to make our communities strong
to integrate services for the benefit of
our shareholders, our employees, and our clients
GoodDecisions
to expand in new markets
to help our clients achieve financial security
®
®
2005 Annual Report
2005 Annual Report
A
TAble of ConTenTs
a message to shareholders .........................................1
making good decisions
for a successful future ............................................... 4
board of directors ....................................................10
e. James trimarchi retires ......................................... 11
corporate information ..............................................12
management’s report on internal control
over financial reporting ........................................... 13
reports of ernst & young, llp, independent
registered public accounting firm .............................14
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
First Commonwealth
A Message to Shareholders
Every year inevitably brings change and the
potential for new successes. But 2005 saw some
of the most significant changes our organization
has ever experienced. In 2005, First
Commonwealth said goodbye to individuals
who shaped the essence of our company. At the
same time, we redefined our management team
to position ourselves for the opportunities and
challenges of the future.
In December, E. James Trimarchi announced
his retirement and stepped down as chairman
non-executive chairman. Dave brings great
of the board. Jim was the founder and original
experience and integrity to his new position.
chief executive officer of First Commonwealth
The Board also appointed Julia E. Cuccaro, Esq.
Financial Corporation. First Commonwealth
to fill Jim Trimarchi’s unexpired term as a
would simply not exist as it does today without
member of the First Commonwealth Financial
Jim’s leadership and dedication. Also, last
Corporation Board. Julia has substantial
summer Johnston A. Glass resigned as president
experience, having served as a member of the
and chief executive officer of First Commonwealth
First Commonwealth Bank Board of Directors
Bank after 33 years of service. His many and
since 1992.
significant contributions to the organization over
those years are greatly appreciated.
The Board also demonstrated its continued
confidence in the future by increasing the
First Commonwealth has moved quickly to
cash dividend once again. This action results
fill these critical positions with individuals of
in a very strong yield in excess of 5% based
exceptional talent and ability. The Board of
on recent market values. We have additional
Directors named Gerard (Jerry) M. Thomchick
reasons to be confident about the future as well.
as president and chief executive officer of
First Commonwealth employees continued to be
First Commonwealth Bank. Jerry has 20 years
recognized for their outstanding commitment to
of experience with First Commonwealth in
community service through the Golden Tower
a number of key positions including, most
and Spirit of Community Service awards. Their
recently, senior executive vice president and
dedication to our clients and communities is
chief operating officer for the Corporation.
greatly appreciated.
In January 2006, the Board of Directors selected
First Commonwealth Financial Corporation
David S. Dahlmann to serve as an independent
was also recently recognized by Bank Director
2005 Annual Report
magazine as the recipient of its annual award
$2.7 million ($1.8 million after tax or $0.03
for excellence in Corporate Governance.
per diluted share) related to the organizational
This award is presented to a Board that has
restructuring and related personnel changes.
instituted and practices corporate governance in
The corporate restructuring has resulted in
a superlative manner.
In addition, our branch network optimization
plan continued to focus on maximizing our
presence in areas identified as growth markets.
reducing the number of full-time equivalent
employees by 72. This action, combined with
other cost-saving actions, will enhance our
efficiency ratio in the future.
We celebrated the grand opening of eight new
Fourth quarter return on average equity was
or renovated offices in 2005, and we anticipate
8.93% and return on average assets was 0.77%
ten additional office openings in 2006.
compared with 12.31% and 1.06% respectively
We accomplished a great deal in 2005, but
in the corresponding period last year.
the year was not without its challenges. The
Net income for the 12 months ending
Corporation reported fourth quarter 2005
December 31, 2005 was $57.8 million or $0.83
net income of $11.8 million or $0.17 per
per diluted share compared with $38.7 million
diluted share compared with net income of
or $0.58 per diluted share in the corresponding
$16.6 million or $0.24 per diluted share in
period last year. The 2005 results included net
the same period last year. The 2005 fourth-
securities losses of $7.7 million ($5.0 million
quarter results included net security losses of
after tax or $0.07 per diluted share) compared
$8.2 million ($5.3 million after tax or $0.08 per
to net securities gains of $4.1 million
diluted share) that consisted of securities losses
($2.7 million after tax or $0.04 per diluted
of $2.7 million ($1.7 million after tax) resulting
share) for 2004. The 2005 period also included
from the sale of $100 million of U.S. Agency
gains from the sale of branch offices of
securities to provide funding for the deposits
$11.8 million ($7.7 million after tax or $0.11
associated with the previously disclosed sale
per diluted share), a gain from the sale of the
of five branch offices and additional securities
Company’s merchant services business of
losses of $5.5 million ($3.6 million after tax).
$2.0 million ($1.3 million after tax or $0.02 per
The branch office sale, a component of the
diluted share) and restructuring charges totaling
Company’s branch network optimization
$5.4 million ($3.5 million after tax or $0.05
initiative, generated a pre-tax gain of
per diluted share).
$8.7 million ($5.7 million after tax or $0.08
per diluted share).
The restructuring and other management
changes are expected to result in a prospective
The fourth quarter of 2005 also included
annual pretax cost savings of approximately
additional restructuring charges of
$3.4 million. Last year’s results included a
2
First Commonwealth
good citizen shi p
ou tstan di ng produc ts
ex eMplary custoM er servi ce
the pittsburgh Market
encompasses allegheny,
washington, lawrence,
and Butler counties.
“First Commonwealth has a tremendous opportunity for growth
in the Pittsburgh Market. I am excited not only to develop our
client base, but also to offer the advantages of banking with First
Commonwealth—outstanding products, good citizenship, and
exemplary customer service.”
Jeanine fallon
Market executive, pittsBurgh
First Commonwealth
First Commonwealth
First Commonwealth: Making Good
Decisions for a Successful Future
Corporate success is not a matter of luck. Rather,
it is due to careful planning, understanding the
market and the competition, and making good
decisions. During 2005, First Commonwealth
Front row (L to R): R. John Previte, James M. Knipple
Middle row (L to R): Richard J. DeHaas, Thaddeus J. Clements, Sue A. McMurdy,
Gerard M. Thomchick
Back row (L to R): William A. Mrozowski, Renee M. Shepko
The New Bank Executive Management Team
In August, Gerard M. Thomchick, Chief Operating
Officer of First Commonwealth Financial and a
made its decisions based on the things that have
20-year veteran of First Commonwealth, was
always been important: helping clients achieve
financial security, making communities better
places to live and work, and maximizing long-
term total return for its shareholders.
Making good decisions for shareholders, clients,
and employees often means developing a more
appropriate executive management team as
well as integrating markets to provide both the
greatest efficiency and the greatest opportunity
for growth. To that end, First Commonwealth
has made great strides.
named president and CEO of First Commonwealth
Bank. Thomchick subsequently announced the
seven members of First Commonwealth Bank’s
new executive management team. They include:
R. John Previte, Senior Executive Vice President
(for trust and treasury functions); Sue A. McMurdy,
Senior Executive Vice President (for information
technology and operations); Thaddeus J. Clements,
Senior Executive Vice President (for human
resources, balanced scorecard, planning, and
marketing); Renee M. Shepko, Executive Vice
President (for branches and deposit product
management); Richard J. DeHaas, Executive
Vice President (for bank asset quality); James M.
Knipple, Executive Vice President (for compliance);
and William A. Mrozowski, Executive Vice
President (for wealth management).
2005 Annual Report
2005 Annual Report
5
5
restructuring Markets
st rengt heni n g ou r operat io n
Aligning Markets for Maximum Potential
Another good decision made by First
Commonwealth in 2005 was to restructure
its retail markets to align with its corporate
regions have differences as well as similarities,
regions. Three market executives were named
the market executives meet regularly to exchange
to oversee the branches in their regions as well
ideas and strategies.
In addition, First Commonwealth carefully
evaluated prospective and current market
areas to make decisions about branch closings,
renovations, and openings in all regions, with
particular emphasis being placed on four high
value markets—Allegheny County, Butler County,
Washington County, and Westmoreland County.
Since December 2003, First Commonwealth has
doubled its presence in the Pittsburgh market.
Using its “branch optimization strategy,” First
Commonwealth opened four de novo offices,
renovated two offices, and relocated two
others. This strategy extends into 2006 with an
expectation to open or relocate ten additional
offices in the high value markets.
as to leverage corporate and retail relationships,
grow overall business, and identify new
business clients. Though the three market
the new branch opened at the village at pittsburgh Mills places
first commonwealth in an excellent strategic position to develop
new customers in a new market.
First Commonwealth
cultivating new clients
the eastern region
encompasses
somerset, Bedford,
Blair, and cambria
counties.
“By consolidating our service
areas into three markets, we are
streamlining and strengthening
our operation. We are committed
to making communities strong,
and the newly defined structure
allows us to be more responsive
to our clients’ needs while
cultivating new retail and
business clients.”
g. lynn lovell
Market executive, eastern
2005 Annual Report
valu ing ou r e Mployees
coM plyi n g wi t h federal standa rds
reMaining active in ou r coMMunities
the central region
encompasses armstrong,
clearfield, elk,
indiana, Jefferson, and
westmoreland counties.
“I see my role as building a successful team of people who are
ready to attract new clients and help our existing retail clients
achieve their financial goals. By being visible and active in our
communities, we fulfill the First Commonwealth mission and
grow our business as well.”
david hanna
Market executive, central
First Commonwealth
First Commonwealth
president and ceo Joe o’dell and his family, as well as hundreds of
other first commonwealth employees, walked to raise money for
diabetes research.
True to Its Values
No one can argue with First Commonwealth’s
decision to continue to consider employees
its number one resource. Employees are
encouraged to be active in their communities,
and First Commonwealth recognizes exemplary
community service with its Golden Tower and
Corporate Pride
Employees, corporate leaders, clients, and
shareholders can all take pride in the fact that First
Commonwealth continues its commitment to being
a good corporate citizen. Always in full compliance
with federal corporate governance standards,
First Commonwealth holds its Board members
and top executives to the highest standards for
competencies and performance. Bank Director
magazine selected First Commonwealth to receive
the 2005 Governance Award for outstanding
corporate governance.
Spirit of Community Service Awards. In addition
to giving countless hours of their time as board
Good Decisions
members, coaches, and scout leaders, hundreds
By expanding into high value markets,
of employees participated in six different walks
restructuring retail markets, remaining committed
for which First Commonwealth was the lead
to a strong dividend, opening new branches in
sponsor. The walks raised over $1 million for
strategic locations, and putting the right people in
the Juvenile Diabetes Research Foundation and
the right positions, First Commonwealth has made
the American Diabetes Association.
decisions that will ultimately benefit shareholders,
clients, and employees. First Commonwealth
remains committed to its founding values and to
proactively plan for a successful future.
2005 Annual Report
2005 Annual Report
First Commonwealth Board of Directors
Front row (L to R): Dale P. Latimer, Julia E. Trimarchi Cuccaro, Esq., Laurie S. Singer, Alan R. Fairman
Middle row (L to R): Edward T. Côté, Johnston A. Glass, David S. Dahlmann, Robert J. Ventura
Back row (L to R): James W. Newill, David R. Tomb Jr., Esq., John A. Robertshaw Jr., Joseph E. O’Dell, Ray T. Charley
Ray T. Charley, Greensburg
Chief Executive Officer,
Thomi Company
Edward T. Côté, Ligonier
Retired
Julia E. Trimarchi Cuccaro, Esq., Indiana
Attorney at Law
David S. Dahlmann, Greensburg
Chairman of the Board,
First Commonwealth Financial Corporation
Alan R. Fairman, DuBois
Partner, Fairman Drilling Company
Johnston A. Glass, Indiana
Retired
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 S. Singer, Allison Park
President, Allegheny Valley
Development Corporation
David R. Tomb Jr., Esq., Indiana
Attorney at Law
Robert J. Ventura, Pittsburgh
Principal, Ventura Group, LLC
0
First Commonwealth
E. James Trimarchi Retires
After over 40 years of dedicated service
to the Indiana finance industry and First
Commonwealth, E. James Trimarchi,
chairman of First Commonwealth Financial
Corporation’s board of directors, has retired.
One of the founders of Conemaugh Valley
Bank in Blairsville and a leader through
its 1967 merger with First National Bank
in Indiana (which was renamed the
National Bank of the Commonwealth),
Trimarchi was instrumental in renovating
the Indiana County courthouse where First
Commonwealth’s administrative offices are currently located. Trimarchi was
named the first president and chief executive officer of National Bank of the
Commonwealth’s holding company, First Commonwealth Financial Corporation,
when it was formed in 1983. He became chairman in 1990.
Under Trimarchi’s leadership, First Commonwealth joined the New York Stock
Exchange in 1992 and significantly expanded the bank’s geographic region as
well as the breadth of its financial service offerings. The company grew from
$250 million in assets to more than $6 billion.
Most recently, Trimarchi developed and implemented the Balanced Scorecard
measurement system, which is used to help First Commonwealth strategize for
the future and manage compliance with corporate governance requirements.
First Commonwealth’s use of the Balanced Scorecard was recognized by Robert
S. Kaplan, Harvard Business School professor and cocreator of the Balanced
Scorecard, who used First Commonwealth’s practices as a model for an
educational conference in 2003.
Praised by colleagues as well as competitors, Trimarchi leaves a lasting mark
both on First Commonwealth and on Pennsylvania’s finance industry.
Replacing Trimarchi as chairman of the board is David S. Dahlmann, who
has served as a member of the board since 1998. Dahlmann is a director of
First Commonwealth Bank, First Commonwealth Insurance Agency, and First
Commonwealth Financial Advisors.
Additionally, Julia E. Cuccaro, Esq., who has served on the board of First
Commonwealth Bank since 1992, has been named to fill Trimarchi’s
unexpired term.
2005 Annual Report
Corporate Information
corporate executive offices
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.
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
Joseph E. O’Dell
President and Chief
Executive Officer
Gerard M. Thomchick
Senior Executive Vice President and
Chief Operating Officer
John J. Dolan
Executive Vice President and
Chief Financial Officer
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
2
First Commonwealth
First Commonwealth FinanCial Corporation and subsidiaries
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
First Commonwealth Financial Corporation is responsible for the preparation, the integrity, and
the fair presentation of the consolidated financial statements included in this annual report. The
consolidated financial statements and notes to the financial statements have been prepared in
conformity with generally accepted accounting principles and include some amounts based upon
management’s best estimates and judgments.
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), that is
designed to produce reliable financial statements in conformity with generally accepted accounting
principles. 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, including the
possibility that a control can be circumvented and that misstatements due to error or fraud may
occur without detection. 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, 2005. Management’s assessment of the effectiveness of internal control over
financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their attestation report on management’s assessment
which is included herein.
