
Accountants issued Statement of Position 03-3 (“SOP 03-3”),
“Accounting for Certain Loans or Debt Securities Acquired in
a Transfer.” SOP 03-3 requires acquired loans, including debt
securities, to be recorded at the amount of the purchaser’s
initial investment and prohibits carrying over valuation
allowances from the seller for those individually-evaluated
loans that have evidence of deterioration in credit quality
since origination, where it is probable that all contractual
cash flows on the loan will be unable to be collected. SOP
03-3 also requires the excess of all undiscounted cash flows
expected to be collected at acquisition over the purchaser’s
initial investment to be recognized as interest income on
a level-yield basis over the life of the loan. Subsequent
increases in cash flows expected to be collected are
recognized prospectively through an adjustment of the loan’s
yield over its remaining life, while subsequent decreases
are recognized as impairment. Loans carried at fair value,
mortgage loans held for sale, and loans to borrowers in good
standing under revolving credit agreements are excluded
from the scope of SOP 03-3. This guidance is effective for
loans acquired in fiscal years beginning after December 15,
2004 and is not expected to have a material impact on the
Corporation’s financial condition or results of operations.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 2—Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income in the
Statements of Changes in Shareholders’ Equity:
December 31, 2004
December 31, 2003
Pretax
Amount
Tax
(Expense)
Benefit Amount
Net of
Tax
Pretax
Amount
Tax
(Expense)
Net of
Tax
Benefit Amount
December 31, 2002
Tax
(Expense)
Benefit Amount
Net of
Tax
Pretax
Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period
Less: reclassification adjustment
$ (3,723)
$ 1,303
$ (2,420)
$ (10,693) $ 3,742 $ (6,951)
$ 26,987
$ (9,445) $ 17,542
for gains realized in net income
(4,051)
1,418
(2,633)
(5,745)
2,011
(3,734)
(606)
212
(394)
Unrealized gains (losses) on derivatives
used in cash flow hedging relationships:
Unrealized holding gains (losses)
arising during the period
Net unrealized gains (losses)
Other comprehensive income (loss)
(182)
(7,956)
$ (7,956)
64
2,785
$ 2,785
(118)
(5,171)
$ (5,171)
7
11
(16,427)
(10,678)
$ (16,427) $ 5,749 $ (10,678)
(4)
5,749
-0-
26,381
$ 26,381
-0-
-0-
(9,233)
17,148
$ (9,233) $ 17,148
NOTE 3—Supplemental Cash Flow Disclosures
2004
2003
2002
Cash paid during the year for:
Interest
Income taxes
$ 110,729
6,302
$
$ 101,361
16,080
$
$ 124,953
12,010
$
Noncash investing and financing activities:
1,332
5,513
ESOP loan reductions
ESOP borrowings
$
$
$
$
1,061
-0-
$
$
1,071
-0-
(First Commonwealth Bank and Southwest Bank) and
the adoption of a new common brand and identity for all
financial services subsidiaries.
Actual termination benefits paid and charged against the total
severance liability were $472, $2,823 and $1,263 during
2004, 2003 and 2002, respectively, leaving a remaining
unpaid liability for severance costs of $94 at December 31,
2004. No additional severance accruals or adjustments were
recorded during 2004 related to the 2002 restructuring.
$
4,613
$
4,270
$
5,029
NOTE 5—Merger and Integration Charges
Loans transferred to other
real estate owned and
repossessed assets
Gross increase (decrease) in
market value adjustment to
securities available for sale $
(7,774) $
(16,438)
$
26,381
Gross increase in market
value adjustment of
derivative instruments
Treasury stock reissued for
business combination
$
(182) $
11
$
-0-
$
203
$
203
$
830
NOTE 4—Restructuring Charges
The Corporation incurred restructuring charges of $6,140
during 2002 in accordance with EITF 94-3. These
restructuring charges were comprised of the following:
$4,652 of employee separation costs consisting of severance
packages for 95 employees from various affiliates of the
Corporation including all levels of staff from the executive
management level to back office support staff, $1,068 related
to realignment of the various Boards of Directors and Board
committees and $420 primarily related to the write-off of
obsolete signage and supplies. These amounts are included as
restructuring charges, as a component of Other Expenses on
the Consolidated Statements of Income.
These restructuring charges resulted from the merger of
the charters of the Corporation’s two commercial banks
During 2004, the Corporation recorded merger and
integration charges totaling $2,125 ($1,381, net of taxes).
The merger and integration charges related to the acquisition
of Pittsburgh Financial Corp. (“PFC”). The charges included
$485 related to the write-off of the unamortized capitalized
costs for the subordinated debentures that were previously
issued by PFC and were called and paid off in January of
2004. Also included in the merger and integration charges
were $1,640 in salary and benefit severance expenses that
were accrued during the first nine months of 2004. The
severance costs were for 23 employees whose positions were
eliminated as part of the acquisition.
NOTE 6—Business Combinations
Effective May 24, 2004, the Corporation acquired 100% of the
outstanding shares of GA Financial, Inc. (“GAF”), a savings and
loan holding company, which was headquartered in Whitehall,
Pennsylvania. GAF was the parent company of Great American
Federal. As a result of the acquisition, GAF merged into First
Commonwealth Financial Corporation and Great American
Federal merged into First Commonwealth Bank.
Shareholders of GAF elected to receive $35.00 in cash or
an equivalent of First Commonwealth common stock for
each GAF share owned. The aggregate purchase price of the
transaction was $176,669, which included cash in the amount
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 6—Business Combinations (continued)
of $71,427 and common stock valued at $105,242. The
value of the 8,274,123 issued shares of First Commonwealth
common stock was based on the average market price of First
Commonwealth’s common stock over the ten-day period ending
three trading days prior to consummation of the acquisition.
The customer deposit base of $15,700 was the only
amortizing intangible that was recorded with the transaction.
As of December 31, 2004, the accumulated amortization
related to the GAF customer deposit base intangible was
$1,149. The estimated amortization expense that should
be recorded in each of the next five years is $1,969. The
weighted-average useful life of the customer deposit base
intangible is 8 years. The goodwill that was recorded with the
transaction is not deductible for tax purposes.
Effective December 5, 2003, the Corporation acquired 100%
of the outstanding shares of Pittsburgh Financial Corp.,
a financial holding company, which was headquartered
in Wexford, Pennsylvania. PFC was the parent company
of Pittsburgh Savings Bank (d/b/a BankPittsburgh). As a
result of the merger, PFC merged into First Commonwealth
Financial Corporation and BankPittsburgh merged into First
Commonwealth Bank.
Shareholders of PFC elected to receive $20.00 in cash or
an equivalent of First Commonwealth common stock for
each PFC share owned. The aggregate purchase price of the
transaction was $28,589, which included $11,587 in cash and
common stock valued at $17,002. The value of the 1,179,037
issued shares of First Commonwealth common stock was
based on the average market price of First Commonwealth’s
common stock over the ten-day period ending three trading
days prior to consummation of the acquisition.
The customer deposit base of $3,270 was the only amortizing
intangible that was recorded with the transaction. As of
December 31, 2004, the accumulated amortization related
to the PFC customer deposit base intangible was $314. The
estimated amortization expense that should be recorded in
each of the next five years is $290. The weighted-average
useful life of the customer deposit base intangible is 12 years.
The goodwill that was recorded with the transaction is not
deductible for tax purposes.
The acquisitions of GAF and PFC were significant steps for
the Corporation to implement its strategy for expansion into
the Pittsburgh, Pennsylvania market. The acquisitions add
an additional customer base, which presents the opportunity
for First Commonwealth Bank to offer insurance, trust and
financial planning services to a larger base of customers.
The GAF and PFC mergers were accounted for as purchase
accounting transactions whereby the identifiable tangible
and intangible assets and liabilities of GAF and PFC were
recorded at their fair values as of the acquisition date.
28
Purchase accounting valuation adjustments, which represent
the difference between the carrying value and the fair value of
identifiable tangible and intangible assets and liabilities, were
recorded in the Consolidated Balance Sheets for December 31,
2004 and 2003. As of December 31, 2004, preliminary
goodwill in the amount of $93,921 was recorded as a result of
the GAF transaction and goodwill in the amount of $21,555
was recorded as a result of the PFC transaction. As prescribed
under the purchase method of accounting, the results of GAF
and PFC’s operations have been included in the Consolidated
Financial Statements since the acquisition date.
Effective March 1, 2002, the Corporation acquired all of
the outstanding shares of Strategic Capital Concepts, Inc.
(“SCC”) and Strategic Financial Advisors, Inc. (“SFA”),
each a Pennsylvania corporation headquartered in Allison
Park, Pennsylvania. As a registered investment advisor, SCC
provided financial planning, asset management and consulting
services to individuals, businesses, retirement plans, trusts
and estates. SFA offered investment and insurance products
as well as employee benefit services. Each of the outstanding
shares of SCC and SFA were exchanged for shares of the
Corporation’s common stock. In addition, the shareholders
of SCC and SFA are entitled to receive additional shares of
the Corporation’s common stock for each of the years 2002
through 2005 based on a formula defined in the merger
agreement which takes into consideration the financial
performance of SCC and SFA after the merger date. The
merger was accounted for as a purchase transaction whereby
the identifiable tangible and intangible assets and liabilities
of SCC and SFA have been recorded at their fair values at
the acquisition date. Goodwill in the amount of $1,656 was
recorded as a result of the transaction. As prescribed under the
purchase method of accounting, the results of operations of
SCC and SFA from the date of acquisition are included in the
Corporation’s financial statements for 2002.
In October 2002, SFA was merged into SCC and the name
was changed to First Commonwealth Financial Advisors, Inc.
This acquisition should expand the Corporation’s product
offerings and positively impact fee based revenue, which is a
continuing priority.
NOTE 7—Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal
Reserve System impose uniform reserve requirements on all
depository institutions with transaction accounts (checking
accounts, NOW accounts, etc.). Reserves are maintained
in the form of vault cash or a noninterest-bearing balance
held with the Federal Reserve Bank. The subsidiary bank
maintained with the Federal Reserve Bank average balances
of $612 during 2004 and $844 during 2003.
NOTE 8—Derivative Instruments
The Corporation entered into an interest rate swap transaction
during the third quarter of 2003 and two additional interest
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
rate swap transactions during the second quarter of 2004. Each
of the swaps had a notional amount of $25,000, for a total of
$75,000, and were initiated to hedge exposure to the variability
in the future cash flows derived from adjustable rate loans. Each
of the interest rate swaps will convert the interest receivables
generated by the first $25,000 of principal outstandings of
three month LIBOR based adjustable commercial loans from
an adjustable rate to a fixed rate. The swaps are traditional
pay-floating and receive-fixed interest rate swaps with original
maturities ranging from 2.5 to 3 years. The transactions are
classified as cash flow hedges whereby the fair value of each
swap is recorded as “Other Assets” or “Other Liabilities” and
changes in the fair value are recorded as “Other Comprehensive
Income,” a component of shareholders’ equity. During 2004,
the hedge transactions had no ineffectiveness.
NOTE 9—Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values
of securities available for sale at December 31, 2004 and 2003:
2004
2003
Gross
Amortized Unrealized Unrealized
Gains
4
Cost
23,470 $
Losses
-0-
$
$
$
Fair
Value
23,474
$
Gross
Amortized Unrealized Unrealized
Gains
18
Cost
24,301
Losses
Gross
$
$
Approximate
Fair
Value
-0- $
24,319
Gross Approximate
U.S. Treasury Securities
Obligations of U.S. Government
Corporation and Agencies:
Mortgage Backed Securities
1,362,705
11,219
(10,874)
1,363,050
1,210,347
12,702
(8,298)
1,214,751
Other
277,085
211
(3,227)
274,069
252,243
803
(1,008)
252,038
Obligations of States and
Political Subdivisions
Debt Securities Issued by
Foreign Governments
190,895
6,810
(75)
197,630
156,790
4,650
(99)
161,341
-0-
-0-
-0-
-0-
50
-0-
-0-
50
Corporate Securities
206,719
8,403
(458)
214,664
204,843
8,607
(216)
213,234
Other Mortgage Backed Securities
Total Debt Securities
2,217
2,063,091
76
26,723
-0-
(14,634)
2,293
2,075,180
4,178
1,852,752
36
26,816
-0-
(9,621)
4,214
1,869,947
Equities
Total Securities Available for Sale
83,665
$2,146,756
3,468
$30,191
-0-
$ (14,634)
87,133
$ 2,162,313
93,103
$ 1,945,855
6,126
$ 32,942
-0-
99,229
$ (9,621) $ 1,969,176
Mortgage backed securities include mortgage backed
obligations of U.S. Government agencies and corporations,
mortgage backed securities issued by other organizations and
other asset backed securities. These obligations have contractual
maturities ranging from less than one year to approximately
29 years and have an anticipated average life to maturity
ranging from less than one year to approximately 18 years. All
mortgage backed securities contain a certain amount of risk
related to the uncertainty of prepayments of the underlying
mortgages. Interest rate changes have a direct impact upon
prepayment speeds, therefore the Corporation uses computer
simulation models to test the average life and yield volatility
of all mortgage backed securities under various interest rate
scenarios to insure that volatility falls within acceptable limits.
At December 31, 2004 and 2003, the Corporation owned no
high risk mortgage backed securities as defined by the Federal
Financial Institutions Examination Council’s Supervisory Policy
Statement on Securities Activities.
The amortized cost and estimated market value of debt
securities at December 31, 2004, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Mortgage Backed Securities
Total Debt Securities
Amortized Approximate
$
Cost
34,974
312,568
31,725
318,902
698,169
1,364,922
$ 2,063,091
Fair Value
34,985
$
309,288
33,185
332,379
709,837
1,365,343
$ 2,075,180
Proceeds from the sales of securities available for sale were
$115,726, $62,941 and $15,328 during 2004, 2003 and 2002,
respectively. Gross gains of $4,214, $5,709 and $609 and
gross losses of $302, $-0- and $-0- were realized on those
sales during 2004, 2003 and 2002, respectively.
Securities available for sale with an approximate fair value
of $1,090,019 and $949,602 were pledged at December 31,
2004 and 2003, respectively, to secure public deposits and for
other purposes required or permitted by law.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 9—Securities Available For Sale (continued)
The following table shows the book value or fair market
value of securities available for sale as of December 31, 2002:
U.S. Treasury Securities
Obligations of U.S. Government
Corporation and Agencies:
Mortgage Backed Securities
Other
Obligations of States and
Political Subdivisions
Debt Securities Issued by
Foreign Governments
Corporate Securities
Other Mortgage Backed Securities
Total Debt Securities
Equities
Total Securities Available for Sale
Approximate Fair Value
$
3,596
895,361
102,788
118,629
75
243,988
52,346
1,416,783
65,988
$ 1,482,771
NOTE 10—Securities Held to Maturity
Below is an analysis of the amortized cost and approximate fair values of debt securities held to maturity at December 31, 2004
and 2003:
2004
2003
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair
Value
Gross Approximate
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Approximate
Fair
Value
Obligations of U.S. Government
Corporation and Agencies:
Mortgage Backed Securities
$
4,389
$
208
$
-0-
$
4,597
$
8,143
$
444
$
-0- $
8,587
Other
-0-
-0-
-0-
-0-
10,000
366
-0-
10,366
Obligations of States and
Political Subdivisions
Debt Securities Issued by
Foreign Governments
Corporate Securities
73,370
3,514
-0-
76,884
76,716
4,322
-0-
81,038
405
-0-
-0-
-0-
-0-
-0-
405
-0-
408
-0-
8,987
223
-0-
-0-
408
9,210
Total Securities Held to Maturity
$ 78,164
$ 3,722
$
-0-
$
81,886
$
104,254
$ 5,355
$
-0- $ 109,609
The amortized cost and estimated market value of debt
securities at December 31, 2004, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Mortgage Backed Securities
Total Debt Securities
Amortized Approximate
Cost
2,477
15,936
29,286
26,076
73,775
4,389
78,164
$
$
Fair Value
2,508
$
16,516
31,101
27,164
77,289
4,597
81,886
$
There were no sales of securities held to maturity in 2004,
2003 or 2002.
30
Securities held to maturity with an amortized cost of $70,227
and $98,173 were pledged at December 31, 2004 and 2003,
respectively, to secure public deposits and for other purposes
required or permitted by law.
The following table shows the book value or amortized cost
of securities held to maturity as of December 31, 2002:
Amortized Cost
Obligations of U.S. Government
Corporation and Agencies:
Mortgage Backed Securities
Other
Obligations of States and
Political Subdivisions
Debt Securities Issued by
Foreign Governments
Corporate Securities
$
Total Securities Held to Maturity
$
63,535
15,000
96,869
408
22,026
197,838
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 11—Other-Than-Temporary Impairment of Investments
The following table presents the gross unrealized losses and fair values at December 31, 2004 by investment category and time
frame for which the loss has been outstanding:
Description of Securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Less Than 12 Months
12 Months or More
Total
U.S. Treasury Obligations
$
-0-
$
-0-
$
-0-
$
-0-
$
-0-
$
-0-
U.S. Government Agency Obligations
199,421
(2,766)
24,513
(461)
223,934
(3,227)
U.S. Government Agency CMO
and MBS
Corporate Securities
Municipal Securities
Total Securities
533,729
29,860
577
(3,835)
(178)
-0-
304,180
18,290
3,522
(7,039)
837,909
(10,874)
(280)
(75)
48,150
4,099
(458)
(75)
$
763,587
$ (6,779)
$
350,505
$ (7,855)
$ 1,114,092
$ (14,634)
At December 31, 2004, 97% of the unrealized losses were
comprised of securities issued by U.S. Government agencies,
U.S. Government sponsored agencies and investment grade
municipalities. Corporate securities, comprising 3% of the
unrealized losses, consist of 12 issues by companies in the
financial services industry. Two of the issues are non-rated and
have unrealized losses of $15, or .1% of the total. A total of 109
positions are temporarily impaired and none individually has
an unrealized loss of more than 5% of its respective amortized
cost basis. Management does not believe any individual loss
as of December 31, 2004 represents an other-than-temporary
impairment. The unrealized losses are predominantly
attributable to changes in interest rates and not from the
deterioration of the creditworthiness of the issuer. Management
has both the intent and ability to hold the securities represented
in the table for a time necessary to recover the amortized cost.