First Commonwealth Financial Corporation
indiana, pennsylvania
February 28, 2006
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 maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). First Commonwealth Financial Corporation’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. because management’s assessment and our audit were conducted to also meet the reporting
requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s
assessment and our audit of First Commonwealth Financial Corporation’s internal control over financial reporting included
controls over the preparation of financial statements in accordance with the instructions for the preparation of Consolidated
Financial Statements for Bank Holding Companies (Form FRY-9C). 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 the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation 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 First Commonwealth Financial Corporation maintained effective internal control
over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also,
in our opinion, First Commonwealth Financial Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, 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 First Commonwealth Financial Corporation and subsidiaries as of December 31, 2005 and 2004,
and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2005, of First Commonwealth Financial Corporation and our report dated February 27, 2006,
expressed an unqualified opinion thereon.
pittsburgh, pennsylvania
February 27, 2006
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 as of December 31, 2005 and 2004, and the related consolidated statements of income, changes
in shareholders’ equity, and cash flows for each of the three years in the period then ended December 31, 2005.
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.
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, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of First Commonwealth Financial Corporation and subsidiaries at December 31, 2005 and 2004,
and the consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2005, 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 First Commonwealth Financial Corporation’s internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of sponsoring organizations of the treadway Commission and our report dated
February 27, 2006, expressed an unqualified opinion thereon.
pittsburgh, pennsylvania
February 27, 2006
15
First Commonwealth FinanCial Corporation and subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
ASSETS
Cash and due from banks
Interest-bearing bank deposits
Federal funds sold
securities available for sale, at market
Securities held to maturity, at amortized cost, (Market value
$89,804 in 2005 and $81,886 in 2004)
loans:
portfolio loans
loans held for sale
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,
$
$
$
2005
84,555
473
1,575
1,851,986
87,757
3,623,102
1,276
(119)
(39,492)
3,584,767
60,860
1,655
122,702
15,251
214,739
6,026,320
491,644
3,504,908
3,996,552
665,665
43,314
108,250
691,494
799,744
5,505,275
2004
$
79,591
2,403
-0-
2,162,313
78,164
3,512,774
2,311
(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
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 70,377,916 shares outstanding in 2005;
71,978,568 shares issued and 69,868,908 shares outstanding in 2004
Additional paid-in capital
retained earnings
Accumulated other comprehensive income (loss)
Treasury stock (1,600,652 and 2,109,660 shares at December 31, 2005 and 2004,
respectively, at cost)
unearned esop shares
total shareholders’ equity
total liabilities and shareholders’ equity
-0-
-0-
71,978
173,967
318,569
(9,655)
(20,214)
(13,600)
521,045
6,026,320
$
71,978
175,453
307,363
10,002
(26,643)
(6,175)
531,978
$ 6,198,478
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 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 (losses)
trust income
service charges on deposits
Gain on sale of branches
Gain on sale of merchant services business
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
Net Income
average shares outstanding
average shares outstanding assuming dilution
Per Share Data:
basic earnings per share
diluted earnings per share
First Commonwealth FinanCial Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
2005
Years Ended December 31,
2004
2003
$
222,090
$
189,629
$
164,441
74,864
12,699
2,225
161
29
312,068
79,070
24,305
7,867
27,376
35,243
138,618
173,450
8,628
164,822
(7,673)
5,526
15,710
11,832
1,991
3,423
5,391
1,349
4,881
7,795
50,225
73,522
10,988
11,578
3,535
4,876
2,262
-0-
5,437
-0-
-0-
31,756
143,954
71,093
13,257
57,836
69,276,141
69,835,285
0.83
0.83
$
$
$
75,309
11,447
1,600
6
34
278,025
58,890
11,989
6,778
33,033
39,811
110,690
167,335
8,070
159,265
4,077
5,254
14,975
-0-
-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
38,652
66,716
10,561
2,038
4
13
243,773
60,100
6,755
3,560
29,826
33,386
100,241
143,532
12,770
130,762
5,851
5,142
13,013
3,041
-0-
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
53,300
$
65,887,611
66,487,516
0.59
0.58
59,002,277
59,387,055
$
$
0.90
0.90
17
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
First Commonwealth FinanCial Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar Amounts in Thousands)
Common
Stock
$ 62,525
additional
paid-in
Capital
$ 64,885
accumulated
retained other Comprehensive treasury
Income (Loss)
Earnings
25,851
$
$ 296,165
Stock
(44,981)
$
-0-
53,300
-0-
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
Comprehensive income
Net income
other comprehensive income, net of tax:
unrealized holding losses on
securities arising during the period
less: reclassification adjustment
for (gains) losses 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
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-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-
(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-
57,836
-0-
-0-
-0-
-0-
-0-
-0-
-0-
119
-0-
(24,050)
-0-
5,008
-0-
-0-
57,836
(46,630)
-0-
(615)
(19,657)
(19,657)
-0-
-0-
-0-
-0-
-0-
(9,655)
$
-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
unearned
esop
Shares
$
(3,055)
total
shareholders’
Equity
$ 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
-0-
57,836
-0-
(24,050)
-0-
5,008
-0-
-0-
-0-
-0-
(7,425)
(615)
(19,657)
38,179
(46,630)
(7,306)
-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-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
plan purchases
Treasury stock reissued
Tax benefit of stock options
Balance at December 31, 2005
The accompanying notes are an integral part of these consolidated financial statements.
(891)
(1,176)
462
$ 173,967
-0-
-0-
-0-
$ 71,978
-0-
-0-
-0-
$ 318,569
18
-0-
6,429
-0-
(20,214)
$
-0-
-0-
-0-
$ (13,600)
(891)
5,253
462
$ 521,045
First Commonwealth FinanCial Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Operating Activities
net income
adjustments to reconcile net income to net cash
provided by operating activities:
provision for credit losses
depreciation and amortization
Net losses (gains) on sales of securities and other assets
net gains on sales of branches
net gains on sale of merchant services business
income from increase in cash surrender value of
bank owned life insurance
Stock option tax benefit
Changes net of acquisition:
Decrease (increase) in interest receivable
Increase (decrease) in interest payable
Increase (decrease) in income taxes payable
net decrease 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
proceeds from sale of merchant services business
Acquisition of affiliate, net of cash received
Net decrease in interest-bearing bank deposits
Net decrease (increase) in loans
purchases of premises and equipment
Net cash provided (used) 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 (decrease) in other short-term borrowings
sale of branch and deposits, net of cash received
reissuance of treasury stock
net increase in deposits
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
2005
2004
2003
Years Ended December 31,
$
57,836
$
38,652
$
53,300
8,628
10,884
6,687
(11,832)
(1,991)
(5,391)
462
(887)
2,252
3,888
1,036
107
5,021
76,700
-0-
10,967
(20,530)
328,791
402,503
(457,967)
10,516
2,000
-0-
1,930
(131,472)
(14,371)
132,367
37,000
(84,255)
-0-
-0-
(891)
(46,193)
4,775
(285,584)
(110,483)
5,050
278,053
(202,528)
6,539
8,070
9,488
(4,197)
-0-
-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
-0-
(70,872)
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)
-0-
(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
-0-
7,859
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
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
79,591
86,130
$
82,510
79,591
$
81,114
82,510
$
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, 2005, 2004 and 2003
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 (“First Commonwealth”) 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, First Commonwealth provides a full
range of loan, deposit, trust, insurance and financial advisory
services primarily to individuals and small to middle-
market businesses in fifteen counties in central and western
pennsylvania. under current conditions, First Commonwealth
is reporting one business segment.
First Commonwealth is subject to regulations of certain state
and federal agencies. these regulatory agencies periodically
examine First Commonwealth 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 First Commonwealth Financial Corporation
and its wholly owned subsidiaries. all material intercompany
transactions have been eliminated in consolidation.
First Commonwealth 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
20
of the entity’s residual returns or both. Refer to NOTE 16
(Variable Interest Entities) 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.
Securities
debt securities that First Commonwealth 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.
First Commonwealth has securities classified as either
held-to-maturity or available-for-sale and does not engage
in trading activities. First Commonwealth utilizes the
average cost method to determine the net gain or loss on the
sale of securities.
First Commonwealth conducts a comprehensive review of
the investment portfolio on a quarterly basis to determine
whether an other-than-temporary impairment has occurred.
Issuer-specific 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. declines in the market value of
individual securities below their cost that are deemed other-
than-temporary will result in write-downs of the individual
securities to their fair value. The related write-downs would
be included in earnings as realized losses.
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.
First Commonwealth 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
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
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.
a loan is placed in nonaccrual status when, based on
current information and events, it is probable that First
Commonwealth 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,
First Commonwealth expects repayment of the remaining
contractual principal and interest, or when the loan otherwise
becomes well-secured and in the process of collection.
First Commonwealth 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.
First Commonwealth considers a loan to be impaired when,
based on current information and events, it is probable that
the company 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 First Commonwealth 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 First Commonwealth purchases or originates mortgage
loans with a definitive plan to sell or securitize those loans
and retain the mortgage servicing rights, the company
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 First Commonwealth
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 company 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, First Commonwealth 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
First Commonwealth 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. First Commonwealth’s management and 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.
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)
First Commonwealth’s methodology for assessing the
appropriateness of the allowance for credit losses consists of
several key elements. these elements include an assessment
of individual 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 First Commonwealth
may also be classified as substandard. Doubtful loans have
the characteristics of substandard loans with the added
characteristic that collection or liquidation in full, on the
basis of presently existing facts and conditions, is highly
improbable. although the possibility of loss is extremely high
for doubtful loans, the classification of loss is deferred until
pending factors, which might improve the loan, have been
determined. loans rated as doubtful, in whole or in part, are
placed in nonaccrual status. Loans which are classified as loss
are considered uncollectible and are charged to the allowance
for credit losses at the next meeting of First Commonwealth’s
Credit Committee after placement in this category. there
were no loans classified as loss on the primary watch list as of
December 31, 2005. First Commonwealth 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 First Commonwealth 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 impaired loan balances that are
not reviewed.
a reserve is established for primary watch list loans that are
classified as substandard (and still accruing interest) and Other
Assets Especially Mentioned (“OAEM”). The reserve on these
22
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 First Commonwealth 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, 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.
First Commonwealth 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 First Commonwealth’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
First Commonwealth purchased insurance on the lives of
certain groups of employees. the policies accumulate asset
values to meet future liabilities including the payment of
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
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 $129,871
and $124,932 at December 31, 2005 and 2004, respectively.
During 2005, First Commonwealth also recorded a liability
which represents the net present value of future expected
payments for a portion of the death benefit for which the
insured employee has designated a beneficiary. This liability
in the amount of $784 is reflected in “Other Liabilities”
on the Consolidated balance sheet and has been included
in “Salaries and Employee Benefits” on the Consolidated
statements of income.
Premises and Equipment
premises and equipment are carried at cost less accumulated
depreciation and amortization on First Commonwealth’s
Consolidated balance sheet. 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 the straight-line
depreciation method is used for buildings and improvements.
Charges for maintenance and repairs are expensed as
incurred. where a lease is involved, amortization expense is
charged over the term of the lease or the estimated useful life
of the improvement, whichever is shorter.
First Commonwealth 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, First Commonwealth 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
First Commonwealth 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
acquired business are included in First Commonwealth’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
First Commonwealth reviews long-lived assets, such as
premises and equipment and intangibles for impairment
whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
These changes in circumstances may include a significant
decrease in the market value of an asset or the extent or
manner in which an asset is used. 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
First Commonwealth 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) includes 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
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)
Comprehensive Income Disclosures (continued)
net of related tax effects in the statement of Changes in
shareholders’ equity.
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 First Commonwealth’s employee
Stock Ownership Plan (“ESOP”) described in NOTE 27
(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”). First Commonwealth
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 First
Commonwealth 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
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 the
Financial Accounting Standards Board (“FASB”) Statement
of Financial Accounting Standards No. 123 (“FAS 123”),
“Accounting for Stock-Based Compensation.” In
December 2002, the FASB issued Statement of Financial
24
Accounting Standards No. 148 (“FAS 148”), “Accounting for
Stock-Based Compensation-Transition and Disclosure.”
FAS 148 did not amend FAS 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 123 or the intrinsic value method of
APB 25. As permitted under FAS 123, First Commonwealth
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 123 had been implemented.
No stock-based employee compensation expense is reflected
in First Commonwealth’s net income as reported in the
Consolidated statements of income because all stock options
granted under First Commonwealth’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 Statement of Financial
Accounting Standards No.123 (Revised) (“FAS 123(R)”),
“Share-Based Payment.” FAS 123(R) replaces FAS 123 and
supersedes APB 25. FAS 123(R) will require companies to
measure compensation costs for all share-based payments,
including employee stock options, using the fair value
method. FAS 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
method for either recognition or disclosure under FAS 123
will apply FAS 123(R) using a modified prospective
application. Under the modified prospective application,
compensation cost is recognized 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 123 for either recognition or pro forma disclosures. For
periods before the required effective date, those companies
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 123. According to FAS 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 123(R) will become effective at the beginning of the
next fiscal year that begins after June 15, 2005, or beginning
on January 1, 2006. The adoption of FAS 123(R) is not
expected to have a material impact on First Commonwealth’s
financial condition or results of operations. See NOTE 28
(Stock Option Plan) for additional information on the
employee stock option plan.
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
the following table illustrates the effect on net income
and earnings per share if First Commonwealth 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
average shares outstanding
average shares outstanding
assuming dilution
December 31,
2005
2004
2003
$ 57,836
$
38,652
$
53,300
(43)
$ 57,793
$
$
$
$
0.83
0.83
0.83
0.83
$
$
$
$
$
(38)
38,614
0.59
0.59
0.58
0.58
(1,352)
51,948
0.90
0.88
0.90
0.87
$
$
$
$
$
69,276,141
65,887,611
59,002,277
69,835,285
66,487,516
59,387,055
Derivative Instruments and Hedging Activities
First Commonwealth 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.
First Commonwealth 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.
management periodically reviews contracts from various
functional areas of First Commonwealth to identify
potential derivatives embedded within selected contracts.
Management has identified potential embedded derivatives
in certain loan commitments for residential mortgages
where First Commonwealth 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
First Commonwealth’s financial condition and results of
operation has not been material. As of December 31, 2005,
First Commonwealth had no freestanding derivative or
hedging instruments.
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.
NOTE 2—New Accounting Pronouncements
In November 2005, the FASB issued FASB Staff Position
FAS 115-1 and FAS 124-1 (“FSP FAS 115-1 and FAS 124-1”),
“The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.” FSP FAS 115-1
and FAS 124-1 provides additional guidance on when an
investment in a debt or equity security should be considered
impaired and when that impairment should be considered
other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should
recognize an impairment loss no later than when the
impairment is deemed other-than-temporary, even if a
decision to sell has not been made. FSP FAS 115-1 and
FAS 124-1 also requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary
impairments. The implementation of FSP FAS 115-1
and FAS 124-1 did not have a material impact on First
Commonwealth’s financial condition or 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 the company will be unable to collect all
contractual cash flows on the loan. 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 was effective for loans acquired in fiscal
years beginning after December 15, 2004 and did not have a
material impact on First Commonwealth’s financial condition
or results of operations.