The following table presents the gross unrealized losses and
fair values at December 31, 2003 by investment category and
time frame for which the loss has been outstanding:
Less Than 12 Months
Description of Securities
U.S. Treasury Obligations
U.S. Government Agency Obligations
U.S. Government Agency CMO and MBS
Corporate Securities
Municipal Securities
$
Fair Value
-0-
101,423
687,974
21,448
10,286
Total Securities
$
821,131
$
Unrealized
Losses
$
NOTE 12—Loans
Loans at year end were divided among these general categories:
Commercial, financial,
agricultural and other
Real estate loans:
Construction and land development
1-4 family dwellings
Other real estate loans
Loans to individuals for household,
family and other personal expenditures
Leases, net of unearned income
Subtotal
Unearned income
Total loans and leases
December 31,
2004
2003
$
715,280
$
655,740
71,351
1,164,707
988,611
27,063
821,159
771,861
562,321
12,815
3,515,085
(252)
$ 3,514,833
521,481
28,033
2,825,337
(455)
$ 2,824,882
Most of the Corporation’s business activity was with
customers located within Pennsylvania. The portfolio is well
diversified, and as of December 31, 2004 and 2003, there
were no significant concentrations of credit.
The following table identifies the amount of nonperforming
loans as of December 31:
-0-
(1,008)
(8,298)
(216)
(99)
(9,621)
Loans on nonaccrual basis
Past due loans
Renegotiated loans
Total nonperforming loans
2004
10,732
14,671
183
25,586
$
$
2003
12,459
10,586
195
23,240
$
$
As of December 31, 2003, there were no unrealized losses
in the investment portfolio that were outstanding for twelve
months or more.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 13—Allowance for Credit Losses
Description of changes:
Allowance at January 1
Additions:
Recoveries of previously
charged off loans
Provisions charged to
operating expense
From acquisition
Deductions:
2004
37,385
2003
34,496
$
$
2002
34,157
$
1,237
1,705
2,048
8,070
4,983
12,770
3,109
12,223
-0-
Loans charged off
Allowance at December 31
10,612
41,063
14,695
37,385
$
$
13,932
34,496
$
Relationship to impaired loans:
Recorded investment in
impaired loans at end
of period
Average balance of impaired
loans for the year
Allowance for credit losses
related to impaired loans
Impaired loans with an
allocation of the allowance
for credit losses
Impaired loans with no
allocation of the allowance
for credit losses
Income recorded on impaired
loans on a cash basis
2004
2003
2002
$
$
$
10,915
$
12,654
$
23,657
12,601
$
19,866
$
24,740
2,252
$
2,048
$
5,204
$
6,500
$
6,327
$
15,065
$
$
4,415
307
$
$
6,327
1,185
$
$
8,592
286
NOTE 14—Financial Guarantees
The Corporation is a party to financial instruments with
off-balance sheet risk in the normal course of business to
meet the financial needs of its customers. These financial
instruments include commitments to extend credit, standby
letters of credit and commercial letters of credit. Those
instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized
in the balance sheet. The contract or notional amount of
those instruments reflects the extent of involvement the
Corporation has in particular classes of financial instruments.
As of December 31, 2004 and 2003, the Corporation did
not own or trade other financial instruments with significant
off-balance sheet risk including derivatives such as futures,
forwards, option contracts and the like, although such
instruments may be appropriate to use in the future to manage
interest rate risk. See NOTE 8 (Derivative Instruments) for a
description of interest rate swaps.
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party of the financial instrument
for commitments to extend credit, standby letters of credit and
commercial letters of credit written is represented by the contract
or notional amount of those instruments. The Corporation uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
32
The following table identifies the notional amount of those
instruments at December 31, 2004 and 2003:
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
2004
2003
$ 744,942
23,079
$
215
$
$
$
$
620,403
28,836
328
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Corporation evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of
credit, is based on management’s credit evaluation of the
counter-party. Collateral that is held varies but may include
accounts receivable, inventory, property, plant and equipment,
residential and income-producing commercial properties.
Standby letters of credit and commercial letters of credit
are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Current notional amounts outstanding at December 31,
2004, for financial standby letters of credit and performance
standby letters of credit include amounts of $8,218 and
$3,375, respectively, issued during 2004 and subject to the
provisions of FIN 45. There is currently no liability recorded
on the Corporation’s balance sheet related to these letters of
credit.
NOTE 15—Premises and Equipment
Premises and equipment are described as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Software
Subtotal
Estimated
Useful Life
Indefinite
10-50 Years
5-40 Years
3-10 Years
3-7 Years
Less accumulated depreciation
and amortization
Total premises and equipment
$
2004
10,257
61,048
11,132
68,819
18,636
169,892
$
2003
7,177
47,438
10,043
58,028
16,599
139,285
112,927
56,965
$
92,747
46,538
$
Depreciation and amortization related to premises and equipment
was $8,017 in 2004, $7,261 in 2003 and $6,840 in 2002.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
The Corporation leases various premises and assorted
equipment under noncancellable agreements. Total future
minimal rental commitments at December 31, 2004, were
as follows:
NOTE 16—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31
were as follows:
2005
2006
2007
2008
2009
Thereafter
Total
Premises
2,239
2,179
2,012
1,717
1,431
7,746
17,324
$
$
$
Equipment
463
448
114
113
-0-
-0-
$ 1,138
Included in the lease commitments above is $827.5 in lease
payments to be paid under a sale-leaseback arrangement,
whereby a gain of $297 on the sale of a branch is being
recognized over the 15 year lease term.
Under the terms of various lease agreements, increases in
utilities and taxes may be passed on to the lessee. Such
adjustments are not reflected in the above table. Additionally,
various lease renewal options are available and are not included
in the minimum lease commitments until such options are
exercised. Total lease expense amounted to $3,180 in 2004,
$1,939 in 2003 and $1,699 in 2002.
NOTE 17—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
NOW and Super NOW accounts
Savings and MMDA accounts
Time deposits
Total interest-bearing deposits
$
2004
92,168
1,703,258
1,568,206
$ 3,363,632
2003
$
110,618
1,302,451
1,466,559
$ 2,879,628
Interest-bearing deposits at December 31, 2004 and 2003,
include allocations from NOW and Super NOW accounts
of $451,938 and $405,521, respectively, into Savings and
MMDA accounts. These reallocations are based on a formula
and have been made to reduce the Corporation’s reserve
requirement in compliance with regulatory guidelines.
Included in time deposits at December 31, 2004 and 2003,
were certificates of deposit in denominations of $100 or more
of $417,988 and $398,716, respectively.
Interest expense related to $100 or greater certificates of
deposit amounted to $15,652 in 2004, $18,227 in 2003 and
$21,685 in 2002.
Included in time deposits at December 31, 2004, were
certificates of deposit with the following scheduled maturities:
2005
2006
2007
2008
2009 and thereafter
$
649,683
374,273
330,536
104,733
108,981
$ 1,568,206
Federal funds purchased
Borrowings from FHLB
Securities sold under agreements
to repurchase
Treasury, tax and loan note option
Total
Maximum total at any month-end
2004
Ending Average Average
Balance
Balance
35,750 $ 81,972
230,204
340,000
Rate
1.46%
1.75%
$
Ending
Balance
2003
Average Average
Balance
$ 14,100 $ 68,455
151,860
120,000
Rate
1.32%
1.33%
2002
Ending Average Average
Balance Balance
$ 63,169
$ 51,600
30,044
146,395
Rate
1.86%
1.76%
477,562
93,162
466,381
18,035
$ 946,474 $ 796,592
$ 1,015,881
1.38%
1.65%
1.51%
326,226
450,140
49,887
7,592
$ 634,127 $ 554,133
$ 699,326
1.16%
0.87%
1.22%
225,793
222,577
48,493
20,902
$ 469,065 $ 339,908
$ 469,065
1.78%
1.47%
1.77%
Interest expense on short-term borrowings for the years
ended December 31 is detailed below:
Federal funds purchased
Borrowings from FHLB
Securities sold under
$
2004
1,199
4,040
$
2003
902
2,019
$
agreements to repurchase
Treasury, tax and loan note option
6,452
298
3,768
66
Total interest on
2002
1,176
530
4,015
308
short-term borrowings
$
11,989
$
6,755
$
6,029
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 18—Subordinated Debentures
Subordinated Debentures outstanding at December 31 are
as follows:
2004
2003
Amount Rate
Amount
Rate
Subordinated Debentures:
Owed to Pittsburgh
Home Capital
Trust I and due 2028 $
-0-
$ 8,292
8.56%
Owed to First
Commonwealth
Capital Trust I
and due 2029
Owed to First
Commonwealth
Capital Trust II
and due 2033
Owed to First
Commonwealth
Capital Trust III
and due 2034
Total junior subordinated
debentures owed to
unconsolidated
subsidiary trusts
36,083 9.50%
36,083
9.50%
LIBOR +
LIBOR+
30,929 2.85%
30,929
2.85%
41,238 5.888%
-0-
$ 108,250
$ 75,304
The Corporation has established three trusts, First
Commonwealth Capital Trust I, First Commonwealth Capital
Trust II and First Commonwealth Capital Trust III, of which
100% of the common equity is owned by the Corporation.
The trusts were formed for the purpose of issuing company
obligated mandatorily redeemable capital securities to third-
party investors and investing the proceeds from the sale
of the capital securities solely in junior subordinated debt
securities (“subordinated debentures”) of the Corporation.
The subordinated debentures held by each trust are the sole
assets of the trust.
Proceeds from subordinated debentures issued to First
Commonwealth Capital Trust III and First Commonwealth
Capital Trust II in March 2004 and December 2003,
respectively, were used to finance the business combination of
GAF. See NOTE 6 (Business Combinations) for a description
of the business combination.
Interest on the debentures issued to First Commonwealth
Capital Trust III is paid quarterly at a fixed rate of 5.888% for
each interest payment prior to April 2009 and LIBOR plus
2.85% for each payment beginning with April 2009 and after.
LIBOR is reset quarterly. Subject to regulatory approval, the
Corporation may redeem the debentures, in whole or in part,
at its option on any interest payment date on or after April 7,
2009, at a redemption price equal to 100% of the principal
amount of the debentures.
Subject to regulatory approval, the Corporation may also
redeem the debentures prior to April 7, 2009, within 90 days
following the occurrence of certain tax or bank regulatory
events at a special redemption price that is greater than 100%.
Deferred issuance costs of $630 are being amortized on a
straight-line basis over the term of the securities.
Interest on the debentures issued to First Commonwealth
Capital Trust II is paid quarterly at a floating rate of LIBOR
plus 2.85% which is reset quarterly. The Corporation may
redeem the debentures, in whole or in part, at its option on
or after January 23, 2009, at a redemption price equal to
100% of the principal amount of the debentures, plus accrued
and unpaid interest to the date of the redemption. Subject
to regulatory approval, the Corporation may also redeem
the debentures prior to January 23, 2009, within 90 days
following the occurrence of certain tax or bank regulatory
events at a special redemption price that is greater than 100%.
Deferred issuance costs of $471 are being amortized on a
straight-line basis over the term of the securities.
Subordinated debentures outstanding at December 31, 2003,
included $8,292 previously issued by PFC to Pittsburgh
Home Capital Trust I. These debentures were assumed by the
Corporation when it acquired PFC in December 2003, and
were called, in accordance with terms of the debentures, and
paid by the Corporation in January 2004.
The subordinated debentures issued to First Commonwealth
Capital Trust I have the same economic terms as the capital
securities issued by the trust. The trust will redeem all of the
outstanding capital securities when the debentures are paid
at maturity. Subject to regulatory approvals, the Corporation
may redeem the debentures, in whole or in part, at any time
on or after September 1, 2009, at a redemption price equal
to 104.75% of the principal amount of the debentures on
September 1, 2009, declining ratably on each September 1
thereafter to 100% on September 1, 2019, plus accrued and
unpaid interest to the date of the redemption. The Corporation
may also redeem the debentures prior to September 1, 2009,
upon the occurrence of certain tax or bank regulatory events,
subject to regulatory approval.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 19—Other Long-term Debt
Other long-term debt at December 31 follows:
2004
2003
ESOP loan due December 2005
ESOP loan due March 2006
ESOP loan due December 2012
Repos due:
2008
Borrowings from FHLB due:
2004
2005
2006
2007
2008
2009
2010
2011
2014
2016
2017
2019
2020
2022
Amount
$
661
-0-
5,514
Weighted Average Weighted Average
Contractual Rate
LIBOR +1%
Effective Rate
LIBOR +1%
LIBOR +1.25% LIBOR +1.25%
Amount
$
1,994
620
Weighted Average Weighted Average
Contractual Rate
LIBOR +1%
8.50%
Effective Rate
LIBOR +1%
8.50%
21,970
5.51%
2.46%
22,522
5.51%
-0-
8,288
40,930
75,855
106,435
222,563
148,822
59,674
17,165
1,646
5,983
7,470
790
7,558
$ 731,324
5.44%
3.50%
3.86%
4.97%
4.25%
5.14%
4.96%
5.40%
5.65%
6.17%
5.72%
7.37%
5.90%
2.05%
3.02%
3.49%
3.30%
3.66%
4.01%
4.01%
4.61%
5.65%
6.17%
5.72%
7.37%
5.90%
19,271
8,555
6,104
21,319
438,413
11,557
140,025
5,895
17,964
1,748
6,271
7,789
817
7,804
718,668
$
5.81%
5.46%
6.01%
5.20%
5.39%
6.49%
5.70%
5.68%
5.40%
5.65%
6.17%
5.72%
7.37%
5.90%
2.46%
1.38%
2.05%
2.67%
4.08%
5.26%
3.52%
4.47%
5.68%
4.64%
5.65%
6.17%
5.72%
7.37%
5.90%
The weighted-average contractual rate reflects the rate
due to creditor. The weighted-average effective rates of
long-term debt in the schedule above include the effects of
the purchase accounting valuation adjustments that were
recorded for the acquisition that was discussed in NOTE 6
(Business Combinations).
FHLB advances in the amount of $307,575 are convertible
on a quarterly basis at the FHLB’s option into floating rate debt
indexed to 3 month LIBOR. Advances in the amount
of $22,500 become convertible at the FHLB’s option into
floating rate debt indexed to 3 month LIBOR beginning
December 19, 2005 through April 24, 2006 and quarterly
thereafter. Advances in the amount of $160,000 become
convertible at the FHLB’s option into floating rate debt indexed
to 3 month LIBOR beginning July 25, 2005 and quarterly
thereafter but only if 3 month LIBOR is 6% or higher. Should
the FHLB elect to convert an advance to a floating rate, the
bank has the right to pay off the advance without penalty.
All Federal Home Loan Bank stock, along with an interest in
unspecified mortgage loans and mortgage-backed securities,
with an aggregate statutory value equal to the amount of the
above advances, have been pledged as collateral with the
Federal Home Loan Bank of Pittsburgh.
Capital securities included in total long-term debt on the
Consolidated Balance Sheets are excluded from this Note, but
are described in NOTE 18 (Subordinated Debentures).
Scheduled loan payments for other long-term debt are
summarized below:
2005
2006
2007
2008
2009 Thereafter
$ 25,423 $ 58,693 $ 64,813 $ 130,354 $ 201,645 $ 226,459
Long-term debt
payments
Purchase
valuation
amortization $ 5,493 $ 5,365 $ 5,190 $ 4,056 $ 2,397 $ 1,436
The amounts on the purchase valuation amortization row
in the table above include fair market adjustments from
the business combination, which is described in NOTE 6
(Business Combinations).
The third quarter of 2004 included a previously announced
charge of $29,495 ($19,172 after tax) representing a penalty
for the prepayment of $440,000 in Federal Home Loan Bank,
or FHLB, long-term borrowings. The prepayment penalty
is reflected as “Debt Prepayment Fees” in the Consolidated
Statements of Income. The FHLB borrowings were replaced
with other borrowings having maturities ranging from overnight
to 2010. This transaction expands the maturity distribution of the
company’s FHLB advances to minimize the impact of maturities
on any one year. It also reduced the initial interest cost on the
$440,000 in FHLB advances by 292 basis points (2.92%). First
Commonwealth expects that the transaction will result in an
increase in net interest income over the remaining term of the
original advances in excess of the prepayment penalty.
NOTE 20—Common Share Commitments
At December 31, 2004 and 2003, the Corporation had
100,000,000 common shares authorized. 71,978,658 shares
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 20—Common Share Commitments (continued)
were issued at December 31, 2004, and 63,704,445 shares
were issued at December 31, 2003. Issued shares were
reduced by 2,109,660 shares of treasury stock at December 31,
2004 and 2,992,425 shares of treasury stock at December 31,
2003. The Corporation may be required to issue additional
shares to satisfy common share purchases related to the
employee stock ownership plan described in NOTE 22
(Retirement Plans). The dilutive effect of stock options
outstanding on average shares outstanding in the diluted
earnings per share reported on the income statement were
599,905, 384,778 and 332,404 shares at December 31, 2004,
2003 and 2002, respectively.
Treasury shares consisting of 906,494 and 552,781 were
reissued during 2004 and 2003 upon exercise of stock
options. Treasury shares consisting of 16,107 and 17,663
were reissued in 2004 and 2003, respectively, to fund the
business combination with SCC and SFA as described in
NOTE 6 (Business Combinations). Treasury shares consisting
of 39,836 were acquired as part of the GAF acquisition.
During 2004, 8,274,123 common shares were issued to
fund the business combination with GAF and during 2003,
1,179,037 common shares were issued to fund the business
combination with PFC. These transactions are also described
in NOTE 6 (Business Combinations).