25
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
nOTE 2—New Accounting Pronouncements (continued)
In May 2005, the FASB issued Statement of Financial
Accounting Standards No. 154 (“FAS 154”), “Accounting
Changes and Error Corrections—a replacement of APB
Opinion No. 20 and FASB Statement No. 3.” As it states in
the title, FAS 154 replaces APB Opinion No. 20, “Accounting
Changes,” and FASB Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements.”
FAS 154 applies to all voluntary changes in accounting
principle and changes the requirements for the accounting
for and reporting of a change in accounting principle.
Unlike APB Opinion No. 20, FAS 154 requires changes in
accounting principle to have retrospective application to the
financial statements from prior periods to which the change
applies unless it is impracticable. FAS 154 will be effective
for accounting changes and corrections of errors that will be
made in fiscal years beginning after December 31, 2005.
First Commonwealth does not expect the implementation of
FAS 154 to have a material impact on its financial condition
or results of operations.
NOTE 3—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, 2005
December 31, 2004
December 31, 2003
Pretax
Amount
Tax
(Expense)
Net of
Tax
Benefit Amount
Pretax
amount
tax
(Expense)
net of
Tax
benefit amount
Pretax
amount
tax
(Expense)
net of
Tax
benefit amount
$ (37,000)
$ 12,950 $ (24,050)
$ (3,723) $ 1,303 $ (2,420)
$ (10,693) $ 3,742 $ (6,951)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period
less: reclassification adjustment for
(gains) losses realized in net income
7,705
(2,697)
5,008
(4,051)
1,418
(2,633)
(5,745)
2,011
(3,734)
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)
(946)
(30,241)
$ (30,241)
331
10,584
$ 10,584
(615)
(19,657)
$ (19,657)
NOTE 4—Supplemental Cash Flow Disclosures
2005
2004
2003
Cash paid during the year for:
interest
income taxes
$ 136,367
9,040
$
$ 110,729
6,302
$
$ 101,361
16,080
$
noncash investing and financing activities:
esop loan reductions
esop borrowings
$
$
1,061
8,486
$
$
1,332
5,513
$
$
1,061
-0-
loans transferred to other
real estate owned and
repossessed assets
$
5,388
$
4,613
$
4,270
Gross decrease in market
value adjustment to
securities available for sale $
(29,295) $
(7,774)
$
(16,438)
Gross increase (decrease) in
market value adjustment
of derivative instruments
treasury stock reissued for
business combination
$
(946) $
(182)
$
11
$
203
$
203
$
203
NOTE 5—Restructuring Charges
In July 2005, an Executive Officer of First Commonwealth,
executed his rights under a previously disclosed employment
26
(182)
(7,956)
(118)
(5,171)
$ (7,956) $ 2,785 $ (5,171)
64
2,785
7
(4)
11
(16,427)
(10,678)
5,749
$ (16,427) $ 5,749 $ (10,678)
contract. First Commonwealth accrued expenses of $700
related to this contract. these expenses are included as
restructuring charges in First Commonwealth’s Consolidated
statement of income. in addition to payments to the
executive, this amount includes First Commonwealth’s
portion of hospitalization costs and employer payroll taxes.
Under terms of the agreement, payments will begin within 90
days and will follow First Commonwealth’s normal payroll
cycle for a period of 24 months.
In September 2005 following the resignation, First
Commonwealth announced that the board of directors
approved a plan to reorganize the operating affiliates
of the company. as part of this reorganization, First
Commonwealth streamlined its organizational structure
on January 1, 2006, by merging its wholly owned
subsidiaries First Commonwealth trust Company,
First Commonwealth systems Corporation, and First
Commonwealth professional resources, inc. with and
into First Commonwealth bank, its principal operating
subsidiary. the reorganization initiative is an extension of
First Commonwealth’s continuing effort to unify, streamline
and simplify its business structure and operations, which
have been built principally through 15 mergers and
acquisitions during the past 23 years. The new structure
will help expedite strategic business and operational
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
decisions and create a more nimble organization capable
of responding more rapidly to evolving and dynamic
market conditions. The 2005 period includes one-time
termination benefits of $4,737 related to the reorganization
initiative and are included as restructuring charges in First
Commonwealth’s Consolidated statement of income.
One-time termination benefits include severance payments,
hospitalization costs and payroll taxes. no additional charges
related to this plan are expected in future periods. the
restructuring charges were for 72 employees whose positions
were eliminated as part of the reorganization initiative.
the costs related to First Commonwealth’s management
changes and reorganization initiative were recorded in
accordance with Fasb statement of Financial accounting
Standards No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities.” The restructuring and other
management changes are expected to result in prospective
annual pretax cost savings of $3,387.
The following is a summary of the 2005 restructuring liability:
Restructuring liability as of January 1, 2005
Accrual related to management contract
Accrual related to reorganization initiative
One-time benefit payments during 2005
Restructuring liability as of December 31, 2005
$
$
-0-
700
4,737
(2,122)
3,315
NOTE 6—Merger and Integration Charges
During 2004, First Commonwealth 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 7—Branch Sale
In June 2005, First Commonwealth Bank, a wholly owned
subsidiary of First Commonwealth Financial Corporation,
sold a branch office located in State College, PA. Under the
terms of the purchase and assumption agreement, $17,618 of
deposit liabilities associated with the office were sold. The
transaction generated a pre-tax gain of approximately $3,090
($2,009 after taxes) that included the premium on deposits
and the gain on the sale of premises and equipment.
First Commonwealth bank completed an additional branch
sale transaction in November 2005. Under terms of the
purchase and assumption agreement, First Commonwealth
Bank sold branch offices located in Huntingdon, Mount
union, saxton, three springs and williamsburg, pa.
Deposit liabilities associated with theses offices amounted
to $108,355. The transaction generated a pre-tax gain of
$8,742 ($5,682 after taxes), which includes a premium on
deposits and a gain on the sale of premises and equipment.
First Commonwealth funded the deposits associated
with the branch sale by selling $100,000 of U.S. Agency
securities with an average yield of 2.53% and an average
life of 1.4 years. First Commonwealth incurred a loss from
the securities sale of $2,722 before taxes ($1,769 after
taxes). The gain on the sale of branches and the loss on the
sale of securities were included in First Commonwealth’s
Consolidated Statements of Income during 2005.
NOTE 8—Merchant Services Sale
In April 2005, First Commonwealth completed an asset sale
and merchant processing alliance with First data Corporation
(“First Data”). Under the terms of the agreement, First Data
acquired certain assets of First Commonwealth’s merchant
processing business and will provide merchant payment
processing services on behalf of First Commonwealth bank.
First Commonwealth bank will participate in future revenue
related to both the existing book of merchant business as
well as new business. The transaction generated a pre-tax
gain of $1,991 that was included in First Commonwealth’s
Consolidated Statements of Income during 2005.
NOTE 9—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. First Commonwealth bank
maintained with the Federal reserve bank average balances
of $1,853 during 2005 and $612 during 2004.
NOTE 10—Derivative Instruments
In December 2005, First Commonwealth terminated its three
interest rate swaps that were classified as cash flow hedges.
First Commonwealth paid an early termination penalty
equal to the market value of the swaps as of the termination
date in the amount of $1,117. The termination penalty, net
of deferred taxes, was classified as “Other Comprehensive
Income” in the Consolidated Balance Sheets as of
December 31, 2005. The penalty will be recognized as a
reduction of earnings over the remaining original term of
the interest rate swaps as of the termination date, which is
seventeen months. First Commonwealth expects to recognize
$994 as a reduction of interest income during 2006.
27
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 11—Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 2005 and 2004:
2005
2004
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Gross Approximate
Fair
Value
30,442
$
Gross
amortized unrealized unrealized
Gains
4
Cost
23,470
losses
Gross
$
$
approximate
Fair
Value
-0- $
23,474
u.s. treasury securities
$
30,477 $
-0- $
(35) $
obligations of u.s. Government
Corporation and agencies:
mortgage backed securities
1,130,425
3,141
(23,774)
1,109,792
1,362,705
11,219
(10,874)
1,363,050
other
245,803
-0-
(3,923)
241,880
277,085
211
(3,227)
274,069
obligations of states and
political subdivisions
debt securities issued by
Foreign Governments
194,305
5,005
(166)
199,144
190,895
6,810
(75)
197,630
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
Corporate securities
195,286
5,342
(686)
199,942
206,719
8,403
(458)
214,664
other mortgage backed securities
total debt securities
1,367
1,797,663
-0-
13,488
(10)
(28,594)
1,357
1,782,557
2,217
2,063,091
76
26,723
-0-
(14,634)
2,293
2,075,180
equities
total securities available for sale
68,062
69,429
$ 1,865,725 $ 15,407 $ (29,146) $ 1,851,986
1,919
(552)
83,665
3,468
-0-
87,133
$ 2,146,756
$ 30,191
$ (14,634) $ 2,162,313
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
98,603
210,988
40,044
316,236
665,871
1,131,792
$ 1,797,663
Fair Value
97,815
$
207,551
41,060
324,982
671,408
1,111,149
$ 1,782,557
proceeds from the sales of securities available for sale were
$328,791, $115,726 and $62,941 during 2005, 2004 and
2003, respectively. Gross gains of $469, $4,214 and $5,709
and gross losses of $8,192, $302 and $-0- were realized on
those sales during 2005, 2004 and 2003, respectively.
securities available for sale with an approximate fair
value of $1,010,992 and $1,090,019 were pledged at
December 31, 2005 and 2004, respectively, to secure public
deposits and for other purposes required or permitted by law.
the following table shows the book value or fair market
value of securities available for sale as of December 31, 2003:
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 28 years and have an anticipated average life
to maturity ranging from less than one year to approximately
seven 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 First
Commonwealth uses computer simulation models to test
the average life and yield volatility of all mortgage backed
securities under various interest rate scenarios to ensure
that volatility falls within acceptable limits. at
December 31, 2005 and 2004, First Commonwealth 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, 2005, 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.
28
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
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
$
24,319
1,214,751
252,038
161,341
50
213,234
4,214
1,869,947
99,229
$ 1,969,176
NOTE 12—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, 2005
and 2004:
2005
2004
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
$
2,478
$
58
$
-0-
$
2,536
$
4,389
$
208
$
-0- $
4,597
other
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
obligations of states and
political subdivisions
debt securities issued by
Foreign Governments
Corporate securities
84,974
2,080
(91)
86,963
73,370
3,514
-0-
76,884
305
-0-
-0-
-0-
-0-
-0-
305
-0-
405
-0-
-0-
-0-
-0-
-0-
405
-0-
total securities held to maturity
$ 87,757
$ 2,138
$
(91)
$
89,804
$
78,164
$ 3,722
$
-0- $
81,886
the amortized cost and estimated market value of debt
securities at December 31, 2005, 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
879
11,847
31,745
40,808
85,279
2,478
87,757
$
$
Fair Value
889
$
12,036
32,984
41,359
87,268
2,536
89,804
$
There were no sales of securities held to maturity in 2005,
2004 or 2003.
Securities held to maturity with an amortized cost of $85,339
and $70,227 were pledged at December 31, 2005 and 2004,
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, 2003:
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
$
8,143
10,000
76,716
408
8,987
104,254
29
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 13—Other-Than-Temporary Impairment of Investments
The following table presents the gross unrealized losses and fair values at December 31, 2005 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
$
2,954
$
(35)
$
-0-
$
-0-
$
2,954
$
(35)
U.S. Government Agency Obligations
U.S. Government Agency CMO and MBS
Corporate Securities
Municipal Securities
other mortgage backed securities
Total Debt Securities
equity
Total Securities
118,692
365,136
25,257
28,318
1,357
541,714
5,300
(1,483)
(5,891)
(367)
(237)
(10)
(8,023)
(552)
123,188
482,786
25,828
681
-0-
632,483
-0-
(2,440)
(17,883)
(319)
(20)
-0-
241,880
847,922
51,085
28,999
1,357
(20,662)
-0-
1,174,197
5,300
(3,923)
(23,774)
(686)
(257)
(10)
(28,685)
(552)
$ 547,014
$
(8,575)
$ 632,483
$ (20,662)
$ 1,179,497
$
(29,237)
At December 31, 2005, 96% of the unrealized losses
were comprised of fixed income securities issued by U.S.
Government agencies, u.s. Government sponsored agencies
and investment grade municipalities. Corporate fixed income
securities comprised 2% of the unrealized losses and equity
securities accounted for the remaining 2%. The corporate
fixed income securities consist of twelve issues by financial
service companies and three trust preferred pools structured
from issuers from the financial services industry. Three of the
issues are non-rated and have unrealized losses of $45, or .2%
of the total. A total of 231 positions of the total fixed income
securities are temporarily impaired and none individually has
an unrealized loss of more than 8% of its respective amortized
cost basis. the unrealized losses in the equity securities
category consist of three issues and no security has been at a
loss for more than five months. Management does not believe
any individual loss as of December 31, 2005 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, 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
U.S. Government Agency CMO and MBS
Corporate Securities
Municipal Securities
Total Securities
199,421
533,729
29,860
577
(2,766)
(3,835)
(178)
-0-
24,513
304,180
18,290
3,522
(461)
(7,039)
(280)
(75)
223,934
837,909
48,150
4,099
(3,227)
(10,874)
(458)
(75)
$ 763,587
$
(6,779)
$ 350,505
$
(7,855)
$ 1,114,092
$
(14,634)
30
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 14—Loans
relationship to impaired 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,
2005
2004
$
729,962
$
715,280
78,279
1,213,223
987,798
71,351
1,164,707
988,611
610,648
4,468
3,624,378
(119)
$ 3,624,259
562,321
12,815
3,515,085
(252)
$ 3,514,833
recorded investment in
impaired loans at end
of period
average balance of impaired
2005
2004
2003
$ 11,564
$ 10,915
$ 12,654
loans for the year
$ 11,895
$ 12,601
$ 19,866
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
$
1,474
$
2,252
$ 2,048
$
5,276
$
6,500
$ 6,327
$
$
6,288
506
$
$
4,415
$ 6,327
307
$ 1,185
most of First Commonwealth’s business activity was with
customers located within pennsylvania. the portfolio is well
diversified, and as of December 31, 2005 and 2004, there
were no significant concentrations of credit.
The following table identifies the amount of nonperforming
loans as of December 31:
loans on nonaccrual basis
Past due more than 90 days
renegotiated loans
total nonperforming loans
2005
11,391
13,977
173
25,541
$
$
2004
10,732
14,671
183
25,586
$
$
NOTE 15—Allowance for Credit Losses
the following table illustrates the changes in First
Commonwealth’s allowance for credit losses during the
periods presented:
Allowance at January 1
additions:
recoveries of previously
charged off loans
provisions charged to
operating expense
From acquisition
deductions:
2005
$ 41,063
2004
$ 37,385
2003
$ 34,496
1,247
1,237
1,705
8,628
-0-
8,070
4,983
12,770
3,109
loans charged off
Allowance at December 31
11,446
$ 39,492
10,612
$ 41,063
14,695
$ 37,385
NOTE 16—Variable Interest Entities
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 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.
as part of its community reinvestment initiatives, First
Commonwealth invests in qualified affordable housing projects
as a limited partner. First Commonwealth receives federal
affordable housing tax credits and rehabilitation tax credits for
these limited partnership investments. First Commonwealth’s
maximum potential exposure to these partnerships is $5,025,
which consists of the limited partnership investments as of
December 31, 2005. Based on FIN 46R, First Commonwealth
has determined that these investments will not be consolidated
but continue to be accounted for under the equity method
whereby First Commonwealth’s portion of partnership losses
are recognized as incurred.
NOTE 17—Financial Guarantees
First Commonwealth 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 that First Commonwealth has in
particular classes of financial instruments.
31
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 17—Financial Guarantees (continued)
NOTE 18—Premises and Equipment
As of December 31, 2005 and 2004, First Commonwealth 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 10 (Derivative Instruments) for a
description of interest rate swaps.
First Commonwealth’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. First
Commonwealth uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance sheet instruments.
The following table identifies the notional amount of those
instruments at December 31, 2005 and 2004:
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
$
2005
10,479
64,719
12,899
70,461
19,701
178,259
$
2004
10,257
61,048
11,132
68,819
18,636
169,892
117,399
60,860
$
112,927
56,965
$
depreciation and amortization related to premises and equipment
was $8,608 in 2005, $8,017 in 2004 and $7,261 in 2003.
First Commonwealth leases various premises and assorted
equipment under noncancellable agreements. total future minimal
rental commitments at December 31, 2005, were as follows:
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
standby letters of credit
Commercial letters of credit
2005
2004
$ 889,489
21,127
$
164
$
$
$
$
744,942
23,079
215
2006
2007
2008
2009
2010
Thereafter
Total
premises
2,391
$
2,200
1,958
1,659
1,437
9,814
$ 19,459
$
equipment
590
225
225
111
111
-0-
$ 1,262
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. First Commonwealth evaluates each
customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by
First Commonwealth 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 First Commonwealth
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, 2005,
for financial standby letters of credit and performance standby
letters of credit include amounts of $15,673 and $4,344,
respectively, issued during 2005 and subject to the provisions
of FIN 45. There is currently no liability recorded on First
Commonwealth’s balance sheet related to these letters of credit.
32
Included in the lease commitments above is $794 in lease
payments to be paid under a sale-leaseback arrangement.
The sale-leaseback transaction began in 2005 and resulted in
a gain of $297 on the sale of a branch being recognized over
the 15 year lease term through 2020.
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
$2,929 in 2005, $3,180 in 2004 and $1,939 in 2003.
NOTE 19—Goodwill and Other Amortizing Intangible Assets
Preliminary goodwill in the amount of $93,921 was recorded
as of December 31, 2004 in connection with the acquisition
of GA Financial, Inc. in May 2004. During 2005, a reduction
of $905 was recorded to result in final goodwill in the
amount of $93,016 being recorded for the acquisition as of
December 31, 2005.
First Commonwealth’s amortizing intangible assets include
$15,700 and $3,270 in customer deposit base intangibles
that were recorded as part of the Ga Financial, inc. and
pittsburgh Financial Corporation acquisitions, respectively.
the accumulated amortization on these intangible assets
was $3,721 as of December 31, 2005 and $1,462 as of
December 31, 2004. Amortization expense on the customer
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
deposit base intangibles is expected to total $2,259 for the
calendar years 2006 through 2009 and $1,705 in 2010. The
weighted-average remaining useful life of the customer
deposit base intangible is approximately nine years.
NOTE 20—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31
were as follows:
now and super now accounts
savings and mmda accounts
time deposits
Total interest-bearing deposits
$
2005
94,325
1,661,482
1,749,101
$ 3,504,908
2004
$
92,168
1,703,258
1,568,206
$ 3,363,632
Interest-bearing deposits at December 31, 2005 and 2004,
include allocations from now and super now accounts
of $463,901 and $451,938, respectively, into Savings and
mmda accounts. these reallocations are based on a formula
NOTE 21—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
and have been made to reduce First Commonwealth’s reserve
requirement in compliance with regulatory guidelines.
Included in time deposits at December 31, 2005 and 2004,
were certificates of deposit in denominations of $100 or more
of $607,868 and $417,988, respectively.
Interest expense related to $100 or greater certificates of
deposit amounted to $20,116 in 2005, $15,652 in 2004 and
$18,227 in 2003.
Included in time deposits at December 31, 2005, were
certificates of deposit with the following scheduled maturities:
2006
2007
2008
2009
2010 and thereafter
$
920,816
490,132
172,702
73,614
91,837
$ 1,749,101
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
2005
Ending Average Average
Balance
Balance
40,525 $ 56,213
137,692
150,000
Rate
3.38%
3.25%
$
$
2004
ending
balance
average average
balance
35,750 $ 81,972
230,204
340,000
rate
1.46%
1.75%
2003
ending average average
balance balance
$ 14,100 $ 68,455
151,860
120,000
rate
1.32%
1.33%
431,696
348,391
126,749
171,547
$ 665,665 $ 797,148
$ 943,447
2.90%
3.16%
3.05%
477,562
93,162
466,381
18,035
$ 946,474 $ 796,592
$ 1,015,881
1.38%
1.65%
1.51%
450,140
49,887
326,226
7,592
$ 634,127 $ 554,133
$ 699,326
1.16%
0.87%
1.22%
Interest expense on short-term borrowings for the years
ended December 31 is detailed below:
Federal funds purchased
borrowings from Fhlb
securities sold under
$
2005
1,900
4,474
$
agreements to repurchase
treasury, tax and loan note option
12,514
5,417
total interest on
2004
1,199
4,040
6,452
298
$
2003
902
2,019
3,768
66
short-term borrowings
$
24,305
$ 11,989
$
6,755
NOTE 22—Subordinated Debentures
Subordinated Debentures outstanding at December 31 are
as follows:
2005
2004
Amount Rate
amount
rate
subordinated debentures:
owed to First
Commonwealth
Capital trust i
and due 2029
owed to First
Commonwealth
Capital trust ii
and due 2034
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
30,929 +2.85%
30,929
libor
+2.85%
41,238 5.888%
41,238
5.888%
$108,250
$108,250
First Commonwealth 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 First
33
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 22—Subordinated Debentures (continued)
Commonwealth. 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
First Commonwealth. 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 Ga Financial, inc.
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,
First Commonwealth 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, First Commonwealth 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.
NOTE 23—Other Long-term Debt
Other long-term debt at December 31 follows:
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. First Commonwealth
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, First Commonwealth 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.
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, First
Commonwealth 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.
First Commonwealth may also redeem the debentures prior
to September 1, 2009, upon the occurrence of certain tax or
bank regulatory events, subject to regulatory approval.
2005
2004
Weighted Average Weighted Average
Contractual Rate
Effective Rate
amount
weighted average weighted average
Contractual rate
effective rate
LIBOR+1.25%
LIBOR+1.25%
$
661
5,514
LIBOR+1%
LIBOR+1.25% LIBOR+1.25%
LIBOR+1%
Amount
$
-0-
13,600
21,405
5.51%
2.46%
21,970
5.51%
-0-
40,751
66,158
87,957
216,783
147,574
58,538
16,323
1,538
5,676
7,132
761
7,298
$ 691,494
3.49%
3.94%
5.35%
4.26%
5.13%
4.95%
5.41%
5.65%
6.17%
5.72%
7.37%
5.90%
3.02%
3.56%
3.49%
3.65%
4.01%
3.99%
4.58%
5.65%
6.17%
5.72%
7.37%
5.90%
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%
2.46%
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%
esop loan due:
December 2005
December 2012
repos due:
2008
borrowings from Fhlb due:
2005
2006
2007
2008
2009
2010
2011
2014
2016
2017
2019
2020
2022
34
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
The weighted-average contractual rate reflects the rate due to
creditors. The weighted-average effective rates of long-term
debt in the schedule above include the effects of purchase
accounting valuation adjustments that were recorded in
connection with prior business combinations.
FHLB advances in the amount of $322,575 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
$7,500 become convertible at the FHLB’s option into floating
rate debt indexed to 3 month LIBOR beginning April 24, 2006
and quarterly thereafter. Advances in the amount of $160,000
are convertible on a quarterly basis at the Fhlb’s option
into floating rate debt indexed to 3 month LIBOR but only if
3 month LIBOR is 6% or higher. Should the FHLB elect to
convert an advance to a floating rate, First Commonwealth 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 22 (Subordinated Debentures).
Scheduled loan payments for other long-term debt are
summarized below:
2006
2007
2008
2009
2010 thereafter
Long-term
debt
payments
purchase
valuation
amortization $ 5,365 $ 5,190 $ 4,056 $ 2,397 $ 1,034 $
$ 59,905 $ 66,025 $ 114,566 $ 202,858 $ 147,027 $ 82,668
2010. This transaction expanded 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 24—Common Share Commitments
At December 31, 2005 and 2004, First Commonwealth had
100,000,000 common shares authorized and 71,978,568
shares issued. Issued shares were reduced by 1,600,652
shares of treasury stock at December 31, 2005 and 2,109,660
shares of treasury stock at December 31, 2004. During 2004,
8,274,123 common shares were issued to fund the business
combination with Ga Financial, inc. First Commonwealth
may be required to issue additional shares to satisfy common
share purchases related to the employee stock ownership
plan described in NOTE 26 (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 559,144, 599,905 and 384,778 at
December 31, 2005, 2004 and 2003, respectively.
Treasury shares consisting of 492,137 and 906,494 were
reissued during 2005 and 2004 upon exercise of stock
options. Treasury shares consisting of 16,871 and 16,107
were reissued in 2005 and 2004, respectively, to fund the
business combination with strategic Capital Concepts, inc.
and Strategic Financial Advisors, Inc. that took place in 2002.
Treasury shares consisting of 39,836 were acquired in 2004
as part of the Ga Financial, inc. acquisition.
403
NOTE 25—Income Taxes
the amounts on the purchase valuation amortization row in
the table above include fair market adjustments that were
recorded in connection with prior business combinations.
The third quarter of 2004 included a 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
the income tax provision consists of:
2005
2004
2003
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
15,836
-0-
(2,686)
13,150
(603)
710
13,257
$
4,138
-0-
1,427
5,565
(474)
(1,384)
3,707
$
$ 13,438
-0-
2,048
15,486
-0-
(2,235)
$ 13,251
35
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 25—Income Taxes (continued)
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, 2005 and 2004, were as follows:
2005
2004
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
unrealized loss on securities available
for sale
other
total deferred tax assets
$ 13,483
1,157
3,921
1,570
699
3,604
271
989
4,809
1,314
31,817
$ 13,997
1,211
6,409
239
1,174
3,297
1,428
854
-0-
825
29,434
A net operating loss carryforward from acquisition of $1,998
is remaining at December 31, 2005. This carryforward
expires in 2024. A tax credit carryforward of $271 is
remaining as of December 31, 2005, and expires in 2025.
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:
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)
net deferred tax asset
(122)
(121)
(5,445)
(3,243)
(1,473)
(1,737)
(490)
(12,509)
$ 16,925
-0-
(1,245)
(1,650)
(687)
(709)
(4,413)
$ 27,404
2005
tax at statutory rate
Increase (decrease) resulting from:
income from bank owned
$
life insurance
other nontaxable interest
tax credits
other
total tax provision
$
NOTE 26—Retirement Plans
Amount
24,882
(1,887)
(8,206)
(958)
(574)
13,257
% of Pretax Income
35.0
(2.7)
(11.5)
(1.3)
(0.8)
18.7
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 First
Commonwealth’s common stock in a transaction whereby
the esop trust borrowed funds that were guaranteed by
First Commonwealth. 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 $1,406 in 2005, $1,442 in 2004 and $938 in
2003. See NOTE 27 (Unearned ESOP Shares) for additional
information on the esop.
36
2004
2003
Amount
$ 14,826
% of Pretax Income
35.0
Amount
23,293
$
% of Pretax Income
35.0
(1,805)
(7,364)
(1,428)
(522)
3,707
$
(4.2)
(17.4)
(3.4)
(1.2)
8.8
(1,520)
(7,332)
(651)
(539)
13,251
$
(2.3)
(11.0)
(1.0)
(0.8)
19.9
First Commonwealth 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 $3,057 in 2005,
$2,977 in 2004 and $2,606 in 2003.
Upon shareholder approval at the regular 1998 meeting,
First Commonwealth 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 by the highly compensated
employees compared to other employees due to limits and
restrictions incorporated into First Commonwealth’s 401(k)
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
and ESOP plans. First Commonwealth’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 First Commonwealth’s 401(k) and ESOP plans) into
the serp, through salary reductions. First Commonwealth
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, First Commonwealth may make
an extra non-elective contribution for plan participants.
the serp will continue to supplement First
Commonwealth’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 $457 in 2005, $418 in 2004 and $235 in 2003.
Postretirement Benefits other than Pensions for
Acquired Subsidiaries
employees of the former southwest bank and Ga Financial,
Inc. were covered by postretirement benefit plans. The
measurement date for these plans was October 1.
Net periodic benefit cost of these plans was as follows:
2005
-0-
service cost
interest cost on projected benefit obligation 220
2
amortization of transition obligation
(1)
Loss (gain) amortization
$ 221
Net periodic benefit cost
$
$
2004
-0-
308
2
84
$ 394
$
2003
-0-
338
2
121
$ 461
the following table sets forth the funded status of the plans
and the amounts recognized on First Commonwealth’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
2005
2004
$ 4,607
-0-
4,607
-0-
$ 3,784
-0-
3,784
-0-
4,607
(11)
(1,290)
3,784
(13)
(310)
$ 3,306
$ 3,461
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
2005
$ 3,784
-0-
-0-
220
(376)
979
$ 4,607
2004
$ 5,901
449
-0-
308
(451)
(2,423)
$ 3,784
the discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation
was 5.50% for 2005 and 6.00% for 2004. The health care
cost trend rates used for 2005 were projected at an initial rate
of 8.50% for 2006 decreasing over time to an annual rate
of 4.75% in 2013 for both indemnity plan participants and
non-indemnity plan participants. For 2004, rates used 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.
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 First Commonwealth are provided
through insurance coverage; therefore, First Commonwealth
will not receive a direct federal subsidy. the preceding
measures of the accumulated postretirement benefit obligation
and the net periodic postretirement benefit cost for the 2004
period assume that the insurer will receive the subsidy
and pass those savings on to First Commonwealth through
reduced insurance premiums. The measures for the 2005
period assume that First Commonwealth will not receive the
subsidy due to the relatively small number of retirees.