NOTE 21—Income Taxes
The income tax provision consists of:
2004
2003
2002
Current tax provision for
income exclusive of
securities transactions:
Federal
State
$
Securities transactions
Total current tax provision
Benefit of operating loss
carryforwards
Deferred tax provision (benefit)
$
Total tax provision
4,138
-0-
1,427
5,565
(474)
(1,384)
3,707
$ 9,279
1
225
9,505
-0-
(594)
8,911
$
$ 13,438
-0-
2,048
15,486
-0-
(2,235)
$ 13,251
2004
Temporary differences between financial statement carrying
amounts and tax bases of assets and liabilities that represent
significant portions of the deferred tax assets (liabilities) at
December 31, 2004 and 2003, were as follows:
2004
2003
Deferred tax assets:
Allowance for credit losses
Postretirement benefits other than pensions
Basis difference in assets acquired
Severance expense
Net operating loss carryforward
from acquisition
Alternative minimum tax credit carryforward
Other tax credit carryforward
Deferred compensation
Other
Total deferred tax assets
$ 13,997
1,211
6,409
239
1,174
3,297
1,428
854
825
29,434
$ 13,107
1,040
4,710
250
-0-
-0-
-0-
788
352
20,247
Deferred tax liabilities:
Accumulated accretion of bond discount
Unrealized gain on securities available
for sale
Lease financing deduction
Loan origination fees and costs
Accumulated depreciation
Other
Total deferred tax (liabilities)
(121)
(124)
(5,445)
(3,243)
(1,473)
(1,737)
(490)
(12,509)
(8,166)
(6,439)
(1,562)
(1,343)
(574)
(18,208)
Net deferred tax asset
$ 16,925
$
2,039
A net operating loss carryforward from acquisition of $3,353
is remaining at December 31, 2004. This carryforward
expires in 2024. A tax credit carryforward of $1,428 is
remaining as of December 31, 2004, and expires in 2024.
Management believes that future taxable income will be
sufficient to fully realize the deferred tax assets associated
with these carryforwards.
The total tax provision for financial reporting differs from the
amount computed by applying the statutory income tax rate
to income before taxes. The differences are as follows:
2003
2002
Amount
% of Pretax Income
Amount
% of Pretax Income
Amount
% of Pretax Income
$
14,826
35.0
$ 23,293
35.0
$
18,353
35.0
(1,805)
(7,364)
-0-
(1,428)
(522)
3,707
(4.2)
(17.4)
0.0
(3.4)
(1.2)
8.8
(1,520)
(7,332)
-0-
(651)
(539)
$ 13,251
(2.3)
(11.0)
0.0
(1.0)
(0.8)
19.9
(1,649)
(6,216)
1
(531)
(1,047)
8,911
$
(3.1)
(11.9)
0.0
(1.0)
(2.0)
17.0
Tax at statutory rate
Increase (decrease) resulting from:
Income from bank owned
life insurance
Other nontaxable interest
State income taxes
Tax credits
Other
Total tax provision
$
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 22—Retirement Plans
All employees with at least one year of service are eligible to
participate in the employee stock ownership plan (“ESOP”).
Contributions to the plan are determined by the Board of
Directors, and are based upon a prescribed percentage of the
annual compensation of all participants. During the current
period, the ESOP acquired shares of the Corporation’s
common stock in a transaction, whereby the ESOP Trust
borrowed funds which were guaranteed by the Corporation.
In addition, the borrowings related to the ESOP as of
December 31, 2004, included amounts that were borrowed
in a similar transaction that took place in a prior period.
The borrowed amounts represent leveraged and unallocated
shares, and accordingly have been recorded as long-term debt
with the offset as a reduction of common shareholders’ equity.
Compensation costs related to the plan were $1,442 in 2004,
$938 in 2003 and $940 in 2002. See NOTE 23 (Unearned
ESOP Shares) for additional information on the ESOP.
The employees of PFC were covered by a leveraged ESOP
plan. The PFC ESOP had unallocated ESOP shares of
43,174 at the merger date. The plan was terminated effective
December 5, 2003. After liquidation of unallocated ESOP
shares with a fair value of $620, which were utilized to pay
off the outstanding PFC ESOP loan payable, remaining shares
were allocated to the participants of the PFC ESOP during
2004. No compensation cost for the PFC ESOP was required
to be recognized in the Consolidated Statements of Income.
The employees of GAF were covered by a leveraged ESOP
plan. The GAF ESOP had unallocated ESOP shares of
157,730 as of December 31, 2004, with a fair market value
of $2,427. Termination of the plan is pending approval from
the Internal Revenue Service. Once approval is received, the
remaining shares will be allocated to participants of the GAF
ESOP. No compensation cost for the GAF ESOP is required
to be recognized in the Consolidated Statements of Income.
The Corporation also has a savings plan pursuant to the
provisions of section 401(k) of the Internal Revenue code.
Under the terms of the plan, each participant will receive an
automatic employer contribution to the plan in an amount
equal to 3% of compensation. Each participating employee
may contribute up to 80% of compensation to the plan
of which up to 4% is matched 100% by the employer’s
contribution. The 401(k) plan expense was $2,977 in
2004, $2,606 in 2003 and $2,616 in 2002. Prior to the plan
amendment effective February 1, 2002, the Corporation’s
401(k) plan permitted each participating employee to
contribute 10% of compensation to the plan of which up to
4% was matched 100% by the employer’s contribution.
The 401(k) plan of PFC was merged into the Corporation’s
401(k) plan effective January 1, 2004, whereby all eligible PFC
employees began to participate in the Corporation’s plan with
no lapse in credited service. During the period from the merger
date of December 5, 2003, until December 31, 2003, the PFC
employees continued to participate in the PFC plan and to
receive employer contributions under the terms of the plan.
The GAF 401(k) plan was merged into the Corporation’s
401(k) plan effective July 1, 2004, whereby all eligible GAF
employees began to participate in the Corporation’s plan
with no lapse in credited service. During the period from the
merger date of May 24, 2004, until June 30, 2004, the GAF
employees continued to participate in the GAF plan and to
receive employer contributions under terms of the plan.
Upon shareholder approval at the regular 1998 meeting,
the Corporation established a “Supplemental Executive
Retirement Plan” (“SERP”) to provide deferred
compensation for a select group of management. The purpose
of this plan is to restore some of the benefits lost to the highly
compensated employees compared to other employees due
to limits and restrictions incorporated into the Corporation’s
401(k) and ESOP plans. The Corporation’s 401(k) and
ESOP plans include restrictions on maximum compensation,
actual deferral percentage, actual contribution, maximum
contribution and maximum salary reduction which are
required in order to meet specific legal requirements.
Participants in the SERP may elect to contribute up to
25% of compensation (compensation in excess of limits
of the Corporation’s 401(k) and ESOP plans) into the
SERP, through salary reduction. The Corporation will
make an elective contribution to the SERP equal to the
elective deferred compensation of the participant for the
plan year. Each participant of the SERP will also receive
a matching contribution equal to 100% of the employee’s
elective contribution up to 4%, and an additional non-
elective contribution from the employer equal to 8% of plan
compensation. In addition, the Corporation may make an
extra non-elective contribution for plan participants.
The SERP will continue to supplement the Corporation’s
401(k) and ESOP plans and will therefore be modified at
the same time and in the same respect as the basic plans are
modified in future periods. The SERP plan expense was $418
in 2004, $235 in 2003 and $133 in 2002.
PFC participated in a multi-employer defined benefit pension
plan that covered all eligible employees and provided benefits
based on each employee’s years of service and compensation.
No contributions were made to the plan and no compensation
costs were recognized in the Consolidated Statements of
Income. The withdrawal penalty of $324 was accrued as a
liability at December 31, 2003, and paid in 2004.
Postretirement Benefits other than Pensions for
Acquired Subsidiaries
Employees of the former Southwest Bank and GAF were
covered by post retirement benefit plans. The measurement
date for these plans was October 1.
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 22—Retirement Plans (continued)
Postretirement Benefits other than Pensions for
Acquired Subsidiaries (continued)
Net periodic benefit cost of these plans was as follows:
$
Service cost
Interest cost on projected benefit obligation
Amortization of transition obligation
Loss amortization
Net periodic benefit cost
2004
-0-
308
2
84
$ 394
2003
-0-
338
2
121
461
$
$
2002
$
-0-
273
2
60
$ 335
The following table sets forth the funded status of the
plans and the amounts recognized on the Corporation’s
Consolidated Balance Sheet as of December 31:
Accumulated post retirement benefit obligation:
Retirees
Actives
Total accumulated postretirement benefit obligation
Plan assets at fair value
Accumulated postretirement benefit obligation
in excess of plan assets
Unrecognized transition obligation
Unrecognized net loss
Accrued benefit liability recognized
on the balance sheet
2004
2003
$ 3,784
-0-
3,784
-0-
$ 5,901
-0-
5,901
-0-
3,784
(13)
(310)
5,901
(14)
(2,844)
$ 3,461
$ 3,043
The following table sets forth the change in benefit obligation:
Benefit obligation at beginning of year
Assumed benefit obligation from acquisition
Service cost
Interest cost
Benefit payments
Actuarial (gain) loss
Benefit obligation at end of year
2004
$ 5,901
449
-0-
308
(451)
(2,423)
$ 3,784
2003
$ 5,142
-0-
-0-
338
(379)
800
$ 5,901
The discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation
was 6.00% for 2004 and 6.25% for 2003. The health care
cost trend rates used for 2004 were projected at an initial rate
of 8.50% for 2005 decreasing over time to an annual rate
of 4.75% in 2014 for both indemnity plan participants and
non-indemnity plan participants. For 2003, rates used were
projected at an initial rate of 8.00% for 2004 decreasing over
time to an annual rate of 4.25% in 2008 for both indemnity
plan participants and non-indemnity plan participants.
The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the “Act”) introduced a
prescription drug benefit under Medicare Part D. The Act
also introduced a federal subsidy to sponsors of retiree health
care benefit plans that provide a prescription drug benefit
that is at least actuarially equivalent to Medicare Part D. The
postretirement plans of the Corporation are provided through
38
insurance coverage; therefore, the Corporation will not
receive a direct federal subsidy. The preceding measures of
the accumulated postretirement benefit obligation and the net
periodic postretirement benefit cost assume that the insurer
will receive the subsidy and pass those savings onto the
Corporation through reduced insurance premiums.
The health care cost trend rate assumption can have a
significant impact on the amounts reported for this plan. A
one-percentage-point change in assumed health care cost
trend rates would have the following effects:
Effect on total of service and
interest cost components
Effect on postretirement
benefit obligation
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
$
(12)
$ (215)
$
(34)
$
(569)
As of December 31, 2004, the projected benefit payments for
the next ten years are as follows:
2005
2006
2007
2008
2009
2010-2014
$
Projected Benefit Payment
388
390
387
370
363
1,563
The projected payments were calculated using the same
assumptions as those used to calculate the benefit obligations
included in this note.
NOTE 23—Unearned ESOP Shares
First Commonwealth Financial Corporation Employee Stock
Ownership Plan Trust (“ESOP”) borrowed funds which
were guaranteed by the Corporation. The combined balances
of the ESOP related loans were $6,175 at December 31,
2004, and $1,994 at December 31, 2003. The outstanding
balance at December 31, 2004, included $5,514 in additional
borrowings that were used to purchase shares during 2004.
The loans have been recorded as long-term debt on the
Corporation’s Consolidated Balance Sheets. A like amount of
unearned ESOP shares was recorded as a reduction of common
shareholders’ equity. Unearned ESOP shares, included as a
component of shareholders’ equity, represent the Corporation’s
prepayment of future compensation expense. The shares
acquired by ESOP are held in a suspense account and will be
released to the ESOP for allocation to the plan participants as the
debt is reduced. Repayment of the loans is scheduled to occur
over a remaining one-year period for the initial loan and an eight-
year period for the new loan from contributions to the ESOP by
the Corporation and dividends on unallocated ESOP shares.
The following is an analysis of ESOP shares held in suspense:
See NOTE 1 (Statement of Accounting Policies) for the
definition of “old shares” and “new shares.”
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
Shares in suspense
December 31, 2002
Shares allocated during 2003
Shares in suspense
December 31, 2003
Shares allocated during 2004
Shares acquired during 2004
Shares in suspense
December 31, 2004
Total
Old Shares
New Shares
271,666
(96,118)
175,548
(124,232)
421,800
66,512
(23,533)
42,979
(28,832)
-0-
205,154
(72,585)
132,569
(95,400)
421,800
473,116
14,147
458,969
The fair market value of the new shares remaining in
suspense was approximately $7,064 and $1,890 at
December 31, 2004 and 2003, respectively.
Interest on ESOP loans was $142 in 2004, $60 in 2003 and
$109 in 2002. During 2004, 2003 and 2002, dividends on
unallocated shares in the amount of $195, $184 and $242,
respectively, were used for debt service while all dividends
on allocated shares were allocated or paid to the participants.
Unearned ESOP shares from PFC at December 31, 2003 were
excluded from the preceding analysis. The PFC ESOP plan
was terminated effective December 5, 2003. Unallocated
shares remaining after liquidation of shares to fund the PFC
ESOP loan payable were allocated to PFC ESOP participants.
Unearned ESOP shares from GAF at December 31, 2004 are
excluded from the preceding analysis. Termination of the GAF
ESOP plan is pending approval from the Internal Revenue
Service. Once approval is received, the remaining unallocated
shares will be allocated to GAF ESOP participants.
NOTE 24—Stock Option Plan
At December 31, 2003, the Corporation had a stock-based
compensation plan, which is described below. All of the
exercise prices and related number of shares have been restated
to reflect historical stock splits. The plan permits the Executive
Compensation Committee to grant options for up to 4.5 million
shares of the Corporation’s common stock through October 15,
2005. Although the vesting requirements and terms of
future options granted are at the discretion of the Executive
Compensation Committee, all options granted in 2002 were
exercisable by December 31, 2002. Options granted from 2003
through 2004 vested immediately on the respective grant dates.
All options expire ten years from the grant date. All equity
compensation plans are approved by security holders.
At May 24, 2004, the Corporation consummated its merger
with GAF, at which time all outstanding GAF options
were converted to First Commonwealth options at a
conversion rate of 2.752. These options were not granted
from the Corporation’s existing stock option plan. First
Commonwealth assumed the option plan of GAF. Under
this plan, a total of 611,962 First Commonwealth shares
were reserved for issuance due to the exercise of previously
granted GAF options assumed in the merger. No further
grants will be made under the GAF plan.
At December 5, 2003, the Corporation consummated
its merger with PFC, at which time all outstanding PFC
options were converted to First Commonwealth options at
a conversion rate of 1.387. These options were not granted
from the Corporation’s existing stock option plan. First
Commonwealth assumed the option plans of PFC. Under
these plans, a total of 62,322 First Commonwealth shares
were reserved for issuance due to the exercise of previously
granted PFC options assumed in the merger. No further
grants will be made under these PFC plans.
Equity Compensation Plan Information as of
December 31, 2004:
Number of Weighted Average
Exercise Price of
Shares
Available for
Options Outstanding Future Grant
Options
Outstanding
Equity compensation
plans approved by
security holders (a)
2,682,938
$10.61
50,274
(a) Includes plans assumed through the acquisitions of GAF
and PFC. As of December 31, 2004, outstanding options
related to these acquired plans totaled 603,459 with a
weighted-average exercise price per share of $6.23.
The Corporation has elected, as permitted by FAS No. 123, to
apply APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been
recognized for its stock options outstanding. Had compensation
cost for the Corporation’s stock option plan been determined
based upon the fair value at the grant dates for awards under
the plan consistent with the method of FAS No. 123, the
Corporation’s net income and earnings per share would have
been reduced to the pro forma amounts shown below:
2004
2003
2002
As
Pro
Pro
Reported Forma Reported Forma Reported Forma
$ 38,652 $ 38,614 $ 53,300 $ 51,948 $ 43,526 $ 41,248
Pro
As
As
Net income
Basic earnings
per share
Diluted earnings
per share
$ 0.59 $
$ 0.58 $
0.59 $
0.90 $ 0.88 $ 0.75 $ 0.71
0.58 $
0.90 $ 0.87 $ 0.74 $ 0.70
The weighted-average grant-date fair value of stock options
granted during 2004, 2003 and 2002 was $2.45, $3.24 and
$4.27, respectively. The fair value of each option granted is
estimated on the date of the grant using the Black-Scholes
options pricing model with the following weighted average
assumptions used:
2004
2003
4.44% per annum 5.14% per annum 5.13% per annum
2002
Dividend yield
Expected
volatility
Risk-free
23.2%
interest rate
4.1%
40.3%
4.1%
54.0%
5.0%
Expected
option life
7.0 years
7.0 years
7.0 years
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 24—Stock Option Plan (continued)
A summary of the status of the Corporation’s outstanding stock
options as of December 31, 2004, 2003 and 2002 and changes
for the years ending on those dates is presented below:
do they present other unfavorable features. It is anticipated that
further such transactions will be made in the future.
The following is an analysis of loans to those parties whose
aggregate loan balances exceeded $60 during 2004:
2004
2003
2002
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Shares
Balances December 31, 2003
Advances
Repayments
Other
Balances December 31, 2004
$
$
4,777
3,411
(4,206)
894
4,876
1 $ 7.60
62,322 $ 7.60
2,965,726 $ 11.51 2,841,772 $ 11.33 2,687,887 $ 11.13
Outstanding at
beginning
of year
PFC converted
options at
merger
GAF converted
options at
merger
Granted
Exercised
Forfeited
Outstanding at
end of year 2,682,938 $ 10.61 2,965,726 $ 11.51 2,841,772 $ 11.33
Exercisable at
end of year 2,682,938 $ 10.61 2,965,726 $ 11.51 2,841,772 $ 11.33
-0- $ 0.00
-0- $ 0.00
820,775 $ 11.70
641,912 $ 12.06
(549,215) $ 10.71
(447,001) $ 10.51
(31,065) $ 12.91 (219,889) $ 11.90
611,962 $ 6.24
24,000 $ 14.41
(906,494) $ 10.68
(12,257) $ 12.54
-0- $ 0.00
The following table summarizes information about the stock
options outstanding at December 31, 2004:
Options Exercisable
Options Outstanding
Weighted-
Average Weighted-
Number Remaining Average Number
Weighted-
Average
Outstanding Contract Exercise Exercisable Exercise
At 12/31/04 Life
5.3
4.7
6.1
5.7
6.4
5.2
539,650
$ 5.85
131,983
$ 9.27
288,683
$ 10.75
949,077
$ 11.48
$ 13.03
773,545
$ 10.61 2,682,938
539,650
131,983
288,683
949,077
773,545
2,682,938
Price
$ 5.85
$ 9.27
$ 10.75
$ 11.48
$ 13.03
$ 10.61
Price At 12/31/04
Range
of Exercise
Prices
$ 4.24-$8.99
$ 9.00-$9.99
$ 10.00-$10.99
$ 11.00-$11.99
$ 12.00-$15.00
Total
NOTE 25—Contingent Liabilities
There are no material proceedings to which the Corporation
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 the Corporation and its subsidiaries.