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
$
14
$ 260
$
(13)
$
(237)
As of December 31, 2005, the projected benefit payments for
the next ten years are as follows:
2006
2007
2008
2009
2010
2011-2015
$
projected benefit payment
459
463
439
433
412
1,730
37
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 26—Retirement Plans (continued)
NOTE 28—Stock Option Plan
Postretirement Benefits other than Pensions for
Acquired Subsidiaries (continued)
the projected payments were calculated using the same
assumptions as those used to calculate the benefit obligations
included in this note.
NOTE 27—Unearned ESOP Shares
First Commonwealth Financial Corporation employee stock
Ownership Plan Trust (“ESOP”) borrowed funds which were
guaranteed by First Commonwealth. the balance of the esop
related loans was $13,600 at December 31, 2005 and $6,175
at December 31, 2004. First Commonwealth used $8,486 in
additional borrowings to purchase shares during 2005.
The loans have been recorded as long-term debt on First
Commonwealth’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
First Commonwealth’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. the initial esop loan
was paid off during 2005 while the new loan is scheduled to
be repaid over the next seven years. payments will be made
from contributions to the esop by First Commonwealth and
from 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.”
shares in suspense
December 31, 2003
Shares allocated during 2004
Shares acquired during 2004
shares in suspense
December 31, 2004
Shares allocated during 2005
Shares acquired during 2005
shares in suspense
December 31, 2005
total
old shares
new shares
175,548
(124,232)
421,800
473,116
(111,776)
625,918
42,979
(28,832)
-0-
14,147
(14,147)
-0-
132,569
(95,400)
421,800
458,969
(97,629)
625,918
987,258
-0-
987,258
the fair market value of the new shares remaining in
suspense was approximately $12,765 and $7,064 at
December 31, 2005 and 2004, respectively.
Interest on ESOP loans was $515 in 2005, $142 in 2004 and
$60 in 2003. During 2005, 2004 and 2003, dividends on
unallocated shares in the amount of $514, $195 and $184,
respectively, were used for debt service while all dividends
on allocated shares were allocated or paid to the participants.
38
At December 31, 2005, First Commonwealth 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 permitted
the executive Compensation Committee to grant options for
up to 4.5 million shares of First Commonwealth’s common
stock through October 15, 2005.
the vesting requirements and terms of options granted
were 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, First Commonwealth consummated its
merger with Ga Financial, inc., 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 First Commonwealth’s existing stock option plan. First
Commonwealth assumed the option plan of Ga Financial,
Inc. Under this plan, a total of 611,962 First Commonwealth
shares were reserved for issuance due to the exercise of
previously granted Ga Financial, inc. options assumed in
the merger. no further grants will be made under the Ga
Financial, inc. plan.
At December 5, 2003, First Commonwealth consummated
its merger with pittsburgh Financial Corporation, at which
time all outstanding pittsburgh Financial Corporation
options were converted to First Commonwealth options at
a conversion rate of 1.387. These options were not granted
from First Commonwealth’s existing stock option plan. First
Commonwealth assumed the option plans of pittsburgh
Financial Corporation. Under these plans, a total of 62,322 First
Commonwealth shares were reserved for issuance due to the
exercise of previously granted pittsburgh Financial Corporation
options assumed in the merger. no further grants will be made
under these pittsburgh Financial Corporation plans.
equity Compensation plan information as of
December 31, 2005:
number of weighted average
exercise price of
shares
available for
options outstanding Future Grant
options
outstanding
equity compensation
plans approved by
security holders (a)
2,164,421
$10.63
-0-
(a) Includes plans assumed through the acquisitions of GA Financial, Inc. and
Pittsburgh Financial Corporation. As of December 31, 2005, outstanding
options related to these acquired plans totaled 514,498 with a weighted-
average exercise price per share of $6.42.
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
First Commonwealth had 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 First Commonwealth’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, First Commonwealth’s net income and
earnings per share would have been reduced to the pro forma
amounts shown below:
2005
2004
2003
As
Pro
as
pro
Reported Forma reported
Forma reported Forma
$ 57,836 $ 57,793 $ 38,652 $ 38,614 $ 53,300 $ 51,948
pro
as
net income
basic earnings
per share
diluted earnings
per share
$ 0.83 $
$ 0.83 $
0.83 $
0.59 $ 0.59 $ 0.90 $ 0.88
0.83 $
0.58 $ 0.58 $ 0.90 $ 0.87
The weighted-average grant-date fair value of stock options
granted during 2005, 2004 and 2003 was $2.44, $2.45 and
$3.24, 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:
2005
2004
2003
4.54% per annum
4.44% per annum
5.14% per annum
dividend
yield
expected
volatility
Risk-free
23.1%
interest rate
4.2%
23.2%
4.1%
40.3%
4.1%
expected
option life
7.0 years
7.0 years
7.0 years
a summary of the status of First Commonwealth’s
outstanding stock options as of December 31, 2005, 2004
and 2003 and changes for the years ending on those dates is
presented below:
outstanding at beginning of year
pittsburgh Financial Corporation
converted options at merger
Ga Financial, inc. converted
options at merger
Granted
exercised
Forfeited
outstanding at end of year
exercisable at end of year
Shares
2,682,938
-0-
-0-
27,000
(492,137)
(53,380)
2,164,421
2,164,421
2005
Weighted Average
Exercise Price
$
$
$
$
$
$
$
$
10.61
0.00
0.00
14.55
10.26
14.69
10.63
10.63
2004
weighted average
exercise price
$
11.51
$
$
$
$
$
$
$
7.60
6.24
14.41
10.68
12.54
10.61
10.61
shares
2,965,726
1
611,962
24,000
(906,494)
(12,257)
2,682,938
2,682,938
2003
weighted average
exercise price
$
11.33
$
$
$
$
$
$
$
7.60
0.00
12.06
10.71
12.91
11.51
11.51
shares
2,841,772
62,322
-0-
641,912
(549,215)
(31,065)
2,965,726
2,965,726
The following table summarizes information about the stock options outstanding at December 31, 2005:
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
number outstanding
At 12/31/05
452,143
112,315
225,105
725,307
649,551
2,164,421
options outstanding
weighted-average
Remaining Contract Life
4.7
4.0
5.2
4.8
5.6
5.0
weighted-average
Exercise Price
6.01
$
$
9.27
$ 10.74
$ 11.48
$ 13.11
$ 10.63
options exercisable
number exercisable
At 12/31/05
452,143
112,315
225,105
725,307
649,551
2,164,421
weighted-average
Exercise Price
6.01
$
$
9.27
$ 10.74
$ 11.48
$ 13.11
$ 10.63
39
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 29—Contingent Liabilities
there are no material proceedings to which First
Commonwealth or its subsidiaries are a party, or of which
their property is the subject, except proceedings which
arise in the normal course of business and, in the opinion
of management, will not have a material adverse effect on
the consolidated operations or financial position of First
Commonwealth or its subsidiaries.
NOTE 30—Related Party Transactions
some of First Commonwealth’s directors, executive
officers, principal shareholders and their related interests
had transactions with the subsidiary bank 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 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 2005:
Balances December 31, 2004
Advances
Repayments
Other
Balances December 31, 2005
$
$
4,876
7,035
(4,462)
(76)
7,373
“Other” primarily reflects the change in those classified as a
“related party” usually as a result of mergers, restructuring,
resignations or retirements.
NOTE 31—Regulatory Restrictions and Capital Adequacy
the amount of funds available to the parent from its
subsidiary bank is limited by restrictions imposed on
all financial institutions by banking regulators. At
December 31, 2005, dividends from subsidiary banks were
restricted not to exceed $281,390. These restrictions have
not had, and are not expected to have, a significant impact on
First Commonwealth’s ability to meet its cash obligations.
First Commonwealth is subject to various regulatory capital
requirements administered by the Federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on First Commonwealth’s financial statements. Under
capital adequacy guidelines and the regulatory framework
for prompt corrective action, First Commonwealth and its
banking subsidiary must meet specific capital guidelines that
involve quantitative measures of First Commonwealth’s assets,
liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices.
First Commonwealth’s capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weighting and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require First Commonwealth to maintain
minimum amounts and ratios of total and tier i capital
(common and certain other “core” equity capital) to risk
weighted assets, and of tier i capital to average assets. as of
December 31, 2005, First Commonwealth and its banking
subsidiary meet all capital adequacy requirements to which
they are subject.
As of December 31, 2005, First Commonwealth Bank was
considered 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.
40
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, 2005
total Capital to risk weighted assets
First Commonwealth Financial Corporation $
$
First Commonwealth bank
537,236
484,712
12.7%
11.6%
tier i Capital to risk weighted assets
First Commonwealth Financial Corporation $
$
First Commonwealth bank
497,745
445,220
11.7%
10.6%
tier i Capital to average assets
First Commonwealth Financial Corporation $
$
First Commonwealth bank
497,745
445,220
8.4%
7.6%
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%
$
$
$
$
$
$
$
$
$
$
$
$
339,562
335,583
169,781
167,792
178,011
176,341
328,500
324,296
164,250
162,148
182,772
181,076
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
419,479
N/A
251,687
N/A
293,902
N/A
405,370
N/A
243,222
N/A
301,793
$
$
$
$
$
$
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 32—Condensed Financial Information of First Commonwealth Financial Corporation (parent company only)
Balance Sheets
Statements of Income
December 31,
2005
2004
Years Ended December 31,
2005
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
$
448
27,488
341
600,452
3,306
6,436
5,846
2,514
5,098
7,603
$ 659,532
Liabilities and Shareholders’ Equity
accrued expenses and other liabilities
dividends payable
loans payable
subordinated debentures payable
shareholders’ equity
total liabilities and shareholders’ equity
$
4,673
11,964
13,600
108,250
521,045
$ 659,532
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
$
$
$
$
1,181
20,545
387
601,843
3,302
5,941
5,732
5,325
6,034
10,520
660,810
2,879
11,528
6,175
108,250
531,978
660,810
34 $
$
61,624
83,715
50 $
(8,383)
-0-
1
(7,405)
84
59
(13,977) (12,778)
48
64,907
(3,629)
742
253
(9,237)
39,299
8,161
63,725
7,439
53,084
4,570
47,460
71,164
57,654
10,376
(4,354)
$ 57,836 $ 38,652 $ 53,300
(32,512)
41
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 32—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 by
operating activities
Years Ended December 31,
2005
2003
2004
$ 57,836 $ 38,652 $ 53,300
470
-0-
437
(84)
835
(739)
5,053
(4,600)
256
(15,076) 32,512
3,006
1,239
(1,017)
462
(4,482)
(2,193)
535
47,728
71,162
47,512
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
(27,481) (91,592) (32,785)
20,538
1,766
104,058
46
59
52
(465)
(125)
(162)
Changes in receivable from and net
investment in subsidiary
net cash used by
935
(82,284) (28,918)
investing activities
(6,427) (69,928) (60,003)
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
803
-0- 41,238
3,486
(9,794)
(3,486)
-0-
(803)
30,929
-0-
-0-
-0-
plan purchases
treasury stock reissued
Cash dividends paid
net cash used by
financing activities
net decrease in cash
Cash at beginning of year
Cash acquired with acquisition
Cash at end of year
(891)
5,050
(706)
5,923
(46,193) (41,736) (36,630)
(816)
9,679
(42,034)
(733)
1,181
(1,429)
(484)
(195) (12,975)
13,844
1,376
507
448 $ 1,181 $ 1,376
-0-
-0-
$
Cash dividends declared per common share were $0.665,
$0.645 and $0.625 for 2005, 2004 and 2003, respectively.
During 2005, dividends from subsidiaries included a special
dividend-in-kind in the amount of $4,701, which was
received in the form of investment securities. 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
42
subsidiaries also included a special dividend from Framal
Holdings Corporation in the amount 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 pittsburgh Financial Corporation acquisition.
During 2004, First Commonwealth’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 in 2004 and 2005 for First Commonwealth’s
esop and is guaranteed by the parent company of First
Commonwealth. During 2005 and 2004, $8,486 and $5,514,
respectively, were 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, 2005, 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, 2005, had no
amounts outstanding.
NOTE 33—Fair Values of Financial Instruments
below are various estimated fair values at
December 31, 2005 and 2004, as required by Statement of
Financial Accounting Standards No. 107 (“FAS No. 107”).
such information, which pertains to First Commonwealth’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 First Commonwealth. it is First
Commonwealth’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,
First Commonwealth 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 First
Commonwealth 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.