NOTE 26—Related Party Transactions
Some of the Corporation’s or its subsidiaries’ directors,
executive officers, principal shareholders and their related
interests, had transactions with the subsidiary banks in the
ordinary course of business. All deposit and loan transactions
were made on substantially the same terms, such as collateral
and interest rates, as those prevailing at the time for comparable
transactions. In the opinion of management, these transactions
do not involve more than the normal risk of collectibility nor
40
“Other” primarily reflects the change in those classified
as a “related party” usually as a result of mergers,
resignations or retirements.
NOTE 27—Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its subsidiary
banks is limited by restrictions imposed on all financial institutions
by banking regulators. At December 31, 2004, dividends from
subsidiary banks were restricted not to exceed $269,122. These
restrictions have not had, and are not expected to have, a significant
impact on the Corporation’s ability to meet its cash obligations.
The Corporation is subject to various regulatory capital
requirements administered by the Federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Corporation’s financial statements.
Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and
its banking subsidiaries must meet specific capital guidelines
that involve quantitative measures of the Corporation’s
assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices.
The Corporation’s capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weighting and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation to maintain minimum
amounts and ratios of total and Tier I capital (common and
certain other “core” equity capital) to risk weighted assets, and
of Tier I capital to average assets. As of December 31, 2004,
the Corporation and its banking subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notifications from the
Federal Reserve Board and Federal Deposit Insurance Corporation
categorized First Commonwealth Bank as well capitalized under
the regulatory framework for prompt corrective action. To be
considered as well capitalized, the bank must maintain minimum
total risk-based capital, Tier I risk-based capital and Tier I leverage
ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have
changed the institution’s category.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
Actual
Amount
Ratio
Regulatory Minimum
Ratio
Amount
To Be Well Capitalized Under
Prompt Corrective Action Provisions
Amount
Ratio
As of December 31, 2004
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $
$
First Commonwealth Bank
526,916
465,350
12.8%
11.5%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $
$
First Commonwealth Bank
485,853
424,287
11.8%
10.5%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $
$
First Commonwealth Bank
485,853
424,287
8.0%
7.0%
As of December 31, 2003
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $
$
First Commonwealth Bank
494,541
403,313
14.5%
12.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $
$
First Commonwealth Bank
457,156
365,929
13.4%
10.9%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $
$
First Commonwealth Bank
457,156
365,929
9.4%
7.6%
$
$
$
$
$
$
$
$
$
$
$
$
328,500
324,296
164,250
162,148
182,772
181,076
273,207
269,734
136,603
134,867
146,571
145,263
8.0%
8.0%
4.0%
4.0%
3.0%
3.0%
8.0%
8.0%
4.0%
4.0%
3.0%
3.0%
N/A
405,370
N/A
243,222
N/A
301,793
N/A
337,167
N/A
202,300
N/A
242,105
$
$
$
$
$
$
N/A
10.0%
N/A
6.0%
N/A
5.0%
N/A
10.0%
N/A
6.0%
N/A
5.0%
NOTE 28—Condensed Financial Information of First Commonwealth Financial Corporation (parent company only)
Balance Sheets
Statements of Income
December 31,
2004
2003
Years Ended December 31,
2002
2003
2004
Assets
Cash
Securities available for sale
Loans to affiliated parties
Investment in subsidiaries
Investment in unconsolidated subsidiary trusts
Investment in jointly-owned company
Premises and equipment
Dividends receivable from subsidiaries
Receivable from subsidiaries
Other assets
Total assets
$
1,181
20,545
387
601,843
3,302
5,941
5,732
5,325
6,034
10,520
$ 660,810
Liabilities and Shareholders’ Equity
Accrued expenses and other liabilities
Dividends payable
Loans payable
Subordinated debentures payable
Shareholders’ equity
Total liabilities and shareholders’ equity
$
2,879
11,528
6,175
108,250
531,978
$ 660,810
Interest and dividends
Dividends from subsidiaries
Interest expense
Net securities gains (losses)
Other revenue
Operating expenses
Income before taxes and equity
in undistributed earnings
of subsidiaries
Applicable income tax benefits
Income before equity in undistributed
earnings of subsidiaries
Equity in undistributed earnings
of subsidiaries
Net income
$
$
$
$
1,376
33,052
439
462,894
2,280
5,622
5,887
11,517
6,085
5,126
534,278
14,199
9,714
2,613
76,806
430,946
534,278
$
50
83,715
(7,405)
84
59
(12,778)
48 $
$
64,907
(3,629)
742
253
(9,237)
48
43,609
(3,570)
-0-
-0-
(9,161)
63,725
7,439
53,084
4,570
30,926
5,304
71,164
57,654
36,230
(32,512)
$ 38,652
(4,354)
7,296
$ 53,300 $ 43,526
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 28—Condensed Financial Information of First
Commonwealth Financial Corporation (parent company
only) (continued)
Statements of Cash Flows
Operating Activities
Net income
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization
Net gains on sale of assets
Decrease (increase) in prepaid
income taxes
Undistributed equity
in subsidiaries
Other—net
Stock option tax benefit
Net cash provided
Years Ended December 31,
2002
2003
2004
$ 38,652
$ 53,300 $ 43,526
437
(84)
835
(739)
537
-0-
(4,600)
256
(397)
32,512
3,006
1,239
(4,482)
(2,193)
535
(7,296)
1,270
225
by operating activities
71,162
47,512
37,865
Investing Activities
Transactions with securities available for sale:
Purchases of investment securities
Sales of investment securities
Net change in loans to affiliated parties
Purchases of premises and equipment
(91,592)
104,058
52
(162)
(32,785)
1,766
59
(125)
(943)
-0-
42
(33)
Changes in receivable from and net
investment in subsidiary
Net cash used by
(82,284)
(28,918)
436
investing activities
(69,928)
(60,003)
(498)
Financing Activities
Issuance of subordinated debentures
Issuance of other long-term debt
Repayment of subordinated debentures
Repayment of other long-term debt
Discount on dividend reinvestment
41,238
3,486
(9,794)
(3,486)
30,929
-0-
-0-
-0-
-0-
-0-
-0-
-0-
plan purchases
Treasury stock reissued
Cash dividends paid
Net cash used by
financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash acquired with acquisition
Cash at end of year
(816)
9,679
(41,736)
(706)
5,923
(36,630)
(637)
4,655
(35,208)
(1,429)
(195)
1,376
-0-
$ 1,181
(484)
(12,975)
13,844
507
(31,190)
6,177
7,667
-0-
$ 1,376 $ 13,844
Cash dividends declared per common share were $0.645,
$0.625 and $0.605 for 2004, 2003 and 2002, respectively.
Dividends from subsidiaries for 2004 and 2003 included
special dividends in the amounts of $7,598 and $11,436,
respectively, that were received from First Commonwealth
Bank, a wholly owned subsidiary. After distribution of the
special dividends, which were within guidelines established
by the banking regulators, First Commonwealth Bank
remains classified as a well-capitalized institution. During
2004, dividends from subsidiaries also included a special
dividend from FraMal Holdings Corporation in the amount
42
of $29,529. During 2003, the parent company also received
a dividend-in-kind from First Commonwealth Bank in the
amount of $8,797, which was received in the form of an
investment holding company subsidiary. The subsidiary,
known as FraMal Holdings Corporation, was acquired by
First Commonwealth Bank in the PFC acquisition that is
described in NOTE 6 (Business Combinations).
During 2004, the Corporation’s Employee Stock Ownership
Trust obtained a $14,000 line of credit from an unrelated financial
institution. The line of credit was used to purchase stock for the
Corporation’s ESOP and is guaranteed by the parent company
of the Corporation. During 2004, $5,514 was borrowed on the
line. The loan was recorded as long-term debt and the offset was
recorded as a reduction of common shareholders’ equity.
As of December 31, 2004, the parent company had available
a one-year line of credit to be used for general operating
cashflows. The line of credit was with an unrelated financial
institution for $15,000, and as of December 31, 2004, had no
amounts outstanding.
NOTE 29—Fair Values of Financial Instruments
Below are various estimated fair values at December 31,
2004 and 2003, as required by Statement of Financial
Accounting Standards No. 107 (“FAS No. 107”). Such
information, which pertains to the Corporation’s financial
instruments, is based on the requirements set forth in FAS
No. 107 and does not purport to represent the aggregate
net fair value of the Corporation. It is the Corporation’s
general practice and intent to hold its financial instruments
to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading
activities. Many of the financial instruments lack an available
trading market, as characterized by a willing buyer and
seller engaging in an exchange transaction. Therefore, the
Corporation had to use significant estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate
fair values may materially affect the estimated amounts. Also,
management is concerned that there may not be reasonable
comparability between institutions due to the wide range of
permitted assumptions and the methodologies in absence of active
markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
The following methods and assumptions were used by the
Corporation in estimating financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying
amounts for cash and short-term instruments approximate the
estimated fair values of such assets.
Securities: Fair values for securities held to maturity and
securities available for sale are based on quoted market
prices, if available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
instruments. The carrying value of nonmarketable equity
securities, such as Federal Home Loan Bank stock, is
considered a reasonable estimate of fair value.
Loans receivable: The estimated fair values of all loans
are estimated by discounting the future cash flows using
interest rates currently offered for loans with similar terms to
borrowers of similar credit quality.
Off-balance sheet instruments: Many of the Corporation’s
off-balance sheet instruments, primarily loan commitments
and standby letters of credit, are expected to expire without
being drawn upon, therefore, the commitment amounts do not
necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows and
difficulty in predicting the timing of such cash flows, fair values
were not estimated for these instruments for both periods.
Deposit liabilities: Management estimates that the fair value
of deposits is based on a market valuation of similar deposits.
The carrying value of variable rate time deposit accounts
and certificates of deposit approximate their fair values at
the report date. Also, fair values of fixed rate time deposits
for both periods are estimated by discounting the future
cash flows using interest rates currently being offered and a
schedule of aggregated expected maturities.
Short-term borrowings: The estimated fair values of
borrowings from the Federal Home Loan Bank were
estimated based on the estimated incremental borrowing rate
for similar types of borrowings. The carrying amounts of
other short-term borrowings such as Federal funds purchased,
securities sold under agreement to repurchase and treasury,
tax and loan notes were used to approximate fair value.
Long-term debt: The fair value of long-term debt is estimated
by discounting the future cash flows using the Corporation’s
estimated incremental borrowing rate for similar types of
borrowing arrangements.
The following table presents carrying amounts and estimated
fair values of the Corporation’s financial instruments at
December 31, 2004 and 2003:
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
2004
2003
Financial assets
Cash and due from banks
Interest-bearing deposits with banks
Securities available for sale
Investments held to maturity
Loans, net
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
$
$
$
$
$
$
$
$
79,591
2,403
2,162,313
78,164
3,473,770
3,844,475
946,474
839,574
$
$
$
$
$
$
$
$
79,591
2,403
2,162,313
81,886
3,492,547
3,670,438
946,631
847,284
$
$
$
$
$
$
$
$
82,510
5,362
1,969,176
104,254
2,787,497
3,288,275
634,127
793,972
$
$
$
$
$
$
$
$
82,510
5,362
1,969,176
109,609
2,844,411
3,193,216
634,361
863,444
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY OF FINANCIAL DATA—UNAUDITED
(Dollar Amounts in Thousands, except per share data)
The unaudited quarterly results of operations for the years ended December 31, 2004 and 2003 are as follows:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
for credit losses
Net securities gains
Other operating income
Merger and integration charges
Debt prepayment fees
Other operating expenses
Income (loss) before income taxes
Applicable income taxes (benefit)
Net income (loss)
Basic earnings per share
Diluted earnings per share
Average shares outstanding
Average shares outstanding assuming dilution
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
for credit losses
Net securities gains
Other operating income
Litigation settlement
Other operating expenses
Income before income taxes
Applicable income taxes
Net income
Basic earnings per share
Diluted earnings per share
Average shares outstanding
Average shares outstanding assuming dilution
First Quarter
$ 61,972
25,165
36,807
2,100
34,707
3,850
9,733
1,291
-0-
30,426
16,573
3,250
$ 13,323
$
$
0.22
0.22
60,772,824
61,289,672
2004
Second Quarter
$
$
$
$
65,498
27,063
38,435
2,520
35,915
145
10,952
873
-0-
32,671
13,468
1,908
11,560
0.18
0.18
Third Quarter
$ 74,940
28,881
46,059
2,675
$
Fourth Quarter
75,615
29,581
46,034
775
43,384
51
11,752
(39)
29,495
34,597
(8,866)
(6,071)
(2,795)
(0.04)
(0.04)
$
$
$
45,259
31
11,135
-0-
-0-
35,241
21,184
4,620
16,564
0.24
0.24
$
$
$
64,455,920
64,947,209
69,077,293
69,702,327
69,173,249
69,938,616
2003
First Quarter
$ 62,317
25,471
36,846
3,460
Second Quarter
$
61,186
25,745
35,441
3,465
Third Quarter
$ 59,605
24,616
34,989
3,495
Fourth Quarter
60,665
$
24,409
36,256
2,350
33,386
2,234
8,837
(610)
28,382
16,685
3,381
$ 13,304
$
$
0.23
0.23
58,703,260
58,934,248
31,976
3,221
9,977
-0-
28,382
16,792
3,365
13,427
0.23
0.23
$
$
$
58,769,160
59,101,475
31,494
166
13,691
-0-
28,005
17,346
3,511
$ 13,835
$
$
0.23
0.23
58,950,258
59,376,716
33,906
230
10,088
-0-
28,496
15,728
2,994
12,734
0.21
0.21
$
$
$
59,577,396
60,122,832
44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollar Amounts in Thousands, except per share data)
The following selected financial data is not covered by the auditor’s report and should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the
consolidated financial statements and related notes. The reclassifications had no effect on the Corporation’s financial condition
or results of operations.
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after
provision for credit losses
Net securities gains
Other operating income
Litigation settlement
Restructuring charges
Merger and related charges
Debt prepayment fees
Other operating expenses
Income before taxes
Applicable income taxes
Net income
Per Share Data
Net income
Dividends declared
Average shares outstanding
Per Share Data Assuming Dilution
Net income
Dividends declared
Average shares outstanding
2004
2003
2002
2001
Years Ended December 31,
278,025
110,690
167,335
8,070
159,265
4,077
43,572
-0-
-0-
2,125
29,495
132,935
42,359
3,707
38,652
$
$
243,773
100,241
143,532
12,770
130,762
5,851
42,593
(610)
-0-
-0-
-0-
113,265
66,551
13,251
53,300
$
$
275,568
122,673
152,895
12,223
140,672
642
37,453
8,000
6,140
-0-
-0-
112,190
52,437
8,911
43,526
$
$
308,891
167,170
141,721
11,495
130,226
3,329
37,776
-0-
-0-
-0-
-0-
105,888
65,443
15,254
50,189
2000
311,882
174,539
137,343
10,030
127,313
1,745
31,938
-0-
-0-
-0-
-0-
99,461
61,535
14,289
47,246
$
$
0.59
0.645
65,887,611
0.90
$
0.625
$
59,002,277
0.75
$
$
0.605
58,409,614
0.87
$
$
0.585
57,885,478
0.82
$
$
0.565
57,558,929
$
$
$
$
$
$
0.58
0.645
66,487,516
0.90
$
$
0.625
59,387,055
0.74
$
$
0.605
58,742,018
0.86
$
$
0.585
58,118,057
0.82
$
$
0.565
57,618,671
At End of Period
Total assets
Investment securities
Loans and leases, net of unearned income
Allowance for credit losses
Deposits
Company obligated mandatorily redeemable
capital securities of subsidiary trust
Subordinated debentures
Other long-term debt
Shareholders’ equity
Key Ratios
Return on average assets
Return on average equity
Net loans to deposits ratio
Dividends per share as a percent of
net income per share
Average equity to average assets ratio
$
6,198,478
2,240,477
3,514,833
41,063
3,844,475
$ 5,189,195
2,073,430
2,824,882
37,385
3,288,275
$ 4,524,743
1,680,609
2,608,634
34,496
3,044,124
$ 4,583,530
1,762,408
2,567,934
34,157
3,093,150
$ 4,372,312
1,636,337
2,490,827
33,601
3,064,146
-0-
108,250
731,324
531,978
0.66%
7.82%
90.36%
109.32%
8.47%
-0-
75,304
718,668
430,946
1.12%
12.95%
84.77%
69.44%
8.68%
35,000
-0-
544,934
401,390
0.96%
11.09%
84.56%
80.67%
8.64%
35,000
-0-
629,220
370,066
1.11%
13.85%
81.92%
67.24%
8.01%
35,000
-0-
621,855
334,156
1.10%
15.65%
80.19%
68.90%
7.00%
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
This discussion and the related financial data are presented to
assist in the understanding and evaluation of the consolidated
financial condition and the results of operations of First
Commonwealth Financial Corporation including its
subsidiaries (the “Corporation”) for the years ended
December 31, 2004, 2003 and 2002 and are intended to
supplement, and should be read in conjunction with, the
Consolidated Financial Statements and related footnotes.
Sections of this financial review, as well as the notes to the
consolidated financial statements, contain forward-looking
statements (as defined in the Private Securities Litigation
Reform Act of 1995), which reflect management’s beliefs and
expectations based on information currently available and
may contain the words “expect,” “estimate,” “project,”
“anticipate,” “should,” “intend,” “probability,” “risk,”
“target,” “objective” and similar expressions or variations on
such expressions. These forward-looking statements are
inherently subject to significant risks and uncertainties,
including but not limited to: changes in general economic and
financial market conditions, the Corporation’s ability to
effectively carry out its business plans, changes in regulatory
or legislative requirements, changes in competitive conditions
and continuing consolidation of the financial services
industry. Although management believes the expectations
reflected in such forward-looking statements are reasonable,
actual results could differ materially. Readers are cautioned
not to place undue reliance on these forward-looking
statements, which reflect management’s analysis only as of
the date hereof. The Corporation undertakes no obligation to
publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
Effective May 24, 2004, the Corporation acquired all of the
outstanding shares of GA Financial, Inc. (“GAF”), and
effective December 5, 2003, the Corporation acquired all of
the outstanding shares of Pittsburgh Financial Corporation
(“PFC”). In addition, the Corporation acquired all of the
outstanding shares of Strategic Capital Concepts, Inc.
(“SCC”) and Strategic Financial Advisors, Inc. (“SFA”),
effective March 1, 2002. As required under the purchase
method of accounting, the results of GAF, PFC, SCC and
SFA have been included in the Corporation’s financial
statements since their respective acquisition dates. In October
2002, SFA was merged into SCC and the name was changed
to First Commonwealth Financial Advisors, Inc.
Financial statement amounts in prior periods have been
reclassified to conform to the presentation format used in
2004. The reclassifications had no effect on the Corporation’s
financial condition or results of operations.
Critical Accounting Policies and Significant Estimates
The Corporation considers accounting policies and estimates
to be critical to reported financial results if (1) the estimate
46
requires management to make assumptions about matters that
are highly uncertain and (2) the different estimates that
management reasonably could have used for the accounting
estimate in the current period or the changes in the
accounting estimates from period to period could have a
material impact on the Corporation’s financial condition or
results of operations. Accounting policies related to the
allowance for credit losses are considered to be critical
because they are highly dependent on subjective or complex
judgments, assumptions and estimates by management.
The allowance for credit losses is a reserve established through
a provision for credit losses charged to expense, which
represents management’s best estimate of probable losses that
are inherent in the existing loan portfolio as of the balance
sheet date. The allowance includes amounts calculated in
accordance with FASB Statement No. 114 “Accounting by
Creditors for Impairment of a Loan” as amended by FASB
Statement No. 118, and amounts determined in accordance
with FASB Statement No. 5 “Accounting for Contingencies.”
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 an
assessment of individual problem loans, delinquency and loss
experience trends, and other relevant factors. While allocations
are made to specific loans and pools of loans, the total
allowance is available for all loan losses.
There are many factors affecting the allowance for credit
losses; some are quantitative while others require qualitative
judgment and the use of estimates related to the amount and
timing of expected future cash flows on impaired loans,
estimated losses based on historical loss experience and
consideration of current economic trend and conditions, all of
which may be susceptible to significant change. To the extent
that actual outcomes differ from management estimates,
additional provision for credit losses could be required that
could adversely affect earnings or financial position in future
periods. The loan portfolio represents the largest asset category
on the Consolidated Balance Sheet.
Classified loans on the primary watch list are analyzed to
determine the level of potential loss in the credits under current
circumstances. The potential loss that is established for these
classified loans is based on careful analysis of the loan’s
performance, the related collateral value, cash flow
considerations and the financial capability of any guarantor.
Primary watch list loans are managed and monitored by
assigned account officers within the Corporation in conjunction
with senior management.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The process of determining the allowance also considers
special circumstances which may warrant an additional
allowance. An additional allowance provides management with
the opportunity to estimate additional potential allowance
amounts which may be needed to cover specific factors. The
special factors that management currently evaluates consist of
portfolio risk or concentrations of credit and economic
conditions. Portfolio risks include unusual changes or recent
trends in specific portfolios such as unexpected changes in the
trends or levels of delinquency, unusual repossession activities
or large levels of unsecured loans in a portfolio.
The Corporation also maintains an unallocated allowance.
Although the unallocated allowance was significantly reduced
during 2004 as a result of methodology enhancements, the
unallocated allowance is still used to cover any factors or
conditions that may cause a potential credit loss but are not
specifically identifiable or considered in the methodology that
was defined above. These factors include, but are not limited to
potential judgment or data errors or factors not yet considered
in the Corporation’s methodology.
Accounting policies related to goodwill and other intangible
assets are also considered to be critical because the
assumptions or judgment that was used in determining the fair
value of assets and liabilities that were acquired as part of
past acquisitions were subjective and complex. As a result,
changes in these assumptions or judgment could have a
significant impact on the financial condition or results of
operations of the Corporation.
The Corporation adopted FASB Statement No. 142 (“FAS No.
142”), “Goodwill and Other Intangible Assets”, effective
January 1, 2001. FAS No. 142 requires that goodwill and other
intangible assets with indefinite useful lives, including goodwill
recorded in past business combinations, no longer be
amortized, but instead be tested for impairment at least
annually and written down and charged to results of operations
only in periods in which the recorded value is more than the
estimated fair value. Intangible assets that have finite useful
lives will continue to be amortized over their useful lives.
The fair value of acquired assets and liabilities that was used to
record goodwill was based either on quoted market prices or
provided by other third-party sources, when available. When
third-party information was not available, estimates were made
in good faith by management primarily through the use of
internal cash flow modeling techniques. The assumptions that
were used in the cash flow modeling were subjective and are
susceptible to significant changes.
Goodwill and other intangible assets with indefinite useful lives
are tested for impairment at least annually and written down
and charged to results of operations in periods in which their
recorded value is more than their estimated fair value. Although
goodwill has not been written down since the adoption of FAS
No. 142, changes in future assumptions based on changing
economic conditions could result in impairment which could
adversely affect earnings or financial position in future periods.
Results of Operations
Net income was $38.7 million in 2004, a decrease of $14.6 million
from the 2003 results of $53.3 million. This compared to net
income of $43.5 million in 2002. The most significant component
of the decrease in the 2004 period was the previously announced
penalty related to the prepayment of FHLB long-term advances.
This penalty was $29.5 million or $19.2 million after taxes. Also
impacting the decrease in 2004 was merger and integration costs
that were not present in the 2003 period and a gain on the sale of
two branches during 2003. The change in net income for the 2003
period reflected an increase in security gains compared to the
corresponding period of 2002. In addition, the effects of
restructuring costs and a litigation settlement negatively impacted
net income for 2002. A partial recovery from insurance for the
claim related to the litigation settlement was received in 2003.
Diluted earnings per share was $0.58 for 2004 compared to
$0.90 and $0.74 for 2003 and 2002, respectively. Return on
average assets was 0.66% and return on equity was 7.82%
during 2004 compared to 1.12% and 12.95%, respectively for
2003 and 0.96% and 11.09%, respectively for 2002.
The following is an analysis of the impact of changes in net
income on diluted earnings per share:
Net income per share, prior year
Increase (decrease) from changes in:
Net interest income
Provision for credit losses
Security transactions
Insurance commissions
Income from bank owned life insurance
Service charges on deposits
Sale of branches
Other income
Salaries and employee benefits
Occupancy and equipment costs
Outside data processing expense
Intangible amortization
Litigation settlement
Restructuring charges
Rebranding costs
Merger and integration charges
Debt prepayment fees
Other operating expenses
Applicable income taxes
2004
vs.
2003
0.90
$
0.10
0.09
(0.04)
0.00
0.00
0.01
(0.05)
(0.02)
(0.01)
(0.03)
(0.01)
(0.02)
(0.01)
0.00
0.00
(0.03)
(0.44)
(0.03)
0.17
0.58
2003
vs.
2002
$ 0.74
(0.18)
(0.01)
0.09
(0.01)
(0.01)
0.02
0.05
0.02
(0.04)
(0.01)
0.00
0.00
0.15
0.10
0.03
0.00
0.00
0.03
(0.07)
$ 0.90
Net income per share
$
Net Interest Income
Net interest income, the engine that powers revenue growth for
the Corporation, is defined as the difference between income
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
on earning assets and the cost of funds supporting those assets.
Net interest income increased $23.8 million in the 2004 period
compared to 2003 after declining $9.4 million in 2003
compared to 2002. Interest income and interest expense both
increased during the 2004 period due to increases in the
volumes of interest-earning assets and interest-bearing
liabilities as average yields continued to decline over 2003
levels. During 2003, both interest income and interest expense
declined compared to 2002 levels primarily as a result of the
dramatic decrease in interest rates that began in 2001 and
continued into 2003.
Net interest margin (net interest income, on a tax-equivalent
basis as a percentage of average earning assets) declined to
3.30% for 2004, a decrease of 17 basis points (0.17%)
compared to 2003, and a decrease compared to 3.80% in 2002.
The year-to-year decrease in the margin was due to asset yields
declining more quickly than the cost of funds. In the lower
interest rate environment, deposit costs begin to reach a floor
while asset yields have a bigger cushion and can continue to
decline. The Corporation uses computer simulation to help
manage interest rate risk. The Corporation’s use of computer
simulation is described in the “Interest Sensitivity” section of
this discussion.
The following is an analysis of the average balance sheets and
net interest income for each of the three years in the period
ended December 31, 2004:
Average
Balance
2004
Income/ Yield or
Expense Rate(a)
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
2003
Average
Balance
Income/
Expense
Yield or
Rate(a)
Average
Balance
2002
Income/ Yield or
Expense Rate(a)
Assets
Interest-earning assets:
Time deposits with banks
Tax free investment securities
Taxable investment securities
Federal funds sold
Loans, net of unearned income (b)(c)
Total interest-earning assets
$
4,964
250,832
1,932,896
512
3,251,645
5,440,849
$
34
11,447
76,909
6
189,629
278,025
0.69% $
7.02
3.98
1.22
6.02
5.34
1,289
226,780
1,605,191
358
2,640,935
4,474,553
$
13
10,561
68,754
4
164,441
243,773
1.03% $
7.16
4.28
1.05
6.46
5.71
1,785
198,687
1,495,824
359
2,597,862
4,294,517
$
31
9,520
86,110
6
179,901
275,568
1.74%
7.37
5.76
1.72
7.13
6.66
Noninterest-earning assets:
Cash
Allowance for credit losses
Other assets
Total noninterest-earning assets
Total Assets
74,559
(41,199)
364,092
397,452
$ 5,838,301
66,614
(36,172)
233,040
263,482
$ 4,738,035
69,735
(34,813)
211,302
246,224
$ 4,540,741
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d)
Savings deposits (d)
Time deposits
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing liabilities and capital:
Noninterest-bearing demand
deposits (d)
Other liabilities
Shareholders’ equity
Total noninterest-bearing
funding sources
Total Liabilities and
Shareholders’Equity
Net Interest Income and Net Yield
on Interest-Earning Assets
$ 538,672
1,141,059
1,513,663
796,591
868,784
4,858,769
$
2,229
11,491
45,170
11,989
39,811
110,690
0.41% $ 457,327
1.01
792,755
2.98
1,524,974
1.51
554,133
4.58
594,383
2.28
3,923,572
$
1,699
7,028
51,373
6,755
33,386
100,241
0.37% $ 416,184
0.89
727,996
1,592,585
3.37
339,908
1.22
5.62
670,258
3,746,931
2.55
$ 3,410
9,375
65,787
6,029
38,072
122,673
0.82%
1.29
4.13
1.77
5.68
3.27
452,701
32,614
494,217
979,532
380,772
22,241
411,450
814,463
380,878
20,493
392,439
793,810
$ 5,838,301
$ 4,738,035
$ 4,540,741
$ 167,335
3.30%
$ 143,532
3.47%
$ 152,895
3.80%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes net loan fees of $3,470 in 2004, $2,196 in 2003 and $1,437 in 2002.
(d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were
made for regulatory purposes.
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and fees on loans increased $25.2 million for 2004
compared to 2003 after declining $15.5 million for 2003
compared to 2002. The increase in interest and fees on loans
during 2004 was due to an increase of $610.7 million in
average loan balances. The volume increase was due in large
part to the loans that were acquired in the acquisitions of PFC
and GAF. Commercial loan growth was primarily due to
internal growth. Volume increases in 2004 were noted in all
loan categories with the exception of leases, which is a
product that the Corporation no longer offers. Volume
increases were also recorded in the 2003 period compared to
2002. During 2003, the Corporation took advantage of the
lower interest rate cycle and changed the mix of the loan
portfolio. Average mortgage loans declined during 2003 as
consumers refinanced their loans at near record levels. The
Corporation continued to offer competitive mortgage loans
but generally sold them immediately after origination along
with the related servicing rights. The Corporation has since
started to retain fixed rate mortgages with maturities of 15
years or less as well as adjustable rate mortgages. Average
commercial and municipal loans offset the decline in
mortgage loans during 2003, primarily in shorter term and
variable rate lending. In addition, 2003 included increases in
average installment loans over 2002 levels. The Corporation
has continued to capitalize on lending opportunities with
small to mid-sized commercial borrowers, including loans
generated through its preferred Small Business
Administration (“SBA”) lender status. The Corporation has
consistently been one of the top small business lenders in
Pennsylvania. The declining rate environment has continued
to negatively impact interest and fees on loans. During 2003
compared to 2002, the increase in average loan volumes was
not enough to offset the reduced interest income caused by
declining yields. Tax-equivalent loan yields fell 44 basis
points (0.44%) during 2004 compared to 2003 after declining
67 basis points (0.67%) during 2003 from the 2002 levels.
Interest income on investments increased $9.0 million in 2004
compared to 2003 after declining $16.3 million in 2003
compared to 2002. Both years reported increases in average
investment balances with decreases in yields on investment
securities. The most significant volume increases during 2004
were related to U.S. government agency securities. Average
investment securities included increases due to PFC for the full
year of 2004 and GAF since May 24, 2004. Yields on
investments for 2004 continued to decline, falling 32 basis
points (0.32%) to 4.32%. Yields for 2003 fell to 4.64%
compared to 5.95% for 2002. As with the loan category, the
increase due to average investment security volumes surpassed
the loss due to the declining yields, but during 2003 the increase
due to volume was not enough to offset the reduced interest
income caused by declining rates. Yields in the 2004 period
compared to 2003 decreased for all investment securities with
the exception of asset backed securities. During 2003 compared
to 2002, all categories of interest income on investments were
negatively impacted by interest rate changes with the largest
decline being registered in the U.S. government agency category.
Prepayment speeds of mortgage backed securities (“MBS”)
declined in 2004 after accelerating in 2003 when interest rates
continued to decline. Interest rate changes have a direct impact on
prepayment speeds. As interest rates increase, prepayments tend
to decline and average lives of MBS increase. As interest rates
decrease, prepayment speeds tend to increase and average lives of
MBS decline, which accelerates the amount of premium
amortization that is realized, further reducing the yields in current
periods. Using computer simulation modeling, the Corporation
tests the average life and yield volatility of all MBS under various
interest rate scenarios on a continuing basis to insure that
volatility falls within acceptable limits. The Corporation holds no
“high risk” securities nor does the Corporation own any securities
of a single issuer exceeding 10% of shareholders’ equity other
than U.S. government and agency securities.
Interest on deposits dropped $1.2 million in 2004 compared to
2003 after a decline of $18.5 million in 2003 compared to
2002. The decrease in both periods was largely due to the lower
interest rate environment. The cost of deposits declined 28
basis points (0.28%) in 2004 compared to 2003. Decreases in
time deposit yields were partially offset by increases in yields
on more non-maturity deposits, such as savings and interest-
bearing demand deposits. Average deposits increased by
$490 million in 2004 compared to 2003 and included increases
in all categories due to PFC for the full year of 2004 and GAF
since May 24, 2004. The deposit mix continued to change in
2004 as clients registered a preference for savings products,
while time deposits dropped due to the prospect of rising
interest rates. During its management of deposit levels and mix,
the Corporation continues to evaluate the cost of time deposits
compared to alternative funding sources as it balances its goals
of providing clients with the competitive rates they are looking
for while also minimizing the Corporation’s cost of funds.
Interest expense on short-term borrowings rose $5.2 million
during 2004 after rising $726 thousand during 2003. Both years
reflected increases in interest expense due to increases in the
average volumes of short-term borrowings. The 2004 period
also reflected increases in interest expense due to increases in
yields, while 2003 reflected decreases in interest expense due
to decreasing yields. Average short-term borrowings increased
$242.5 million in 2004 compared to 2003 and increased $214.2
million for 2003 compared to 2002. The 2004 period included
an increase due to the inclusion of short-term borrowings that
were acquired with the GAF acquisition on May 24, 2004. The
2004 period also included an increase in short-term borrowings
which were used to replace a portion of the $440 million of
long-term FHLB advances that were paid before their maturity.
Refer to NOTE 19 (Other Long-term Debt) to the Consolidated
Financial Statements for additional information on the debt
prepayment. The increase in the average short-term borrowings
during 2003 was due in part to $100 million of long-term debt
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
that matured during the fourth quarter of 2002 and was
replaced with short-term borrowings. In addition, the increase
in short-term borrowings during 2003 can be attributed to an
ALCO strategy implemented to mitigate the risk of further
declines in net interest income resulting from a low or
declining interest rate environment. This increase in short-term
borrowings funded the purchase of U.S. government agency
securities maturing in approximately 3.5 years.
Interest expense on long-term debt increased by $6.4 million
during 2004 compared to 2003 after a decrease of $4.7 million
for 2003 compared to the 2002 period. The 2003 period
recorded decreases in interest expense due to declining average
balances of long-term debt and declining yields, while the 2004
period included decreases in interest expense due to declining
yields that were offset by increases in interest expense due to
increases in average balances of long-term debt. The increases
in volume during 2004 were due in large part to the
acquisitions of PFC and GAF. In addition, subordinated
debentures in the amount of $41.2 million were issued during
March 2004. These subordinated debentures along with the
subordinated debentures of $30.9 million that were issued
during December 2003 were used to fund the acquisition of
GAF in May 2004. Refer to NOTE 18 (Subordinated
Debentures) to the Consolidated Financial Statements for
further discussion of subordinated debentures that are included
in long-term debt. Average long-term debt for 2003 decreased
by $75.9 million compared to 2002. This was due in part to the
$100 million of long-term debt that matured during the fourth
quarter of 2002 that was replaced by short-term borrowings.
The interest rate on long-term debt decreased 104 basis points
(1.04%) during 2004 compared to 2003. The rate reduction was
anticipated in connection with the prepayment of $440 million
in FHLB long-term advances during the third quarter of 2004.