First Commonwealth FinanCial Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
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
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 First
Commonwealth’s off-balance sheet instruments, primarily
loan commitments and standby letters of credit, are
expected to expire without being drawn upon; therefore, the
commitment amounts do not necessarily represent future
cash requirements. 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 First
Commonwealth’s estimated incremental borrowing rate for
similar types of borrowing arrangements.
the following table presents carrying amounts and estimated
fair values of First Commonwealth’s financial instruments at
December 31, 2005 and 2004:
Carrying Amount
Estimated Fair Value
Carrying amount
estimated Fair Value
2005
2004
Financial assets
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
securities available for sale
investments held to maturity
loans, net
Financial liabilities
deposits
Short-term borrowings
Long-term debt
$
$
$
$
$
$
$
$
$
84,555
473
1,575
1,851,986
87,757
3,584,767
3,996,552
665,665
799,744
$
$
$
$
$
$
$
$
$
84,555
473
1,575
1,851,986
89,804
3,583,873
3,771,140
665,668
790,776
$
$
$
$
$
$
$
$
$
79,591
2,403
-0-
2,162,313
78,164
3,473,770
3,844,475
946,474
839,574
$
$
$
$
$
$
$
$
$
79,591
2,403
-0-
2,162,313
81,886
3,492,547
3,670,438
946,631
847,284
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, 2005 and 2004 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 (losses)
Gain on sale of branches
Gain on sale of merchant services business
other operating income
restructuring charges
other operating expenses
income before income taxes
applicable income taxes
net income
basic earnings per share
diluted earnings per share
2005
First Quarter
$
75,637
30,705
44,932
1,744
Second Quarter
$
77,540
33,900
43,640
3,000
Third Quarter
79,248
$
36,214
43,034
2,850
Fourth Quarter
$
79,643
37,799
41,844
1,034
43,188
485
-0-
-0-
10,955
-0-
35,393
19,235
4,016
15,219
0.22
0.22
$
$
$
40,640
-0-
3,090
1,991
12,068
-0-
35,072
22,717
4,879
17,838
0.26
0.26
$
$
$
40,184
34
-0-
-0-
11,526
2,704
33,599
15,441
2,445
12,996
0.19
0.19
$
$
$
40,810
(8,192)
8,742
-0-
9,526
2,733
34,453
13,700
1,917
11,783
0.17
0.17
$
$
$
average shares outstanding
average shares outstanding assuming dilution
69,346,722
70,024,400
69,129,387
69,693,693
69,242,056
69,787,884
69,386,338
69,837,737
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
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
$
$
$
2004
second Quarter
$
65,498
27,063
38,435
2,520
third Quarter
74,940
$
28,881
46,059
2,675
35,915
145
10,952
873
-0-
32,671
13,468
1,908
11,560
0.18
0.18
$
$
$
43,384
51
11,752
(39)
29,495
34,597
(8,866)
(6,071)
(2,795)
(0.04)
(0.04)
$
$
$
Fourth Quarter
$
75,615
29,581
46,034
775
45,259
31
11,135
-0-
-0-
35,241
21,184
4,620
16,564
0.24
0.24
$
$
$
Average shares outstanding
Average shares outstanding assuming dilution
60,772,824
61,289,672
64,455,920
64,947,209
69,077,293
69,702,327
69,173,249
69,938,616
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. Financial statement amounts for prior periods have been reclassified
to conform to the presentation format used in 2005. The reclassifications had no effect on First Commonwealth’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 (losses)
Gain on sale of branches
Gain on sale of merchant services business
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
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
2005
2004
2003
2002
2001
Years Ended December 31,
312,068
138,618
173,450
8,628
164,822
(7,673)
11,832
1,991
44,075
-0-
5,437
-0-
-0-
138,517
71,093
13,257
57,836
$
$
278,025
110,690
167,335
8,070
159,265
4,077
-0-
-0-
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
3,041
-0-
39,552
(610)
-0-
-0-
-0-
113,265
66,551
13,251
53,300
$
$
275,568
122,673
152,895
12,223
140,672
642
-0-
-0-
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
-0-
-0-
37,776
-0-
-0-
-0-
-0-
105,888
65,443
15,254
50,189
0.83
0.665
69,276,141
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
$
$
$
$
$
$
0.83
0.665
69,835,285
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
$
6,026,320
1,939,743
3,624,259
39,492
3,996,552
$ 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
-0-
108,250
691,494
521,045
0.94%
10.89%
89.70%
80.12%
8.60%
-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%
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 (“First Commonwealth”) for the years ended
december 31, 2005, 2004 and 2003, 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:
anticipated cost savings resulting from the proposed
restructuring, the timing and magnitude of changes in interest
rates, changes in general economic and financial market
conditions, First Commonwealth’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. First
Commonwealth undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Critical Accounting Policies and Significant Estimates
First Commonwealth considers accounting policies and
estimates to be critical to reported financial results if (1) the
estimate 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 First Commonwealth’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.
Allowance for Credit Losses
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
46
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 First Commonwealth’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. First
Commonwealth’s methodology for assessing the
appropriateness of the allowance for credit losses consists of
several key elements. These elements include an assessment of
individual 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 First Commonwealth in
conjunction with senior management.
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.
First Commonwealth also maintains an unallocated allowance.
Although the unallocated allowance was significantly reduced
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
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 First Commonwealth’s methodology.
Goodwill and Other Intangible Assets
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
First Commonwealth.
First Commonwealth 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 would be written
down and charged to results of operations in periods in which
their recorded value would be 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 $57.8 million in 2005, an increase of $19.1
million from the 2004 results of $38.7 million. This compared
to net income of $53.3 million in 2003. the 2005 results
included net securities losses of $7.7 million ($5.0 million after
tax) compared to net securities gains of $4.1 million ($2.7
million after tax) and $5.9 million ($3.8 million after tax) for
2004 and 2003, respectively. The 2005 period also included
gains from the sale of branch offices of $11.8 million
($7.7 million after tax), a gain from the sale of the company’s
merchant services business of $2.0 million ($1.3 million
after tax) and restructuring charges totaling $5.4 million
($3.5 million after tax). the results for 2004 included a charge
of $29.5 million ($19.2 million after tax) representing a penalty
for the prepayment of Federal Home Loan Bank (“FHLB”)
long-term borrowings. Also impacting the decrease in 2004
was merger and integration costs of $2.1 million ($1.4 million
after tax) that were not present in the 2003 period. A gain on
the sale of two branches of $3.0 million ($2.0 million after tax)
was recorded in 2003.
Diluted earnings per share was $0.83 for 2005 compared to
$0.58 and $0.90 for 2004 and 2003, respectively. Return on
average assets was 0.94% and return on equity was 10.89%
during 2005 compared to 0.66% and 7.82%, respectively for
2004 and 1.12% and 12.95%, respectively for 2003.
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
sale of branches
sale of merchant services business
merchant discount income
other income
Salaries and employee benefits
Occupancy and equipment costs
Intangible amortization
restructuring charges
merger and integration charges
Debt prepayment fees
Other operating expenses
Applicable income taxes
2005
vs.
2004
$ 0.58
(0.03)
0.00
(0.17)
0.17
0.03
(0.04)
0.01
(0.02)
0.00
(0.01)
(0.08)
0.03
0.44
0.05
(0.13)
0.83
2004
vs.
2003
$ 0.90
0.10
0.09
(0.04)
(0.05)
0.00
(0.01)
0.00
(0.01)
(0.03)
(0.02)
0.00
(0.03)
(0.44)
(0.05)
0.17
$ 0.58
Net income per share
$
Net Interest Income
Net interest income, the primary component of revenue for
First Commonwealth, is defined as the difference between
income on earning assets and the cost of funds supporting those
assets. Net interest income increased $6.1 million in the 2005
period compared to an increase of $23.8 million in 2004.
Interest income and interest expense both increased during the
2005 and 2004 periods due to increases in the volumes of
interest-earning assets and interest-bearing liabilities. Interest-
earning assets increased $271.5 million or 5% in 2005
compared to 2004. This compared to an increase of $966.3
million or 21.6% in 2004 compared to 2003. Interest-bearing
liabilities increased $277.0 million or 5.7% in the 2005 period
47
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
compared to an increase of $935.2 million or 23.8% for 2004.
The increases in interest-earning assets and interest-bearing
liabilities in 2004 were due in large part to the acquisitions of
Pittsburgh Financial Corporation in December 2003 and
Ga Financial, inc. in may 2004.
Net interest margin (net interest income, on a tax-equivalent
basis as a percentage of average earning assets) declined to
3.28% for 2005, a decrease of 2 basis points (0.02%) compared
to 3.30% in 2004, and a decrease compared to 3.47% in 2003.
Although rates increased during 2005, the year-to-year decrease
in the margin was due primarily to funding costs increasing at a
faster rate than yields on earning assets. First Commonwealth
uses computer simulation to help manage interest rate risk. First
Commonwealth’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, 2005:
average Balance sheets and net interest analysis
(Dollar Amounts in Thousands)
2004
income/
Expense
average
Balance
Yield or
Rate (a)
average
Balance
2005
Income/ Yield or
expense Rate (a)
Average
Balance
2003
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
$
807
279,339
1,829,449
5,060
3,597,705
5,712,360
$
29
12,699
77,089
161
222,090
312,068
3.61% $
6.99
4.21
3.18
6.36
5.70
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
Noninterest-earning assets:
Cash
allowance for credit losses
other assets
Total noninterest-earning assets
total assets
80,716
(41,834)
430,179
469,061
$ 6,181,421
74,559
(41,199)
364,092
397,452
$ 5,838,301
66,614
(36,172)
233,040
263,482
$ 4,738,035
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
$ 563,254
1,298,984
1,643,350
797,148
833,000
5,135,736
$
5,262
18,885
54,923
24,305
35,243
138,618
0.93% $ 538,672
1.45
1,141,059
3.34
1,513,663
3.05
796,591
4.23
868,784
2.70
4,858,769
$
2,229
11,491
45,170
11,989
39,811
110,690
0.41% $ 457,327
1.01
792,755
1,524,974
2.98
554,133
1.51
594,383
4.58
3,923,572
2.28
$ 1,699
7,028
51,373
6,755
33,386
100,241
0.37%
0.89
3.37
1.22
5.62
2.55
Noninterest-bearing liabilities and capital:
Noninterest-bearing demand
deposits (d)
other liabilities
Shareholders’ equity
Total noninterest-bearing
funding sources
total liabilities and
Shareholders’ Equity
488,305
26,062
531,318
1,045,685
$ 6,181,421
net interest income and net Yield
on Interest-Earning Assets
452,701
32,614
494,217
979,532
380,772
22,241
411,450
814,463
$ 5,838,301
$ 4,738,035
$ 173,450
3.28%
$ 167,335
3.30%
$ 143,532
3.47%
(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 $4,258 in 2005, $3,470 in 2004 and $2,196 in 2003.
(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 $32.5 million for 2005
compared to 2004 after increasing $25.2 million for 2004
compared to 2003. Interest and fees on loans during 2005 were
favorably impacted by increases in loan volumes as well as
increases in loan yields. the average balance of loans increased
$346.1 million or 10.6% during 2005. This increase is due in
large part to the inclusion of GA Financial, Inc. assets for the
entire 2005 period as compared to only seven months in 2004.
increases were recorded in all loan categories with the
exception of leases, which is a product that First
Commonwealth no longer offers. tax equivalent loan yields
increased 34 basis points (0.34%) during 2005 compared to
2004. 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 pittsburgh
Financial Corporation and GA Financial, Inc. Commercial loan
growth was primarily due to internal growth. Volume increases
in 2004 were noted in all loan categories with the exception of
leases. Tax-equivalent loan yields fell 44 basis points (0.44%)
during 2004 compared to 2003.
First Commonwealth 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. First
Commonwealth has consistently been one of the top small
business lenders in pennsylvania.
interest income on investments increased $1.4 million in 2005
compared to 2004 after an increase of $9.0 million in 2004
compared to 2003. The average balance of investment
securities decreased $74.9 million in 2005 compared to 2004.
the increase in interest income on investments in 2005 due to
rising investment yields surpassed the decrease due to the
declining balances. the decrease in average investment
balances during 2005 is due in part to securities sales in the
fourth quarter of 2005. First Commonwealth sold $100 million
of U.S. Agency securities to fund the deposits associated with
the branch sale in the fourth quarter of 2005. the decrease in
average balances of investment securities is also largely due to
the decrease in the market value of securities available for sale.
Additionally, due to the relatively flat yield curve, First
Commonwealth has limited the reinvestment of investment
securities that have matured or have been paid down. The tax
equivalent yield on investment securities for the 2005 period
was 4.58%, an increase of 25 basis points (0.25%) over the
prior year yield of 4.33%. The 2004 year reported an increase
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
Pittsburgh Financial Corporation balances being included for
the full year of 2004 and Ga Financial, inc. since may 24, 2004.
Yields on investments for 2004 declined, falling 31 basis points
(0.31%) to 4.33%. as with the loan category in 2004, the
increase due to average investment security volumes surpassed
the loss due to the declining yields. Yields in the 2004 period
compared to 2003 decreased for all investment securities with
the exception of asset backed securities.
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,
First Commonwealth tests the average life and yield volatility
of all mbs under various interest rate scenarios on a continuing
basis to ensure that volatility falls within acceptable limits. First
Commonwealth holds no “high risk” securities nor does it own
any securities of a single issuer exceeding 10% of shareholders’
equity other than u.s. government and agency securities.
Interest on deposits increased $20.2 million in 2005 compared
to 2004 after declining $1.2 million in 2004 compared to 2003.
the increase in 2005 was due to increases in volumes and
rates. The average balance of interest-bearing deposits
increased $312.2 million or 9.8% in 2005 compared to 2004.
Increases were recorded in each of the deposit types with the
most significant increase being in the savings deposit category.
The cost of deposits increased 36 basis points (0.36%) in 2005
compared to 2004. The decrease in 2004 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 pittsburgh Financial
Corporation for the full year of 2004 and GA Financial, Inc.
since May 24, 2004. Towards the end of 2005, the deposit mix
had once again started to shift as clients began to register a
preference for time deposits with the rising rate environment.
This is a drastic shift from 2004 when clients had a preference
for savings products. During its management of deposit levels
and mix, First Commonwealth 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 First
Commonwealth’s cost of funds.
Interest expense on short-term borrowings increased
$12.3 million during 2005 after an increase of $5.2 million
during 2004. Both years reflected increases in interest expense
due to increases in the average volumes of short-term
borrowings and increases in the borrowing yields. average
short-term borrowing increases were only $557 thousand
during 2005 compared to $242.5 million in 2004. The 2004
49
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
period included an increase due to the inclusion of short-term
borrowings that were acquired with the Ga Financial, inc.
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 23 (Other Long-term Debt) to the Consolidated
Financial statements for additional information on the debt
prepayment. The majority of the increase in interest expense
for the 2005 period was due to the rising interest rates on
short-term borrowings. The interest rate rose 154 basis points
(1.54%) or 102.0% during 2005 compared to an increase of
29 basis points (0.29%) or 23.8% during 2004.
Interest expense on long-term debt decreased by $4.6 million in
2005 compared to 2004 after an increase of $6.4 million in 2004
compared to 2003. The 2005 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 as a result of increases in
average balances of long-term debt. The decrease in volumes
and rates during 2005 was due to the prepayment of
$440 million in FHLB long-term advances during the third
quarter of 2004. First Commonwealth 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 23 (Other Long-term Debt) to the
Consolidated Financial statements for additional information on
the debt prepayment. The increases in volume during 2004 were
due in large part to the acquisitions of Pittsburgh Financial
Corporation and GA Financial, Inc. 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 Ga
Financial, inc. in may 2004. refer to note 22 (subordinated
debentures) to the Consolidated Financial statements for further
discussion of subordinated debentures that are included in long-
term debt. The interest rate on long-term debt decreased 35 basis
points (0.35%) during 2005 compared to 2004 after a decrease of
104 basis points (1.04%) during 2004 compared to 2003. The
rate reduction was anticipated in connection with the prepayment
of the Fhlb advances.
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)
2005 Change from 2004
change Due
change Due
to Rate (a)
total
Change
2004 Change from 2003
Change due
Change due
to Volume
to Rate (a)
Interest-earning assets:
Time deposits with banks
tax free investment securities
taxable investment securities
Federal funds sold
loans
total interest income
Interest-bearing liabilities:
NOW & super NOW deposits
MMDA & savings deposits
Time deposits
Short-term borrowings
Long-term debt
Total interest expense
net interest income
total
Change
$
(5)
1,252
180
155
32,461
34,043
3,033
7,394
9,753
12,316
(4,568)
27,928
$ 6,115
to Volume
$
(29)
2,001
(4,117)
55
20,834
18,744
102
1,590
3,871
8
(1,640)
3,931
$ 14,813
$
24
(749)
4,297
100
11,627
15,299
2,931
5,804
5,882
12,308
(2,928)
23,997
(8,698)
$
$
21
886
8,155
2
25,188
34,252
530
4,463
(6,203)
5,234
6,425
10,449
$ 23,803
$
38
1,723
14,036
2
39,451
55,250
302
3,088
(381)
2,956
15,413
21,378
$ 33,872
$
(17)
(837)
(5,881)
-0-
(14,263)
(20,998)
228
1,375
(5,822)
2,278
(8,988)
(10,929)
$ (10,069)
(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 increased
$558 thousand in 2005 compared to 2004 after a decrease of
50
$4.7 million for 2004 when compared to 2003. The decrease in
the provision during 2004 reflected 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 percentage of total loans outstanding
continued to improve to 0.70% at December 31, 2005, compared
to 0.73% and 0.82% at december 31, 2004 and 2003,
respectively. The allowance for credit losses was $39.5 million
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
at December 31, 2005, which represents a ratio of 1.10% of
average loans outstanding compared to 1.26% and 1.42%
reported at December 31, 2004 and 2003, respectively.
Net charge-offs for 2005 increased $824 thousand compared to
2004. This follows a decline of $3.6 million in 2004 over 2003
levels. During 2005, net charge-off increases in commercial
loans not secured by real estate, construction loans, and
residential loans secured by real estate were partially offset by
decreases in loans to individuals and leases. the most
significant components of the year-to-year decrease in 2004
were decreases in residential loans secured by real estate and
commercial loans not secured by real estate. Net charge-offs as
a percentage of average loans outstanding continued to
improve to 0.28% at December 31, 2005, compared to 0.29%
and 0.49% at December 31, 2004 and 2003, 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, 2005 (Dollar Amounts in Thousands):
2005
2004
2003
2002
2001
Summary of Loan Loss Experience
loans outstanding at end of year
$ 3,624,259
$ 3,514,833
$ 2,824,882
$ 2,608,634
$ 2,567,934
average loans outstanding
$ 3,597,705
$ 3,251,645
$ 2,640,935
$ 2,597,862
$ 2,548,596
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
$
41,063
-0-
$
37,385
4,983
$
34,496
3,109
$
34,157
-0-
$
33,601
-0-
4,920
2,801
598
965
2,103
59
11,446
601
550
-0-
-0-
93
3
1,247
10,199
8,628
4,434
3,414
1
1,060
1,456
247
10,612
772
351
-0-
-0-
114
-0-
1,237
9,375
8,070
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
balance, end of year
$
39,492
$
41,063
$
37,385
$
34,496
$
34,157
Ratios:
Net charge-offs as a percentage of
average loans outstanding
Allowance for credit losses as a percentage of
average loans outstanding
Noninterest Income
net securities losses of $7.7 million were recorded in 2005
compared to net securities gains of $4.1 million and $5.9 million
in 2004 and 2003, respectively. First Commonwealth funded the
deposits associated with the branch sale in the fourth quarter of
2005 by selling $100 million of u.s. agency securities with an
average yield of 2.53% and an average life of 1.4 years. the
Company incurred a loss from the securities sale of $2.7 million
before taxes ($1.8 million after taxes). during 2005, First
Commonwealth also repositioned its mortgage backed securities
0.28%
1.10%
0.29%
1.26%
0.49%
1.42%
0.46%
1.33%
0.43%
1.34%
investment portfolio which is expected to reduce the company’s
interest rate exposure and improve net interest income. First
Commonwealth sold approximately $130.7 million of
mortgage backed securities with high premium carrying values
during the fourth quarter of 2005. the average yield of the
securities sold was 3.38% with an average life of
approximately 2.9 years. The proceeds were reinvested in more
current coupon mortgage backed securities with an average
yield of 5.3% and an average life of 3.7 years. the loss
incurred from this securities sale was $5.5 million before taxes
51
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
($3.6 million after taxes). It is projected that the loss will be
recovered through increased earnings in 2 to 3 years. in addition
to management’s intent to reduce the company’s interest rate
exposure and improve net interest income, the securities sales
were part of a strategy to manage income taxes. 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.
trust income has continued to increase 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. through coordinated efforts of First
Commonwealth’s Wealth Management Group, which
includes trust, insurance and financial advisory services,
First Commonwealth should continue to build successful
relationships with clients. These relationships should continue
to provide additional sales opportunities and help trust income
to trend in a positive direction.
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 $735 thousand for 2005
compared to 2004 and an increase of $2.0 million for 2004
compared to 2003. Nonsufficient funds (or “NSF”) fees
continue to be the driver of the growth in service charges on
deposits. NSF fees increased $1.1 million in 2005 compared to
2004 and $1.9 million in 2004 compared to 2003. The increase
in nsF fees is due to the continued success of the high
Performance Checking products for consumer and business
clients as well as the inclusion of pittsburgh Financial
Corporation since December 2003 and GA Financial, Inc. since
may 2004. in addition, First Commonwealth increased the nsF
fee during the fourth quarter of 2005 from $25 an item to
$29 per item. The increase in NSF fees was partially offset by
decreases in account analysis and account maintenance fees.
Management strives to implement reasonable fees for services
and closely monitors collection of those fees.
The 2005 period included an $11.8 million pre-tax gain on the
sale of several branch offices ($7.7 million after tax). First
Commonwealth Bank, a wholly-owned subsidiary of First
Commonwealth, sold branches located in state College,
Huntingdon, Mount Union, Saxton, Three Springs and
Williamsburg, PA in two separate branch sale transactions.
The sales included $126.0 million in deposit liabilities
associated with the offices. The branch sales were part of First
Commonwealth’s continuing branch optimization initiative to
increase penetration in the higher growth Pittsburgh regional
markets. the branch sales were considered to be related to
continuing operations. Management’s analysis considered
52
factors that included but were not limited to the fact that very
few loans were sold as part of the transactions and First
Commonwealth continues to operate within these same
geographical markets. First Commonwealth opened two
de novo branch offices in Washington County, one of the
Pittsburgh region’s fastest growing counties, late in the first
quarter of 2005. First Commonwealth also opened a new branch
office in July 2005 at Pittsburgh Mills in Tarentum, western
Pennsylvania’s newest and largest commercial retail real estate
development project. In addition, First Commonwealth opened
a branch in Adams Township, Butler County in December 2005.
First Commonwealth constructed or renovated a total of eight
new branch offices in 2005, as compared to four in 2004. These
new branch offices include three relocations, one renovation and
four de novo offices. 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.
The 2005 period also included a pre-tax gain of $2.0 million
($1.3 million after tax) on the sale of First Commonwealth’s
merchant services business to First Data Corporation
(“First data”). during the second quarter of 2005, First
Commonwealth entered into an asset sale and merchant
processing alliance with First Data. Under the terms of the
agreement, First data acquired certain assets of First
Commonwealth’s merchant processing business and will
provide merchant payment processing services on behalf of
First Commonwealth Bank. First Commonwealth Bank will
participate in future revenue related to both the existing book of
merchant business as well as new business. the decrease of
$2.3 million in merchant discount income during 2005 was due
to this sale of the merchant services business.
insurance commissions have continued to increase slightly
over each of the past three years. As part of the previously
discussed coordinated efforts of First Commonwealth’s
Wealth Management Group and referral programs, First
Commonwealth’s insurance subsidiary will continue to have
expanded opportunities to meet the insurance needs of clients.
Income from bank owned life insurance increased
$234 thousand in 2005 after an increase of $815 thousand in
2004. The 2004 period included an addition of $16.7 million in
bank owned life insurance related to the GA Financial, Inc.
acquisition in may 2004.
Other changes in noninterest income over the past three years
included increases in card related interchange income. this
income increased $1.3 million in 2005 compared to 2004 after
an increase of $1.0 million in 2004 from the same period of
2003. Card related interchange income includes income on
debit, credit and atm cards that are issued to consumers and/or
businesses. Increases over the past three years were due in part
to the inclusion of Pittsburgh Financial Corporation since
december 2003 and Ga Financial, inc. since may 2004. the
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
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.
Noninterest Expense
Total noninterest expenses for 2005 decreased $20.6 million to
$144.0 million from $164.6 million reported in 2004. The 2004
amount represented an increase of $51.9 million compared to
$112.7 million reported in 2003. The 2005 period included
restructuring charges in the amount of $5.4 million related to
the reorganization of First Commonwealth’s organizational
structure and related personnel changes. The reorganization is
expected to result in prospective annual pretax cost savings of
approximately $3.4 million. 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.
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
Pittsburgh Financial Corporation 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 Pittsburgh Financial Corporation into First
Commonwealth. the inclusion of pittsburgh Financial
Corporation and GA Financial, Inc. results since the acquisition
dates was the primary cause of the remaining increases in
noninterest expenses during the 2004 period. The 2003 period
included the benefit of a $610 thousand partial recovery of the
litigation settlement from the 2002 period.
Employee costs were $73.5 million in 2005, an increase of
6.7% compared to costs of $68.9 million in 2004. Employee
costs for 2003 were $61.1 million. Salary costs for the 2005
period increased $3.5 million compared to 2004, while salary
costs for the 2004 period increased $5.1 million over the 2003
levels. Employee benefit costs rose $1.1 million for 2005
compared to 2004 and rose $2.7 million for 2004 compared to
2003. The 2005 period included an increase of $784 thousand
related to the accrual of a liability for the net present value of
future expected payments for a portion of the death benefit on
bank owned life insurance for which the insured employee was
able to designate a beneficiary. During the 2004 period,
hospitalization costs reflected the largest increase in employee
benefit costs with increases of $743 thousand or 12.7% in
2004. The increases in employee costs during 2004 were due in
large part to an increase in the number of employees from the
addition of Pittsburgh Financial Corporation and GA Financial,
Inc. Full-time equivalent employees were 1,598 at the end of
2005 compared to 1,634 and 1,474 at the same time in 2004
and 2003, respectively. First Commonwealth continues to
evaluate its current menu of employee benefits to provide a
competitive benefits package while also managing costs.
Beginning in January 2006, First Commonwealth self-insured
its hospitalization coverage for employees. This is anticipated
to stabilize hospitalization costs over the next year. 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 $1.3 million during 2005 to
$11.0 million compared to expenses of $9.7 million during
2004 and $7.5 million during 2003. the increase in 2005 was
due in part to the inclusion of GA Financial, Inc. for the full
year of 2005. The most significant increases in the 2005 period
were in depreciation on leasehold improvements and building
repairs and maintenance. 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 Pittsburgh Financial Corporation
and Ga Financial, inc. mergers. First Commonwealth
continues to actively evaluate its branch delivery network to
optimize client service in existing branch offices and to
continue expansion into growth markets. As part of its branch
optimization plan, First Commonwealth expects to construct or
renovate ten branch offices during 2006. The execution of these
initiatives may continue to impact net occupancy and other
expenses in future periods.
Furniture and equipment expenses decreased $110 thousand in
2005 after an increase of $1.6 million in 2004. The increase
during 2004 was largely due to an increase in depreciation
expense, some of which was related to the inclusion of
Pittsburgh Financial Corporation and GA Financial, Inc. since
the acquisition dates.
Outside data processing expense decreased $273 thousand in
2005 after an increase of $1.3 million for the 2004 period.
Data processing expense increases during 2004 were due in
part to the acquisitions of Pittsburgh Financial Corporation
and GA Financial, Inc. Additional expenses were incurred
until the systems for the acquired companies, some of which
were processed through an outsourced processing vendor,
were converted to the systems that are used by First
Commonwealth. 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 First
Commonwealth’s data processing department. First
Commonwealth’s needs are evaluated based on technology,
efficiency and cost considerations.
Intangible amortization expense increased by $819 thousand in
2005 after an increase of $1.4 million during 2004. the
53
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
increase in both periods was due to the amortization of the core
deposit intangibles that were recorded for the recent acquisitions.
Other operating expenses decreased $1.1 million to $31.8 million
in 2005 after an increase of $5.2 million in 2004. the 2005
period included a decrease in charge card interchange expense
in the amount of $1.9 million. the decrease in charge card
interchange expense was due to the sale of First
Commonwealth’s merchant services business. Increases in
noninterest expense during the 2004 period included increases
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 relocated,
remodeled or acquired.
Income tax expense was $13.3 million during 2005,
representing an increase of $9.6 million from the 2004 amount
of $3.7 million and compared to $13.3 million in 2003. 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. First Commonwealth’s effective
tax rate was 18.6% for 2005 compared to 8.8% for 2004 and
19.9% for 2003. First Commonwealth’s 2005 effective tax rate
was favorably impacted by tax-free interest income.
aggregate contractual obligations and off-Balance
Sheet Arrangements
The following table summarizes First Commonwealth’s
contractual obligations to make future payments as of
december 31, 2005. 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
23
23
22
23
18
1 Year
or less
$ 57,912
-0-
-0-
2,000
2,975
$ 62,887
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 First
Commonwealth’s cash obligations upon maturity of
certificates of deposit whose maturities are described in
NOTE 20 (Interest-Bearing Deposits) to the Consolidated
Financial statements.
The following table summarizes First Commonwealth’s
off-balance sheet commitments as of December 31, 2005.
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
$ 156,606
20,000
-0-
4,000
4,573
$ 185,179
$ 345,891
-0-
-0-
4,000
3,221
$ 353,112
(Dollar Amounts In Thousands)
Commitments to extend credit
standby letters of credit
Total lending-related commitments
$ 79,068
-0-
108,250
3,600
9,295
$ 200,213
Footnote
reference
17
17
$ 639,477
20,000
108,250
13,600
20,064
$ 801,391
amount
$ 889,489
21,127
$ 910,616
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, 2005. 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 First Commonwealth 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, First Commonwealth would be required to fund the
commitment. The maximum potential amount of future
payments First Commonwealth could be required to make is
represented by the contractual amount of the commitment. If
the commitment is funded, First Commonwealth would be
entitled to seek repayment from the client. First
Commonwealth’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 First Commonwealth’s ability to
efficiently meet normal cash flow requirements of both
borrowers and depositors. In the ordinary course of business,
funds are generated from the banking subsidiary’s core deposit
base (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, First
Commonwealth’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 a source of liquidity, and First Commonwealth has
the ability to access the capital markets.
Liquidity risk stems from the possibility that First
Commonwealth may not be able to meet current or future
financial obligations or may become overly reliant on
alternative funding sources. First Commonwealth 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. First Commonwealth’s
liquidity position is monitored by the Asset/Liability
management Committee.
First Commonwealth’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. Although
$126.0 million in deposits were sold during 2005, deposits still
increased $152.1 million or 4.0% for the year. Noninterest-
bearing deposits increased $10.8 million, while interest-bearing
deposits increased $141.3 million with the largest increases
being recorded in the time deposit category. Although the most
significant increase was recorded in time deposits, $25 million
in Brokered CD’s matured during March 2005 and an
additional $25 million matured in September 2005, none of
which were renewed. First Commonwealth’s deposit mix has
started to shift as clients are registering a preference for time
deposits rather than savings deposits with the rising rate
environment. Time deposit increases were due in large part to
the continuation of higher rate products that were advertised
during 2005. Noncore deposits, which are time deposits in
denominations of $100 thousand or more, represented 15.2% of
total deposits at December 31, 2005. Noncore deposits
increased by $189.9 million in 2005.