The Corporation was able to replace these advances with
$230 million in other lower rate FHLB advances with maturities
ranging from two to six years. The remaining $210 million was
replaced with short-term borrowings. Refer to NOTE 19 (Other
Long-term Debt) to the Consolidated Financial Statements for
additional information on the debt prepayment.
The following table shows the effect of changes in volumes
and rates on interest income and interest expense:
Analysis of Year-to-Year Changes in Net Interest Income
(Dollar Amounts in Thousands)
2004 Change from 2003
Change Due
Change Due
to Rate (a)
Total
Change
2003 Change from 2002
Change Due
Change Due
to Volume
to Rate (a)
Interest-earning assets:
Time deposits with banks
Securities
Federal funds sold
Loans
Total interest income
Interest-bearing liabilities:
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Total
Change
$
21
9,041
2
25,188
34,252
(1,210)
5,234
6,425
10,449
$ 23,803
to Volume
$
38
15,759
2
39,451
55,250
3,009
2,956
15,413
21,378
$ 33,872
$
(17)
(6,718)
-0-
(14,263)
(20,998)
(4,219)
2,278
(8,988)
(10,929)
$ (10,069)
$
(18)
(16,315)
(2)
(15,460)
(31,795)
(18,472)
726
(4,686)
(22,432)
$ (9,363)
$
(9)
8,367
-0-
3,070
11,428
(1,622)
3,799
(4,310)
(2,133)
$ 13,561
$
(9)
(24,682)
(2)
(18,530)
(43,223)
(16,850)
(3,073)
(376)
(20,299)
$ (22,924)
(a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to interest sensitivity of
consolidated assets and liabilities.
Provision for Credit Losses
The provision for credit losses is an amount added to the
allowance against which credit losses are charged. The amount
of the provision is determined by management based upon its
assessment of the size and quality of the loan portfolio and the
adequacy of the allowance in relation to the risks inherent
within the loan portfolio. The provision for credit losses
decreased $4.7 million for 2004 when compared to 2003. The
decrease in the provision reflects the trend in improvement of
nonperforming loans, net charge-offs and lower levels of the
allowance for loan losses allocated to larger impaired credits.
Nonperforming loans as a percent of average loans outstanding
50
improved to 0.73% at December 31, 2004, compared to 0.82%
and 1.47% at December 31, 2003 and 2002, respectively.
The allowance for credit losses was $41.1 million at
December 31, 2004, which represents a ratio of 1.26% of
average loans outstanding compared to 1.42% and 1.33%
reported at December 31, 2003 and 2002, respectively.
Net charge-offs for 2004 declined $3.6 million over 2003
levels. The most significant components of this year-to-year
change were decreases in the following categories: residential
loans secured by real estate (down $1.8 million); and
commercial, financial and agricultural loans (down $1.7
million). Net charge-offs as a percent of average loans
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
outstanding improved to 0.29% at December 31, 2004,
compared to 0.49% and 0.46% at December 31, 2003 and
2002, respectively. For an analysis of credit quality, see the
“Credit Review” section of this discussion.
The following table presents an analysis of the consolidated
allowance for credit losses for the five years ended
December 31, 2004 (Dollar Amounts in Thousands):
Loans outstanding at end of year
$ 3,514,833
$ 2,824,882
$ 2,608,634
$ 2,567,934
$ 2,490,827
Average loans outstanding
$ 3,251,645
$ 2,640,935
$ 2,597,862
$ 2,548,596
$ 2,503,036
Summary of Loan Loss Experience
2004
2003
2002
2001
2000
Allowance for credit losses:
Balance, beginning of year
Addition as a result of acquisition
Loans charged off:
Commercial, financial and agricultural
Loans to individuals
Real estate-construction
Real estate-commercial
Real estate-residential
Lease financing receivables
Total loans charged off
Recoveries of loans previously charged off:
Commercial, financial and agricultural
Loans to individuals
Real estate-construction
Real estate-commercial
Real estate-residential
Lease financing receivables
Total recoveries
Net loans charged off
Provision charged to expense
$
37,385
4,983
4,434
3,414
1
1,060
1,456
247
10,612
772
351
-0-
-0-
114
-0-
1,237
9,375
8,070
$
34,496
3,109
$
34,157
-0-
$
33,601
-0-
$
33,539
-0-
6,424
3,288
384
1,111
3,172
316
14,695
1,047
641
-0-
-0-
17
-0-
1,705
12,990
12,770
6,085
4,040
3
1,315
2,065
424
13,932
1,287
710
-0-
-0-
46
5
2,048
11,884
12,223
3,297
4,199
-0-
2,300
1,818
606
12,220
456
757
-0-
-0-
49
19
1,281
10,939
11,495
4,335
5,521
-0-
130
874
407
11,267
406
826
-0-
-0-
42
25
1,299
9,968
10,030
Balance, end of year
$
41,063
$
37,385
$
34,496
$
34,157
$
33,601
Ratios:
Net charge-offs as a percentage of
average loans outstanding
Allowance for credit losses as a percentage of
average loans outstanding
0.29%
1.26%
0.49%
1.42%
0.46%
1.33%
0.43%
1.34%
0.40%
1.34%
Noninterest Income
Net securities gains decreased $1.8 million during 2004 to
$4.1 million from the $5.9 million reported in 2003. This
compared to $642 thousand reported in 2002. Securities
gains during the 2004 period resulted primarily from the
sale of Pennsylvania bank stocks with book values of $19.3
million. The securities gains during the 2003 period
resulted primarily from the sales of Pennsylvania bank
stocks with book values of $7.6 million and fixed rate
corporate bonds classified as securities “available for sale”
with book values of $35 million. The corporate bonds sold
during 2003 had an average remaining life of one year, and
the proceeds were reinvested in adjustable rate trust
preferred securities with maturities of 30 years and
mortgage backed securities with an average life of 3.6
years. This reinvestment strategy was initiated to partially
mitigate the Corporation’s exposure to low and declining
interest rates. The securities gains during 2002 resulted
primarily from the sales of Pennsylvania bank stocks, U.S.
Treasury securities and fixed rate corporate bonds classified
as securities “available for sale” with book values of $1.1
million, $1.5 million and $3.0 million, respectively.
Trust income has increased slightly over each of the past three
years. The rebound in market values over prior year levels
should help trust income to continue to trend in a positive
direction. The referral programs and integrated growth plans
for financial affiliates have continued to help grow trust
revenues. The Corporation’s continued success in building
relationships with commercial clients provides fee based
affiliates with additional sales opportunities through the
“Total Solutions Financial Management” (“TSFM”) process.
This strategy combines products, services and professional
staff from the Corporation’s trust, insurance, financial
advisory and banking affiliates and partners them in providing
comprehensive financial services offerings.
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Service charges on deposits are the most significant
component of noninterest income and have continued to
increase over the past three years with an increase of $2.0
million for 2004 compared to 2003 and an increase of $1.5
million for 2003 compared to 2002. Increases in nonsufficient
funds (“NSF”) fees of $1.9 million in 2004 compared to 2003
and $2.1 million in 2003 compared to 2002 helped to pace the
continued year-to-year rise. The increase in NSF fees is due
to the growth of the High Performance Checking products for
consumer and business clients as well as the inclusion of PFC
and GAF. In addition, the increase in NSF fees is due in part
to better management of the collection process to ensure that
fee waivers are kept to a minimum. Management strives to
implement reasonable fees for services and closely monitors
collection of those fees.
The 2003 period included a $3.0 million gain which occurred
when First Commonwealth Bank, a wholly-owned subsidiary
of the registrant, sold two of its branch offices. The sale
included $29.2 million in deposit liabilities and $4.4 million in
loans associated with the two offices.
Insurance commissions remained relatively stable from 2004
compared to 2003 after a decrease of $326 thousand from 2003
compared to 2002. Decreases in 2003 were primarily due to
decreases in annuity commissions. As part of the previously
discussed TSFM process, the Corporation’s insurance
subsidiary will continue to have expanded opportunities to
meet the insurance needs of commercial clients.
Income from bank owned life insurance was $5.2 million for
2004 compared to $4.3 million for 2003 and compared to $4.7
million for 2002. The 2004 period included an addition of
$16.7 million related to the GAF acquisition, while the 2003
period included an addition of $6.6 million due to the PFC
acquisition. The 2002 period included an additional investment
in bank owned life insurance of $5.0 million.
Other changes in noninterest income during 2004 compared to
2003 included increases in card related interchange income in
the amount of $1.0 million. Card related interchange income
includes income on debit, credit and ATM cards that are issued
to consumers and/or businesses. The increase was due in part to
the inclusion of PFC and GAF. The card related interchange
income growth was favorably affected by additional volume
related to card usage and the migration of business accounts
from the consumer debit card product. The business debit card
product pays a higher rate than the consumer debit card.
Changes in other noninterest income for 2003 over 2002 levels
included increases in card related interchange income in the
amount of $338 thousand and income from the increase in cash
surrender value of split dollar life insurance in the amount of
$248 thousand.
Noninterest Expense
Total noninterest expenses for 2004 increased $51.9
million to $164.6 million from $112.7 million reported in
2003. The 2003 amount represented a decrease of $13.6
million compared to $126.3 million reported in 2002.
Noninterest expenses during the 2004 period included a
one-time penalty of $29.5 million for the prepayment of
$440 million in long-term FHLB advances. The FHLB
advances were replaced with other long-term debt with
lower interest rates as well as with short-term borrowings.
The transaction is expected to result in an increase in net
interest income over the remaining term of the original
advances in excess of the prepayment penalty. Noninterest
expenses during the 2004 period also included merger and
integration charges in the amount of $2.1 million. The
merger and integration charges included $485 thousand
related to the write-off of the unamortized capitalized costs
for the subordinated debentures that were previously
issued by PFC and were called and paid off in January of
2004. Merger and integration charges also included $1.6
million of severance related salary and benefit expenses
that were accrued during 2004 and were due to the
integration of PFC into the Corporation. Future periods
could be impacted by similar costs as the GAF integration
continues. The inclusion of PFC and GAF results since the
acquisition dates were the primary causes of the remaining
increase in noninterest expenses during the 2004 period.
The 2003 year included the benefit of a $610 thousand
partial recovery of the litigation settlement from the 2002
period. The decrease in noninterest expenses for 2003 was
primarily the result of charges that were incurred during
2002 for the previously described litigation settlement of
$8.0 million and corporate restructuring of $6.1 million.
The litigation settlement related to a lender liability action
filed in 1994 against one of the Corporation’s subsidiary
banks and followed an adverse pre-trial judgment by the
trial judge on procedural grounds. The restructuring
charges consisted principally of severance amounts paid to
employees as part of the plan to consolidate the multiple
bank charters and develop the First Commonwealth brand
and identity for all of the financial services subsidiaries.
Payments to retiring directors as part of the realignment
for the Corporation’s new vision on corporate governance
were also included in restructuring charges.
Employee costs were $68.9 million in 2004, representing
1.18% of average assets compared to $61.1 million and 1.29%,
respectively, in 2003. Employee costs for 2002 were $58.1
million and 1.28% of average assets. Salary costs for the 2004
period increased $5.1 million compared to 2003, while salary
52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
costs for the 2003 period increased $1.6 million compared to
2002 levels. Employee benefit costs rose $2.7 million for 2004
compared to 2003 and rose $1.4 million for 2003 compared to
2002. Hospitalization costs continue to reflect the largest
increases in employee benefit costs with increases of $743
thousand or 12.7% in 2004 and $1.1 million or 23.1% in 2003.
The increases in employee costs during 2004 were due in large
part to an increase in the number of employees from the
addition of PFC and GAF. Full-time equivalent employees
were 1,634 at the end of 2004 compared to 1,474 at the same
time in 2003. The Corporation continues to evaluate its current
menu of employee benefits to provide a competitive benefits
package while also managing costs. Current benefit options
include coverages fully paid for by the employer, as well as
voluntary benefits whereby employees have the option of
purchasing additional benefits at reduced group rates.
Net occupancy expense increased $2.2 million during 2004 to
$9.7 million compared to expenses of $7.5 million during 2003
and $6.8 million during 2002. The most significant increases
during the 2004 period were related to building rental expense
and building repairs and maintenance, largely due to the
branches that were acquired with the PFC and GAF mergers.
The 2003 period included increases in building repairs and
maintenance, net rental expense and utilities compared to 2002
costs. Much of these increases were due to increased utility
costs and snow removal expenses resulting from the harsh
winter. The 2003 period also included an increase in the
amortization of the purchase accounting adjustments related to
premises of $328 thousand over the 2002 period. An
adjustment of $291 thousand was taken during the 2003 period
for the write-off of the remaining purchase accounting
adjustment for three branch offices that were closed during
2003. These branch offices were closed and their clients are
served at nearby existing branch offices. The Corporation
continues to actively evaluate its branch delivery network to
optimize client service in existing branch offices and to
continue expansion into growth markets. The Corporation
expects to open three new branch offices in growth areas of
Washington and Allegheny counties as well as renovate or
relocate offices in existing markets. The execution of these
initiatives may continue to impact occupancy and other
expenses in future periods.
Furniture and equipment expenses increased $1.6 million to
$11.7 million in 2004 after an increase of $126 thousand to
$10.1 million in 2003. Increases during both periods were
largely due to continued increases in depreciation expense
some of which was related to the inclusion of PFC and GAF
since the acquisition dates.
Outside data processing expense increased $1.3 million for the
2004 period to $3.8 million compared to $2.5 million for the
2003 period and $2.1 million for 2002. Data processing
expense increases during 2004 were due in part to the
acquisitions of PFC and GAF. Additional expenses were
incurred until the PFC and GAF systems, which were processed
through an outsourced processing vendor, were converted to the
systems that are provided by a subsidiary of the Corporation. In
addition, the data processing expense in 2004 was unfavorably
impacted by a rate increase related to clients using debit and
credit cards over the STAR network. Outside data processing
costs are managed by the Corporation’s data processing
subsidiary. Its needs are evaluated based on technology,
efficiency and cost considerations.
Intangible amortization expense increased by $1.4 million
during 2004 compared to the same period of 2003. The
increase was due to the amortization of the core deposit
intangibles that were recorded for the recent acquisitions.
Other operating expenses increased $5.2 million to $32.9
million for 2004, while the expenses decreased $3.4 million to
$27.7 million for 2003. Increases in noninterest expense during
the 2004 period included increase in telephone and data line
expenses, other professional fees and advertising costs in the
amounts of $897 thousand, $801 thousand and $599 thousand,
respectively. Telephone and data line expense increases were
due in large part to the recent acquisitions. The increase in
other professional services is due in part to the use of a
consultant in 2004 to provide targeted marketing services.
Advertising expense increases are due in large part to grand
re-opening events that have taken place in branches that
have been newly re-built, remodeled or acquired.
The 2003 period included decreases in other professional
fees and services, advertising, expenses related to training
and seminars, telephone and loss on the sale of other assets
(primarily vehicles previously leased) in the amounts of
$1.4 million, $637 thousand, $428 thousand, $420 thousand
and $402 thousand, respectively, compared to 2002 costs.
Directors’ fees for the 2003 period reflected decreases of
$349 thousand resulting from the restructuring of the
Corporation’s Boards of Directors and committees during
2002. Other professional fees in 2002 included consulting
fees related to implementation of the Corporation’s
“Balanced Scorecard” performance measurement system,
enhancements to product and customer profitability systems,
corporate restructuring and common branding and identity.
Consultants were also utilized to assist in the ongoing
efforts to develop a world class sales culture and to generate
new deposit dollars and relationships. Corporate
53
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
restructuring and movement towards a sales culture also
impacted the decision to have employee benefit plans
reviewed by outside specialists during 2002. Advertising
and promotion expenses in the 2002 period included
expenditures related to the $1.8 million launch of the new
corporate brand and identity and expenses incurred in the
successful marketing campaign for free checking products
introduced during 2002. These products have had a
favorable impact on deposit growth, interest expense and
service charge revenue since their introduction.
Income tax expense was $3.7 million during 2004, representing
a decrease of $9.6 million from the 2003 amount of $13.3
million and compared to $8.9 million in 2002. Pretax income in
the 2004 period was reduced by the $29.5 million in debt
prepayment fees related to the previously mentioned
prepayment of FHLB advances, which allowed the effect of
nontaxable income and tax credits to have a greater impact on
the effective tax rate in 2004. The Corporation’s effective tax
rate was 8.75% for 2004 compared to 19.9% for 2003 and
17.0% for 2002. The Corporation’s 2003 effective tax rate was
favorably impacted by tax-free municipal income. Pretax
income in the 2002 period was reduced by the $8.0 million
litigation settlement as well as the $6.1 million restructuring
charges, which allowed the effect of nontaxable income to have
a greater impact on the effective tax rate in 2002.
Aggregate Contractual Obligations and Off-Balance Sheet
Arrangements
The following table summarizes the Corporation’s contractual
obligations to make future payments as of December 31, 2004.
Payments for borrowings do not include interest. Payments
related to operating leases are based on actual payments
specified in the underlying contracts.
(Dollar Amounts In Thousands)
Federal Home Loan Bank advances
Repurchase agreements
Subordinated debentures
ESOP loan
Operating leases
Total contractual obligations
Footnote
Reference
19
19
18
19
15
1 Year
or Less
$ 24,768
-0-
-0-
661
2,702
$ 28,131
The preceding table excludes unamortized premiums and
discounts on Federal Home Loan Bank advances because these
premiums and discounts do not represent future cash
obligations. The preceding table also excludes the
Corporation’s cash obligations upon maturity of certificates of
deposit whose maturities are described in NOTE 16 (Interest-
Bearing Deposits) to the Consolidated Financial Statements.
The following table summarizes the Corporation’s off-balance
sheet commitments as of December 31, 2004. Commitments to
extend credit and standby letters of credit are presented at
contractual amounts; however, since many of these
commitments are expected to expire unused or only partially
used, the total amounts of these commitments do not
necessarily reflect future cash requirements.
After 1 But
Within 3 Years
After 3 But
Within 5 Years
After 5 Years
Total
$ 121,944
-0-
-0-
1,575
4,753
$ 128,272
$ 310,437
20,000
-0-
1,576
3,261
$ 335,274
(Dollar Amounts In Thousands)
Commitments to extend credit
Standby letters of credit
Total lending-related commitments
$ 224,096
-0-
108,250
2,363
7,746
$ 342,455
Footnote
Reference
14
14
$ 681,245
20,000
108,250
6,175
18,462
$ 834,132
Amount
$ 744,942
23,079
$ 768,021
Commitments to extend credit include unfunded loan
commitments as well as the undrawn portions of revolving
and closed-end lines of credit as of December 31, 2004. The
contractual provisions of these commitments normally
include fixed expiration dates or termination clauses, specific
interest rates and clauses indicating that funding is contingent
upon borrowers maintaining stated credit standards at the
time of loan funding.
54
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Standby letters of credit are written conditional commitments
issued by the Corporation to guarantee the performance of a
client to a third party. In the event that the client does not
perform in accordance with the terms of the agreement with
the third party, the Corporation would be required to fund the
commitment. The maximum potential amount of future
payments the Corporation could be required to make is
represented by the contractual amount of the commitment. If
the commitment is funded, the Corporation would be entitled
to seek repayment from the client. The Corporation’s policies
generally require that standby letter of credit arrangements
contain security and debt covenants similar to those contained
in loan agreements.
Liquidity
Liquidity is a measure of the Corporation’s ability to
efficiently meet normal cash flow requirements of both
borrowers and depositors. In the ordinary course of
business, funds are generated from deposits (primary
source) and the maturity or repayment of earning assets,
such as securities and loans. As an additional secondary
source, short-term liquidity needs may be provided through
the use of overnight Federal funds purchased, borrowings
through the use of lines available for repurchase agreements
and borrowings from the Federal Reserve Bank.
Additionally, the Corporation’s banking subsidiary is a
member of the Federal Home Loan Bank and may borrow
under overnight and term borrowing arrangements. The sale
of earning assets may also provide an additional source of
liquidity. In addition to the previously described funding
sources, the Corporation also has the ability to access the
capital markets.
Liquidity risk stems from the possibility that the Corporation
may not be able to meet current or future financial obligations,
or the Corporation may become overly reliant on alternative
funding sources. The Corporation maintains a liquidity risk
management policy to manage this risk. This policy identifies
the primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity and quantifies minimum
liquidity requirements based on board approved limits. The
policy also includes a liquidity contingency plan to address
funding needs to maintain liquidity under a variety of business
conditions. The Corporation’s liquidity position is monitored
by the Asset/Liability Management Committee (“ALCO”).
The Corporation’s long-term liquidity source is a large core
deposit base and a strong capital position. Core deposits are the
most stable source of liquidity a bank can have due to the long-
term relationship with a deposit customer. Deposits increased
$556.2 million in 2004. This included an increase of $524.2
million for the deposits that were assumed in the acquisition of
GAF and an increase due to purchase accounting adjustments
in the amount of $5.4 million that were recorded as part of the
GAF acquisition transaction. Excluding the GAF acquisition
activity, noninterest-bearing demand deposits and savings
deposits increased by $32.4 million and $105.1 million,
respectively, while time deposits decreased by $110.9 million.
Noncore deposits, which are time deposits in denominations of
$100 thousand or more, represented 10.9% of total deposits at
December 31, 2004. Noncore deposits increased by $19.3
million in 2004.
The total increase in short-term borrowings of $312.3 million
included $53.6 million that was acquired from GAF. During the
third quarter of 2004, the Corporation prepaid $440 million of
long-term FHLB advances to minimize the impact of maturities
in any one year. The advances were replaced with short-term
borrowings and other long-term FHLB advances with lower
interest rates. Refer to NOTE 19 (Other Long-term Debt) to the
Consolidated Financial Statements for additional information
on the debt repayment.
Although the Corporation’s primary source of funds remains
traditional deposits from within the communities served by its
banking subsidiary, future sources of deposits utilized could
include the use of brokered time deposits offered outside the
Corporation’s traditional market area. Time deposits of $100
thousand or more at December 31, 2004, 2003 and 2002 had
remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit
(Dollar Amounts in Thousands)
2004
2003
2002
Amount
Percent
Amount
Percent
Amount
Percent
Remaining Maturity:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
$ 74,463
49,691
51,485
242,349
$ 417,988
18%
12
12
58
100%
$
77,603
50,132
69,239
201,742
$ 398,716
19%
13
17
51
100%
$
97,862
54,758
114,596
222,486
$ 489,702
20%
11
24
45
100%
55
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net loans increased $686.3 million during 2004 as increases
were noted in all categories with the exception of leases. Most
notable were increases in residential loans secured by real
estate of $343.5 million and increases in commercial loans
secured by real estate of $216.8 million compared to year-end
2003. Net loans in the amount of $532.7 million, which
includes a purchase accounting adjustment of ($3.3) million,
were acquired with the GAF acquisition.
Below is a schedule of loans by classification for the five years
ended December 31, 2004:
Loans by Classification
(Dollar Amounts in Thousands)
2004
2003
2002
2001
2000
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Commercial, financial,
agricultural and other $ 715,280
71,351
Real estate-construction
988,611
Real estate-commercial
1,164,707
Real estate-residential
562,321
Loans to individuals
12,815
Net leases
20%
2
28
33
16
1
$ 655,740
27,063
771,861
821,159
521,481
28,033
23%
1
27
29
19
1
$ 633,955
20,998
663,220
739,018
505,139
47,110
24%
1
26
28
19
2
$ 529,300
14,727
638,576
849,787
473,515
63,326
21%
1
25
33
18
2
$ 443,618
37,146
560,066
932,915
450,154
68,975
18%
2
22
37
18
3
Gross loans and leases
Unearned income
Total loans and
leases net of
3,515,085
(252)
100%
2,825,337
(455)
100%
2,609,440
(806)
100%
2,569,231
(1,297)
100%
2,492,874
(2,047)
100%
unearned income $ 3,514,833
$ 2,824,882
$ 2,608,634
$ 2,567,934
$ 2,490,827
An additional source of liquidity is marketable securities that
the Corporation holds in its investment portfolio. These
securities are classified as “securities available for sale.”
While the Corporation does not have specific intentions to sell
these securities, they have been designated as “available for
sale” because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part
of the implementation of tax management strategies. As of
December 31, 2004, securities available for sale had an
amortized cost of $2,147 million and an approximate fair
value of $2,162 million. Gross unrealized gains were $30,191
thousand and gross unrealized losses were $14,634 thousand.
Based upon the Corporation’s historical ability to fund liquidity
needs from other sources, the current available for sale
portfolio is deemed more than adequate, as the Corporation
does not anticipate a need to liquidate the investments until
maturity. Below is a schedule of the contractual maturity
distribution of securities held to maturity and securities
available for sale at December 31, 2004:
56
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Maturity Distribution of Securities Held to Maturity At Amortized Cost
(Dollar Amounts in Thousands)
U.S. Government
Agencies and
Corporations
$
146
3,254
860
129
$ 4,389
States and
Political
Subdivisions
$ 2,377
15,631
29,286
26,076
$ 73,370
Other
Securities
$ 100
305
-0-
-0-
$ 405
Total
Amortized
Cost
$ 2,623
19,190
30,146
26,205
$ 78,164
Weighted
Average
Yield*
7.02%
7.30%
7.39%
6.99%
7.22%
Maturity Distribution of Securities Available for Sale At Amortized Cost
(Dollar Amounts in Thousands)
U.S. Treasury,
and other
U.S. Government
Agencies and
Corporations
$
22,036
317,850
497,265
826,109
$ 1,663,260
States and
Political
Subdivisions
$
2,837
3,295
31,725
153,038
$ 190,895
Other
Securities
$ 10,101
30,754
-0-
251,746
$ 292,601
Total
Amortized
Cost
Weighted
Average
Yield*
$
34,974
351,899
528,990
1,230,893
$ 2,146,756
2.17%
3.08%
3.96%
4.78%
4.25%
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
* Yields are calculated on a tax-equivalent basis.
Interest Sensitivity
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due to changes in interest
rates, currency exchange rates or equity prices. The
Corporation’s market risk is composed primarily of interest rate
risk. Interest rate risk results principally from timing
differences in the repricing of assets and liabilities, changes in
the relationship of rate indices and the potential exercise of
freestanding or embedded options.
The objective of interest rate sensitivity management is to
maintain an appropriate balance between the stable growth of
income and the risks associated with maximizing income
through interest sensitivity imbalances. While no single
number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity
positions, or “gaps,” when measured over a variety of time
periods, can be informative.
An asset or liability is considered to be interest-sensitive if the
rate it yields or bears is subject to change within a
predetermined time period. If interest-sensitive assets (“ISA”)
exceed interest-sensitive liabilities (“ISL”) during a prescribed
time period, a positive gap results. Conversely, when ISL
exceeds ISA during a time period, a negative gap results.
The cumulative gap at the 365-day repricing period was
negative in the amount of $1,258 million or 20.30% of total
assets at December 31, 2004. A positive gap tends to indicate
that earnings will be impacted favorably if interest rates rise
during the period and negatively when interest rates fall during
the time period. A negative gap tends to indicate that earnings
will be affected inversely to interest rate changes. In other
words, as interest rates fall, a negative gap should tend to
produce a positive effect on earnings and when interest rates
rise, a negative gap should tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans
and investments, loan repayments, investment maturities and
money market investments. The primary components of ISL
include maturing certificates of deposit, money market deposits,
savings deposits, NOW accounts and short-term borrowings.
57
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods
indicated as of December 31, 2004 and 2003 (Dollar Amounts in Thousands):
Loans
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities
Gap
ISA/ISL
Gap/Total assets
Loans
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities
Gap
ISA/ISL
Gap/Total assets
0-90 Days
$ 1,300,777
190,336
2,403
1,493,516
346,191
1,795,426
985,049
3,126,666
$ (1,633,150)
2004
91-180 Days
181-365 Days
$ 185,633
133,127
-0-
318,760
205,507
-0-
5,497
211,004
$ 107,756
$ 333,978
185,979
-0-
519,957
237,318
-0-
15,513
252,831
$ 267,126
Cumulative
0-365 Days
$ 1,820,388
509,442
2,403
2,332,233
789,016
1,795,426
1,006,059
3,590,501
$ (1,258,268)
0.48
26.35%
1.51
1.74%
2.06
4.31%
0.65
20.30%
0-90 Days
$ 1,057,021
241,163
5,362
1,303,546
325,957
1,413,069
634,878
2,373,904
$ (1,070,358)
0.55
20.63%
2003
91-180 Days
181-365 Days
$ 178,006
116,979
-0-
294,985
242,706
-0-
1,407
244,113
$ 50,872
1.21
0.98%
$ 291,352
189,610
-0-
480,962
249,361
-0-
21,290
270,651
$ 210,311
1.78
4.05%
Cumulative
0-365 Days
$ 1,526,379
547,752
5,362
2,079,493
818,024
1,413,069
657,575
2,888,668
(809,175)
$
0.72
15.59%
Although the periodic gap analysis provides management
with a method of measuring current interest rate risk, it only
measures rate sensitivity at a specific point in time, and as a
result may not accurately predict the impact of changes in
general levels of interest rates or net interest income.
Therefore, to more precisely measure the impact of interest
rate changes on the Corporation’s net interest income,
management simulates the potential effects of changing
interest rates through computer modeling. The income
simulation model used by the Corporation captures all assets,
liabilities, and off-balance sheet financial instruments,
accounting for significant variables that are believed to be
affected by interest rates. These variables include prepayment
speeds on mortgage loans and mortgage backed securities,
cash flows from loans, deposits and investments and balance
sheet growth assumptions. The model also captures embedded
options, such as interest rate caps/floors or call options, and
accounts for changes in rate relationships as various rate
indices lead or lag changes in market rates. The Corporation
is then better able to implement strategies which would
include an acceleration of a deposit rate reduction or lag in a
deposit rate increase. The repricing strategies for loans would
be inversely related.
The Corporation’s asset/liability management policy
guidelines limit interest rate risk exposure for the
succeeding twelve-month period. Simulations are prepared
under the base case where interest rates remain flat, and
most likely case where interest rates are defined using
projections of economic factors. Additional simulations are
produced estimating the impact on net interest income of a
200 basis point (2.00%) movement upward or downward
which cannot result in more than a 5.0% decline in net
interest income when compared to the base case. The
analysis at December 31, 2004, indicated that a 200 basis
point (2.00%) increase in interest rates would decrease net
interest income by 48 basis points (0.48%) below the base
case scenario and a 200 basis point (2.00%) decrease in
interest rates would decrease net interest income by 285
basis points (2.85%) below the base case scenario over the
next twelve months, both within policy limits.
58
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation’s “Asset/Liability Management Committee”
(“ALCO”) is responsible for the identification, assessment and
management of interest rate risk exposure, liquidity, capital
adequacy and investment portfolio position. The primary
objective of the ALCO process is to ensure that the
Corporation’s balance sheet structure maintains prudent levels
of risk within the context of currently known and forecasted
economic conditions and to establish strategies which provide
the Corporation with appropriate compensation for the
assumption of those risks. The ALCO attempts to mitigate
interest rate risk through the use of strategies such as asset
sales, asset and liability pricing and matched maturity funding.
The ALCO strategies are established by the Corporation’s
senior management.
The Corporation entered into an interest rate swap transaction
during the third quarter of 2003 and two additional interest rate
swap transactions during the second quarter of 2004. Each of
the swap transactions involved hedging adjustable LIBOR
based commercial loans with a receive-fixed and pay-floating
interest rate swap of $25 million notional amount, for a total of
$75 million. The original maturities of the swap transactions
ranged from 2.5 to 3 years. The purpose of the swaps was to
reduce the Corporation’s exposure to further declines in interest
rates. The ALCO continues to evaluate the use of additional
derivative instruments to protect against the risk of adverse
price or interest rate movements on the value of certain assets
and liabilities.
Another strategy aimed at reducing the Corporation’s exposure
to falling interest rates was implemented during 2003. U.S.
government agency securities maturing in approximately 3.5
years were purchased with short-term borrowings.
Final loan maturities and rate sensitivities of the loan portfolio
excluding consumer installment and mortgage loans and before
unearned income at December 31, 2004 were as follows
(Dollar Amounts in Thousands):
Commercial and industrial
Financial institutions
Real estate-construction
Real estate-commercial
Other
Totals
Loans at fixed interest rates
Loans at variable interest rates
Totals
Credit Review
Maintaining a high quality loan portfolio is of great importance
to the Corporation. The Corporation manages the risk
characteristics of the loan portfolio through the use of prudent
lending policies and procedures and monitors risk through a
periodic review process provided by internal auditors,
regulatory authorities and our loan review staff. These reviews
include the analysis of credit quality, diversification of industry,
compliance to policies and procedures and an analysis of
current economic conditions.
In the management of its credit portfolio, the Corporation
emphasizes the importance of the collectibility of loans and
leases as well as asset and earnings diversification. The
Corporation immediately recognizes as a loss all credits judged
to be uncollectible and has established an allowance for credit
losses that may exist in the portfolio at a point in time, but have
not been specifically identified.
Within One Year
One to 5 Years
After 5 Years
$ 244,771
55
18,047
122,723
20,929
$ 406,525
$ 127,535
300
15,229
239,807
17,116
$ 399,987
125,592
274,395
$ 399,987
$ 108,049
-0-
38,075
626,081
196,525
$ 968,730
256,406
712,324
$ 968,730
Total
$ 480,355
355
71,351
988,611
234,570
$ 1,775,242
The Corporation’s written lending policy requires certain
underwriting standards to be met prior to funding any loan,
including requirements for credit analysis, collateral value
coverage and documentation. The principal factor used to
determine potential borrowers’ credit worthiness is business
cash flows or consumer income available to service debt
payments. Secondary sources of repayment, including
collateral and guarantees, are frequently obtained.
The lending policy provides limits for individual and bank
committee lending authorities. In addition to the bank loan
approval process, requests for borrowing relationships which
will exceed one million dollars must also be approved by the
Corporation’s Credit Committee. This Committee consists of
a minimum of three members of the Corporation’s Board of
Directors. The Corporation has an additional level of approval
for credit relationships between $500 thousand and $1.0
million. This procedure requires approval of those credits by
a committee consisting of senior lenders of the Corporation.
59
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial and industrial loans are generally granted to small
and middle market customers for working capital, operations,
expansion or asset acquisition purposes. Operating cash flows
of the business enterprise are identified as the principal source
of repayment, with business assets held as collateral. Collateral
margins and loan terms are based upon the purpose and
structure of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or
improvement of real property. Generally, commercial real
estate loans do not exceed 75% of the appraised value of
property pledged to secure the transaction. Repayment of such
loans is expected from the operations of the subject real estate
and is carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of
constructing improvements to real property, both commercial
and residential. On-site inspections are conducted by qualified
individuals prior to periodic permanent project financing,
which is generally committed prior to the commencement of
construction financing.
Real estate loans secured by 1-4 family residential housing
properties are granted subject to statutory limits in effect for the
bank regarding the maximum percentage of appraised value
of the mortgaged property. Residential loan terms are
normally established in compliance with secondary market
requirements. Residential mortgage portfolio interest rate risk
is controlled by secondary market sales, variable interest rate
loans and balloon maturities.
Loans to individuals represent financing extended to consumers
for personal or household purposes, including automobile
financing, education, home improvement and personal
expenditures. These loans are granted in the form of
installment, credit card or revolving credit transactions.
Consumer credit worthiness is evaluated on the basis of ability
to repay, stability of income sources and past credit history.
The Corporation maintains an allowance for credit losses at a
level deemed sufficient to absorb losses which are inherent in
the loan and lease portfolios at each balance sheet date.
Management reviews the adequacy of the allowance on a
quarterly basis to ensure that the provision for credit losses has
been charged against earnings in an amount necessary to
maintain the allowance at a level that is appropriate based on
management’s assessment of probable estimated losses. The
Corporation’s methodology for assessing the appropriateness of
the allowance for credit losses consists of several key elements.
These elements include an assessment of individual problem
loans, delinquency, loss experience, trends and other relevant
factors, all of which may be susceptible to significant changes.