Although First Commonwealth’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 of First Commonwealth’s traditional market area. Time
deposits of $100 thousand or more at December 31, 2005, 2004
and 2003 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit
(Dollar Amounts in Thousands)
2004
2003
2005
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
$ 210,442
70,923
120,001
206,502
$ 607,868
34%
12
20
34
100%
$
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%
55
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
total loans increased $109.4 million or 3.1% during 2005 as
increases were noted in all categories with the exception of
commercial real estate loans and leases. most notable were
increases in residential loans secured by real estate of
$48.5 million and increases in loans to individuals of
$48.3 million compared to year-end 2004.
The following is a schedule of loans by classification for the
five years ended December 31, 2005:
Loans by Classification
(Dollar Amounts in Thousands)
2005
2004
2003
2002
2001
Amount
%
amount
%
amount
%
amount
%
amount
%
Commercial, financial,
agricultural and other $ 729,962
78,279
Real estate-construction
987,798
Real estate-commercial
1,213,223
Real estate-residential
610,648
loans to individuals
4,468
net leases
20%
2
27
33
17
1
$ 715,280
71,351
988,611
1,164,707
562,321
12,815
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
Gross loans and leases
unearned income
total loans and
leases net of
3,624,378
(119)
100%
3,515,085
(252)
100%
2,825,337
(455)
100%
2,609,440
(806)
100%
2,569,231
(1,297)
100%
unearned income $ 3,624,259
$ 3,514,833
$ 2,824,882
$ 2,608,634
$ 2,567,934
An additional source of liquidity is marketable securities that
First Commonwealth holds in its investment portfolio. These
securities are classified as “securities available for sale.” While
First Commonwealth 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, 2005, securities available for sale had an
amortized cost of $1,866 million and an approximate fair value
of $1,852 million. Gross unrealized gains were $15,407
thousand and gross unrealized losses were $29,146 thousand.
Based upon First Commonwealth’s historical ability to fund
liquidity needs from other sources, the current available for sale
portfolio is deemed more than adequate, as the company does
not anticipate a need to liquidate the investments until maturity.
the following is a schedule of the contractual maturity
distribution of securities held to maturity and securities
available for sale at December 31, 2005:
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
$
$
2
1,872
485
119
2,478
states and
Political
Subdivisions
$
849
11,572
31,745
40,808
$ 84,974
Other
Securities
$
$
30
275
-0-
-0-
305
total
Amortized
Cost
$
$
881
13,719
32,230
40,927
87,757
weighted
Average
Yield*
7.07%
7.81%
7.54%
6.65%
7.16%
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
$
69,248
245,111
260,175
832,171
$ 1,406,705
states and
Political
Subdivisions
$
356
3,061
40,044
150,844
$ 194,305
Other
Securities
$ 29,894
-0-
-0-
234,821
$ 264,715
total
Amortized
Cost
$
99,498
248,172
300,219
1,217,836
$ 1,865,725
weighted
Average
Yield*
2.45%
3.87%
4.36%
5.12%
4.69%
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. First
Commonwealth’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 $1,220 million or 20.25% of total
assets at December 31, 2005. 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, 2005 and 2004 (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
$ 1,223,588
179,227
2,048
1,404,863
465,223
1,755,808
711,185
2,932,216
$ (1,527,353)
2005
91-180 Days
181-365 Days
$ 204,682
115,495
-0-
320,177
189,534
-0-
4,657
194,191
$ 125,986
$ 359,406
159,963
-0-
519,369
288,933
-0-
49,338
338,271
$ 181,098
Cumulative
0-365 Days
$ 1,787,676
454,685
2,048
2,244,409
943,690
1,755,808
765,180
3,464,678
$ (1,220,269)
0.48
25.34%
1.65
2.09%
1.54
3.01%
0.65
20.25%
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)
0.48
26.35%
2004
91-180 Days
181-365 Days
$ 185,633
133,127
-0-
318,760
205,507
-0-
5,497
211,004
$ 107,756
1.51
1.74%
$ 333,978
185,979
-0-
519,957
237,318
-0-
15,513
252,831
$ 267,126
2.06
4.31%
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)
0.65
20.30%
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 First
Commonwealth’s net interest income, management simulates
the potential effects of changing interest rates through computer
modeling. the income simulation model used by First
Commonwealth 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. First
Commonwealth 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.
First Commonwealth’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, 2005, indicated
that a 200 basis point (2.00%) increase in interest rates would
decrease net interest income by 138 basis points (1.38%) below
the base case scenario and a 200 basis point (2.00%) decrease
in interest rates would increase net interest income by 7 basis
points (0.07%) above 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
First Commonwealth’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
First Commonwealth’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 company 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.
First Commonwealth’s senior management establishes the
alCo strategies.
First Commonwealth terminated its interest rate swaps during
the fourth quarter of 2005; however, the alCo continues to
evaluate the use of future derivative instruments to protect
against the risk of adverse price or interest rate movements on
the value of certain assets and liabilities.
Final loan maturities and rate sensitivities of the loan portfolio
excluding consumer installment and mortgage loans and before
unearned income at december 31, 2005 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
within one Year
one to 5 Years
after 5 Years
$ 278,013
340
22,714
102,266
20,894
$ 424,227
$ 145,589
280
20,022
207,788
25,712
$ 399,391
149,762
249,629
$ 399,391
$ 110,241
-0-
35,543
677,744
148,893
$ 972,421
258,469
713,952
$ 972,421
total
$ 533,843
620
78,279
987,798
195,499
$ 1,796,039
Maintaining a high quality loan portfolio is of great importance
to First Commonwealth. First Commonwealth 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, First Commonwealth
emphasizes the importance of the collectibility of loans and
leases as well as asset and earnings diversification. First
Commonwealth 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.
First Commonwealth’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 that will
exceed five million dollars must also be approved by First
Commonwealth’s Credit Committee. This Committee consists
of a minimum of three members of First Commonwealth’s
board of directors. First Commonwealth has an additional
level of approval for credit relationships between $1.0 million
and $5.0 million. This procedure requires approval of those
credits by a committee consisting of senior lenders of First
Commonwealth as well as the Credit analysis manager, a
member of First Commonwealth’s Board of Directors and First
Commonwealth Bank’s Asset Quality Manager.
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.
59
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
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.
First Commonwealth 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. First
Commonwealth’s methodology for assessing the
appropriateness of the allowance for credit losses consists of
several key elements. These elements include an assessment of
individual problem loans, delinquency, loss experience, trends
and other relevant factors, all of which may be susceptible to
significant changes.
Enhancements to First Commonwealth’s methodology during
2004 resulted in reallocation of the allowance for credit losses
from unallocated to specific loan categories. While First
Commonwealth 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 First
Commonwealth’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, First Commonwealth 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 principles.
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 changes.
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)
2005
2004
2003
2002
2001
Commercial, industrial, financial, agricultural and other
Real estate-construction
Real estate-commercial
Real estate-residential
loans to individuals
Lease financing receivables
unallocated
total
$
$
13,100
1,762
14,260
4,792
4,533
65
980
39,492
$ 13,422
1,088
13,099
8,759
3,806
136
753
$ 41,063
$ 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
Allowance as percentage of average total loans
1.10%
1.26%
1.42%
1.33%
1.34%
the decrease in the allowance for residential real estate loans
during 2005 was partially due to an improvement in loans that
were 30 days or more past due. In addition, the decrease was
due in part to enhancements that were made to the
methodology in 2005. these enhancements were an extension
of the methodology changes that were made in 2004. the
allowance for credit losses in 2005 was also impacted by the
removal of two credits from the specific reserve and the
improvement in overall historical trends of charge-offs and
30-day past due credits. The decrease in the allowance as a
percent of average loans in 2004 reflected the trend of
improvement in nonperforming loans, net charge-offs and
lower levels of the allowance being allocated to larger
classified credits.
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.
loans on nonaccrual basis
past due more than 90 days
renegotiated loans
Total nonperforming loans
Nonperforming loans as a percentage of total loans
Allowance as percentage of nonperforming loans
other real estate owned
Gross income that would have been recorded
at original rates
Interest that was reflected in income
net reduction to interest income due to nonaccrual
Nonperforming and Impaired Assets and Effect on Interest Income Due to Nonaccrual
(Dollar Amounts in Thousands)
2005
$ 11,391
13,977
173
$ 25,541
0.70%
154.62%
$
1,655
$
$
2,344
506
1,838
2004
$ 10,732
14,671
183
$ 25,586
0.73%
160.49%
$
1,814
$
$
1,757
307
1,450
2003
$ 12,459
10,586
195
$ 23,240
0.82%
160.86%
2002
$ 23,450
14,774
207
$ 38,431
1.47%
89.76%
2001
$ 22,899
17,781
832
$ 41,512
1.62%
82.28%
$ 1,866
$
1,651
$
1,619
$ 1,962
1,185
777
$
$
$
1,542
286
1,256
$
$
1,422
750
672
the reduction of income due to renegotiated loans was less
than $50 thousand in any year presented.
Nonperforming loan levels remained relatively stable from
december 31, 2004 to december 31, 2005; however, an
increase of $659 thousand was noted in nonaccrual loans, while
a decrease of $694 thousand was noted in past due loans. The
increase in nonaccrual loans was largely due to commercial
loans not secured by real estate. The decrease in past due loans
was largely due to commercial loans not secured by real estate
and construction loans.
First Commonwealth’s loan portfolio continues to be monitored
by senior management to identify potential portfolio risks and
detect potential credit deterioration in the early stages. First
Commonwealth has a “watch list Committee” which includes
credit workout officers of the bank. The Watch List Committee
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
61
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
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 $521.0 million at December 31, 2005, a
$10.9 million decrease compared to December 31, 2004.
Dividends declared reduced equity by $46.6 million during
2005 as dividends were increased over 2004 levels. the
dividends per share of $0.665 for 2005 represented a 3.1%
increase over the 2004 dividends. retained net income in the
amount of $11.2 million remained in permanent capital to fund
future growth and expansion.
Besides dividends, the most significant component that
contributed to the decrease in equity was the market value
adjustment to securities available for sale, which decreased
equity by $19.0 million for the period. Other contributing
components to the equity decrease included additional advances
by First Commonwealth’s Employee Stock Ownership Plan
(“ESOP”) to fund the acquisition of First Commonwealth’s
common stock for future distribution as employee
compensation, net of long-term debt payments and fair value
adjustments to unearned ESOP shares, which decreased equity
by $7.3 million and amounts paid to fund the discount on
reinvested dividends, which reduced equity by $891 thousand.
The decreases in equity were partially offset by increases in
equity due to proceeds from the issuance of treasury shares to
provide for stock options exercised, which increased equity by
$5.1 million during 2005, and the tax benefit related to stock
options, which increased equity by $462 thousand.
Equity capital was also impacted during 2005 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 First
Commonwealth’s common stock was the third of four
scheduled annual installments.
A capital base can be considered adequate when it enables First
Commonwealth to intermediate funds responsibly and provide
related services while protecting against future uncertainties.
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 First Commonwealth’s capital position is to
maintain an adequate and stable ratio of equity to assets. see
NOTE 31 (Regulatory Restrictions and Capital Adequacy) to
the Consolidated Financial statements for an analysis of
62
regulatory capital guidelines and First Commonwealth’s capital
ratios relative to these measurement standards.
Risk Management
in the normal course of business First Commonwealth assumes
various types of risk. First Commonwealth 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 First Commonwealth’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 company. In addition to establishing a
comprehensive policy and procedure manual that is updated
and regularly communicated throughout First Commonwealth,
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 Executive
Vice President, Chief Risk Officer, 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; asset liability management, which monitors
interest rate and liquidity risks; Policies and Procedures, which
reviews and approves policies and procedures prior to Board
approval; Fraud Prevention, which ensures that First
Commonwealth is taking appropriate action in both preventive
and detective measures to identify and deal with potentially
fraudulent activity; Business Continuity, which plans to provide
structure to First Commonwealth’s response during emergency
situations; and disclosure, which evaluates internal controls
regarding 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.
First Commonwealth FinanCial Corporation and subsidiaries
ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations
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 First Commonwealth 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 that
First Commonwealth is assuming and appropriately manage
those risks.
common stock information
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. First Commonwealth 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 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.
First Commonwealth Financial Corporation (“First Commonwealth”) is listed on the New York Stock Exchange under the symbol
“FCF.” The approximate number of holders of record of First Commonwealth’s common stock is 20,500. The table below sets forth
the high and low sales prices per share and cash dividends declared per share for common stock of First Commonwealth.
period
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
period
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
high sale
low sale
$ 15.40
$ 14.10
$ 14.70
$ 13.77
$
$
$
$
13.39
12.73
12.90
12.63
high sale
low sale
$ 15.00
$ 14.96
$ 14.30
$ 15.90
$
$
$
$
13.99
12.01
12.50
13.61
Cash dividends
per share
$
$
$
$
0.165
0.165
0.165
0.170
Cash dividends
per share
$
$
$
$
0.160
0.160
0.160
0.165
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 17, 2006 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
1-212-815-3700 (outside the U.S.)
1-888-269-5221 (Hearing Impaired—TTY Phone)
Address Shareholder Inquiries To:
Investor Services Department
P.O. Box 11258
New York, NY 10286-1258
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
New York, NY 10286-1002
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.
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 10-K
A copy of the Form 10-K 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 10-K 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, 2005.
64
Golden Tower Awards
January ............................................ Johnston a. glass
february ........................................... thomas Johnston
march .................................................sandra hitchens
april ...................................................... dave mcnichol
may ......................................................... ann rougeaux
June .................................................................pat heath
July ....................................................... bill stancombe
august ........................................................terry henry
september ..............................................susan smolka
october ............................................. william kishlock
november ................................................. cathy fraser
december .............................................michael balchin
spirit of Community service Awards
January ............................ loretta snyder, mark buggy
february ........................ pamela batzel, gregory sipos
march .......................... barbara crowe, betsy benning
april ......................................... amy testa, lorie miller
may ....................... lillian martinez, christine turcato
June .......................... kathleen gemza, charlene miller
July ...............................sally burkett, danielle brown
august ........................karen chiappino, darlene lerch
september ........................lisa perkins, wayne meekins
october ..........................deana mumau, sherry carney
november ......................tiffani hurt, wendy berdomas
december ...................bonnie griffith, sharon cecconi
many thanks to creps united publications in indiana, the
lemont restaurant in pittsburgh, the palace theatre
in greensburg, and the altoona convention center for
graciously allowing us to take photographs at their sites.
2005 Annual Report
C
®
®
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
First Commonwealth