Enhancements to the Corporation’s methodology during 2004
resulted in reallocation of the allowance for credit losses from
unallocated to specific loan categories. While the Corporation
consistently applies a comprehensive methodology and
procedure, which is described in NOTE 1 (Statement of
Accounting Policies) to the Consolidated Financial Statements,
the allowance for credit loss methodologies incorporate
management’s current judgments about the credit quality of the
loan portfolio as well as collection probabilities for problem
credits. Although management considers the allowance for
credit losses to be adequate based on information currently
available, additional allowance for credit loss provisions may
be necessary due to changes in management estimates and
assumptions about asset impairment, information about
borrowers that indicate changes in the expected future cash
flows or changes in economic conditions. The allowance for
credit losses and the provision for credit losses are significant
elements of the Corporation’s financial statements, therefore
management periodically reviews the processes and procedures
utilized in determining the allowance for credit losses to
identify potential enhancements to these processes including
development of additional management information systems to
ensure that all relevant factors are appropriately considered in
the allowance analysis. In addition, the Corporation maintains a
system of internal controls which are independently monitored
and tested by internal audit and loan review staff to ensure that
the loss estimation model is maintained in accordance with
internal policies and procedures as well as generally accepted
accounting principals.
Since all identified losses are immediately charged off, no
portion of the allowance for credit losses is restricted to any
individual credit or groups of credits, and the entire allowance is
available to absorb any and all credit losses. For analytical
purposes, the following table sets forth an allocation of the
allowance for credit losses at December 31 according to the
categories indicated. Management feels the unallocated portion
of the reserve is necessary due to the uncertain economic and
geo-political environment and its impact on a variety of sectors
such as health care and lodging. The unallocated allowance was
reduced during 2004 as a result of methodology enhancements.
60
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
2004
2003
2002
2001
2000
Commercial, industrial, financial, agricultural and other
Real estate-construction
Real estate-commercial
Real estate-residential
Loans to individuals
Lease financing receivables
Unallocated
Total
Allowance as percentage of average total loans
$
$
13,422
1,088
13,099
8,759
3,806
136
753
41,063
1.26%
$ 10,739
330
11,361
4,910
4,614
202
5,229
$ 37,385
$
7,856
600
7,201
5,294
3,035
259
10,251
$ 34,496
$
6,315
432
9,808
7,379
3,845
401
5,977
$ 34,157
$
6,263
643
9,064
10,211
4,938
638
1,844
$ 33,601
1.42%
1.33%
1.34%
1.34%
The decrease in the allowance as a percent of average loans
in 2004 reflects the trend of improvement in nonperforming
loans, net charge-offs and lower levels of the allowance being
allocated to larger classified credits. The spike in the
allowance for credit losses as a percentage of average total
loans outstanding during the 2003 period was due to the
impact of having the BankPittsburgh loans included in the
average for only a short period during the year, or from the
acquisition date of December 5, 2003. While the allowance
for credit losses as a percentage of average total loans
outstanding spiked during 2003, the allowance for credit
losses as a percentage of actual loans outstanding remained at
1.32% for 2002 and 2003 before declining to 1.17% in 2004.
Other than those described below, there are no material
credits that management has serious doubts as to the
borrower’s ability to comply with the present loan repayment
terms. The following table identifies nonperforming loans at
December 31. A loan is placed in a nonaccrual status at the
time when ultimate collectibility of principal or interest,
wholly or partially, is in doubt. Past due loans are those loans
which are contractually past due 90 days or more as to
interest or principal payments but are well secured and in the
process of collection. Renegotiated loans are those loans
which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deteriorating
financial position of the borrower.
Nonperforming and Impaired Assets and Effect on Interest Income Due to Nonaccrual
(Dollar Amounts in Thousands)
Loans on nonaccrual basis
Past due loans
Renegotiated loans
Total nonperforming loans
Nonperforming loans as a percentage of total loans
2004
$ 10,732
14,671
183
$ 25,586
0.73%
Allowance as percentage of nonperforming loans
160.49%
2003
$ 12,459
10,586
195
$ 23,240
0.82%
160.86%
Other real estate owned
$
1,814
$
1,866
Gross income that would have been recorded
at original rates
Interest that was reflected in income
Net reduction to interest income due to nonaccrual
$
$
1,757
307
1,450
$
$
1,962
1,185
777
2002
$ 23,450
14,774
207
$ 38,431
1.47%
89.76%
1,651
1,542
286
1,256
$
$
$
2001
$ 22,899
17,781
832
$ 41,512
1.62%
82.28%
2000
$ 10,698
22,086
2,263
$ 35,047
1.41%
95.87%
$
1,619
$
1,661
$
$
1,422
750
672
$
$
750
333
417
The reduction of income due to renegotiated loans was less
than $50 thousand in any year presented.
Nonperforming loan levels at December 31, 2004, increased
$2.3 million compared to 2003 levels due to increases in past
due loans. The increases in past due loans in 2004 were
largely due to increases in residential loans secured by real
estate. Increases in past due loans during 2004 were partially
offset by decreases in nonaccrual loans which were largely
due to decreases in residential loans secured by real estate.
Nonperforming loan levels at December 31, 2003 decreased
$15.2 million compared to 2002 levels as decreases were
noted in nonaccrual and past due loans. The decrease in
nonaccrual loans during 2003 was due to eight commercial
loans that paid in full or were charged down and/or charged
off. The decrease in past due loans for the 2003 period
included decreases in all major categories with the most
significant decreases in loans secured by residential real
estate, loans secured by commercial real estate and other
commercial loans. This decrease in past due loans during
2003 was due to successful collection strategies. Interest
income on nonaccrual loans decreased in the 2004 period
compared to 2003 as the 2003 period included the final
resolution of several large credits that included collection of
some interest income.
61
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation’s loan portfolio continues to be monitored
by senior management to identify potential portfolio risks and
detect potential credit deterioration in the early stages. The
Corporation has a “Watch List Committee” which includes
credit workout officers of the bank and reviews watch list
credits for workout progress or deterioration. Loan loss
adequacy and the status of significant nonperforming credits
are monitored on a quarterly basis by a committee made up of
senior officers of the bank and parent company. These
committees were established to provide additional internal
monitoring and analysis in addition to that provided by the
Credit Committees of the bank and parent company. Credit
risk is mitigated during the loan origination process through
the use of sound underwriting policies and collateral
requirements and its previously described committee
structure. Management also attempts to minimize loan losses
by analyzing and modifying collection techniques on a
periodic basis. Management believes that the allowance for
credit losses and nonperforming loans remained safely within
acceptable levels.
Capital Resources
Equity capital stood at $532.0 million at December 31, 2004,
a $101.0 million increase compared to December 31, 2003.
The most significant change in equity resulted from the
issuance of stock related to the GAF acquisition which
increased equity by $105.2 million, while the conversion of
GAF’s investment in FCFC stock into treasury shares resulted
in a decrease of $514 thousand to equity capital. Dividends
declared reduced equity by $43.6 million during 2004 as
dividends were increased over 2003 levels, while net income
increased equity by $22.1 million for the same period.
Additional advances by the Corporation’s Employee Stock
Ownership Plan (“ESOP”) to fund the acquisition of the
Corporation’s common stock for future distribution as
employee compensation, net of long-term debt payments and
fair value adjustments to unearned ESOP shares, decreased
equity by $3.9 million. The market value adjustment to
securities available for sale decreased equity by $5.1 million
for the period. Amounts paid to fund the discount on
reinvested dividends reduced equity by $816 thousand.
Proceeds from the issuance of treasury shares to provide for
stock options exercised increased equity by $9.7 million
during 2004, while the tax benefit related to the stock options
increased equity by $1.2 million. Equity capital was also
impacted during 2004 by an increase of $203 thousand from
the reissuance of treasury shares to fund contingent payments
related to the acquisition of First Commonwealth Financial
Advisors, which consummated in 2002. This contingent
payment of the Corporation’s common stock was the second
of four scheduled annual installments.
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide
related services while protecting against future uncertainties.
62
The evaluation of capital adequacy depends on a variety of
factors, including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management’s primary
emphasis with respect to the Corporation’s capital position is
to maintain an adequate and stable ratio of equity to assets.
See NOTE 27 (Regulatory Restrictions and Capital
Adequacy) to the Consolidated Financial Statements for an
analysis of regulatory capital guidelines and the Corporation’s
capital ratios relative to these measurement standards.
Risk Management
In the normal course of business the Corporation assumes
various types of risk. The Corporation has identified twenty-
six standard risks which have been summarized into seven
major risk categories. The seven major risk categories
include credit risk, market risk, liquidity risk, compliance/
legal risk, operational risk, reputation risk and strategic risk.
Credit risk, market risk and liquidity risk are discussed in
this Management’s Discussion and Analysis of Financial
Condition and Results of Operations section. The remaining
major risk categories are defined as follows: compliance/
legal risk—the risk arising from violations of, or
noncompliance with laws, rules, regulations, prescribed
practices, or ethical standards; operational risk—threat
created by inadequate information systems, operational
problems, weak internal control systems, fraud, or any other
unforeseen catastrophes; reputation risk—the risk to
earnings or capital arising from negative public opinion; and
strategic risk—the risk arising from adverse business
decisions or improper implementation of those decisions.
These factors and others could impact the Corporation’s
business, financial condition and results of operation.
Corporate management has taken strong and wide-ranging
actions to enhance the awareness of and proactively manage
risk within the Corporation. In addition to establishing a
comprehensive policy and procedure manual that is updated
and regularly communicated throughout the Corporation,
the Executive Vice President, Chief Risk Officer, oversees
all aspects of the risk process. Our committee structure
embraces a risk management culture, which begins with the
Risk Committee that provides oversight and monitoring of
key risk areas. The Risk Committee, which is chaired by the
Senior Vice President, Risk Management, and has
representation from all of the disciplines across the
organization, meets to discuss and assess current and
emerging risks as well as to identify solutions and mitigants.
Credit quality and loan loss adequacy issues are addressed
by the Credit Quality, Watch List and Loan Loss Reserve
committees. Additional committees include Security, which
is responsible for coordinating the security program;
Privacy, which focuses on safeguarding client information;
ALCO, which monitors interest rate and liquidity risks; and
Disclosure, which evaluates internal controls regarding
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
information utilized in certain regulatory reports, as well as
reviewing those reports and the disclosure process to ensure
that disclosures are timely, complete and accurate.
The Risk Department has specific procedures to analyze and
quantify risks in the seven major risk categories. Gaps
between inherent risks and mitigants are quantified and
presented to the Risk Committee for their review.
Management continually reviews the mitigants and controls
to ensure their continuity. The Internal Audit Department
validates the existence and effectiveness of the controls. Risk
gaps are compiled to develop a risk rating, which is
incorporated into the balanced scorecard measure and is
reported to the Board of Directors. An analytical review of
key indicators, both monetary and nonmonetary, as well as
other current information that may become available through
discussions with management serves as an early warning
system to detect potential deteriorating internal controls. All
significant new initiatives and products are subject to a risk
assessment prior to being presented for implementation. An
annual assessment of risk is also performed to identify
potential threat areas to our computer systems. Our internal
audit staff performs routine and consistent information
technology reviews of identified risk areas, security measures
and control processes.
With these processes in place the Corporation believes that its
objective of establishing a risk culture that identifies,
measures, controls and monitors events or actions that may
adversely affect our organization has been achieved. Our goal
is not to eliminate risk but to understand fully the risk the
Corporation is assuming and appropriately manage those risks.
Inflation and Changing Prices
Management is aware of the impact inflation has on interest
rates and therefore, the impact it can have on a bank’s
performance. The ability of a financial institution to cope
with inflation can only be determined by analyzing and
monitoring its asset and liability structure. The Corporation
monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and
liabilities in order to reduce the effect of inflation upon its
performance. However, it must be remembered that the asset
and liability structure of a financial institution is
substantially different from an industrial corporation in that
virtually all assets and liabilities are monetary in nature,
meaning that they have been or will be converted into a
fixed number of dollars regardless of changes in general
price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and
liabilities which do not gain or lose purchasing power solely
as a result of general price level changes. Examples of
nonmonetary items are premises and equipment.
Inflation can have a more direct impact on categories of
noninterest expenses such as salaries and wages, supplies and
employee benefit costs. These expenses are very closely
monitored by management for both the effects of inflation and
increases relating to such items as staffing levels, usage of
supplies and occupancy costs.
COMMON STOCK INFORMATION
First Commonwealth Financial Corporation (the “Corporation”) is listed on the New York Stock Exchange under the symbol
“FCF.” The approximate number of holders of record of the Corporation’s common stock is 20,100. The table below sets forth the
high and low sales prices per share and cash dividends declared per share for common stock of the Corporation.
Period
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
$ 15.00
$ 14.96
$ 14.30
$ 15.90
$
$
$
$
13.99
12.01
12.50
13.61
High Sale
Low Sale
$ 12.55
$ 13.30
$ 14.00
$ 14.98
$
$
$
$
11.50
11.57
12.60
13.15
Cash Dividends
Per Share
$
$
$
$
0.160
0.160
0.160
0.165
Cash Dividends
Per Share
$
$
$
$
0.155
0.155
0.155
0.160
63
Our Mission
The mission of First Commonwealth Financial Corporation
is to maximize the long-term total return to shareholders.
Shareholder Value
First Commonwealth is committed to building shareholder
value. It is our mission, our highest priority. Value is
delivered through a combination of total return (dividend
yields plus market price appreciation), market liquidity
(the ease of buying or selling First Commonwealth shares),
and shareholder services. This section of our annual report
summarizes the many services that are made available to
our shareholders.
Dividend Reinvestment
First Commonwealth Financial Corporation's Dividend
Reinvestment Plan offers shareholders an opportunity
to reinvest their dividends in additional shares of the
Corporation's common stock. Once enrolled in the plan,
participants may also purchase shares through voluntary
cash investments. For more information on the plan,
please call The Bank of New York, Plan Administrator,
at 1-800-524-4458.
Annual Meeting
The Annual Meeting of Shareholders will be held at:
First Commonwealth Place
654 Philadelphia St., Indiana, PA
On Monday, April 18, 2005 at 3:00 PM.
Common Stock
First Commonwealth Financial Corporation common
stock is listed on The New York Stock Exchange and is
traded under the symbol FCF. Current market prices for
First Commonwealth Financial Corporation common
stock can be obtained from your local stock broker or by
calling the Corporation at (724) 349-7220 (in Indiana,
PA) or 1-800-331-4107 (outside Indiana, PA).
Transfer Agent
The Bank of New York
Telephone Inquiries: 1-800-524-4458
1-610-382-7833 (outside the U.S.)
1-888-269-5221 (Hearing Impaired—TDD Phone)
Address Shareholder Inquiries To:
Shareholder Relations Department
P.O. Box 11258
Church Street Station
New York, NY 10286
E-Mail Address:
Shareowners@bankofny.com
The Bank of New York's Stock Transfer Website:
http://www.stockbny.com
Send Certificates For Transfers and Address Changes To:
Receive and Deliver Department
P.O. Box 11002
Church Street Station
New York, NY 10286
Dividend Payments
Subject to the approval of the Board of Directors,
quarterly cash dividends are paid on or about the 15th
day of January, April, July and October.
64
For shareholders who do not participate in the Dividend
Reinvestment Plan, Automated Direct Dividend Deposit
Service is available for direct deposit of quarterly dividend
payments to a checking or savings account. To enroll, please
call The Bank of New York at 1-800-524-4458 for an
Authorization Form (completed forms must be received by
the Bank 30 days prior to dividend payment date).
Form 10K
A copy of the Form 10K as filed with the Securities and
Exchange Commission will be provided to any shareholder
on request to the Corporation, to the attention of the
Corporate Secretary.
Investor/Shareholder Inquiries
Requests for information or assistance regarding the
corporation should be directed to the Corporation, to the
attention of Shareholder Relations, 1-800-331-4107.
Additional Investor/Shareholder Information
Form 10K and other corporate filings to the Securities and
Exchange Commission are available on the Corporation’s
website at www.fcbanking.com under “Investor Relations”.
The “Investor Relations” section of the website also includes
additional information of interest to shareholders such as:
press releases, historical stock prices, dividend declarations
and corporate governance information, including the
Corporation’s “Code of Ethics”.
First Commonwealth’s Chief Executive Officer has certified
to the NYSE that, as of the date of the certification, he was
not aware of any violation by First Commonwealth of
NYSE’s corporate governance listing standards. In addition,
First Commonwealth’s Chief Executive Officer and
Chief Financial Officer have made certain certifications
concerning the information contained in the annual report
on Form 10-K pursuant to Section 302 of the Sarbanes-Oxley
Act. The Section 302 certifications appear as exhibits 31.1
and 31.2 to the annual report on Form 10-K as of
December 31, 2004.
Golden Tower Awards
January ............................................................................Pat Nagle
February ................................................................... William Locher
March .........................................................................Lori Schreiber
April ............................................................................. Lisa Resslar
May ........................................................................... Melanie Ansell
June ........................................................................... Randy Koontz
July ........................................................................... Janine Fennell
August ............................................................................. Tim Nagle
September ......................................................................Gary Bentz
October ............................................................... Robert Ellenberger
November ..................................................................... Dave Hanna
December .....................................................................Peter Zerega
Spirit of Community Service Awards
January ....................................................... Lori Styers, Irene Caskey
February .......................................Daniel Gehring, Barbie Wojichowski
March ................................................. Jacqueline Snyder, John Parsch
April .................................................. Deborah Robertson, Connie Biss
May ....................................................... Leo Klebacha, Deborah Aller
June ......................................................... Cheryl Knisely, Joni Kosior
July .......................................................... Joslin Bennett, Aja Whiting
August .................................................... Michael James, Valerie Korb
September ...................................................Tanya Snyder, Joyce Lock
October .................................................. Karen Walters, Diane Eppley
November ......................................... Candi Beltowski, Claudia Jacobson
December ......................................................Judy Anthony, Lloyd Rager
First Commonwealth Financial Corporation
Old Courthouse Square
22 North Sixth Street
Indiana, Pennsylvania 15701-0400
(724) 349-7220
(800) 711-BANK (2265)
www.fcbanking.com