First Commonwealth Financial
Annual Report 2006

Plain-text annual report

2006 Annual Report Viewpoint 2006 Annual Report 1 TAble of ConTenTs A Message to shareholders .................................................. 2 seeing business from the Client’s Viewpoint ............................ 4 Vision: To become first Choice .............................................. 7 Knowing the Consumer ....................................................... 8 Affirming our Mission ....................................................... 11 board of Directors ........................................................... 12 Management’s Report on Internal Control over financial Reporting ................................................... 13 Reports of KPMG, 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 ............................................... 62 shareholder Information ................................................... 64 Corporate Information ...................................inside back cover Golden Tower Awards and spirit of Community service Awards ..................inside back cover 2 first Commonwealth A Message to shareholders When we look back years from now, I believe 2006 will prove to have been a pivotal year in the history of First Commonwealth. The year saw an unprecedented review of how our company does business. This comprehensive evaluation led to the development of a new strategic plan that seeks to position First Commonwealth as the financial services organization of first choice in our marketplace. We will earn the reputation of first choice through a renewed emphasis on providing exceptional products, services, and convenience to our clients and communities. Numerous members of the First Commonwealth team contributed an extraordinary amount of time and effort towards the creation of our new strategic plan. Special thanks are owed to Joseph E. O’Dell, who recently announced his retirement as President and Chief Executive Officer of First Commonwealth Financial Corporation (FCFC) after 42 years with the company. Joe has laid a strong foundation on which we now must build. As we prepare for the opportunities and challenges that await us, we also reflect on how we arrived at where we are. It is with great pride in our company’s heritage that we honor the memory of E. James Trimarchi, the former chairman of the FCFC board of directors, and Alan Fairman, a long-time First Commonwealth director. Their presence will be missed, but their legacy will always be a part of our company. In honoring our heritage and celebrating our successes, we must remember that there is a lot left to be done. Our strategic plan is a roadmap to meeting the many challenges and seizing the many opportunities that lie ahead. We must first and foremost re-establish an unwavering focus on our customers. By expanding our customer relationships, we can achieve our goals of revenue growth and increased long-term earnings. We have already begun the process of reviewing every product we offer to ensure that the features, delivery, and pricing of these products exceed our customers’ expectations. We know that a plan is only as good as its execution, so we have established service standards that will be monitored at every level of the organization. We will continue to enhance our availability to our customers through new branch locations and convenient support services. The acquisition of Laurel Savings Bank further strengthened our presence in the Pittsburgh market, which witnessed a dramatic increase in awareness and recognition of the First Commonwealth brand in 2006. In 2005, First Commonwealth had only a three percent market share 2006 Annual Report 3 in the high-potential Pittsburgh market. We have carefully selected sponsorships and added three newly constructed branches and the eight Laurel Savings branches. Our name recognition in that market has expanded ten-fold over the past year. The year 2006 also brought the financial challenges associated with a flat yield curve. Our emphasis on the customer, our expansion in the Pittsburgh market, and the adjustments that we’ve made to our balance sheet are intended to mitigate the obstacles we currently face and position us to take full advantage of every opportunity when the yield curve returns to normal. In 2007 we look to build upon what was begun in 2006. First Commonwealth maintains a well- established market position in most of the counties in which we do business. We will work aggressively to provide exceptional service in order to retain our existing customers, while implementing a more dynamic strategy for cross-selling so that we may expand these customer relationships. We will also look to establish new customer relationships in markets with higher potential, such as Washington, Allegheny, and Butler counties. Through all these efforts, we will maintain a diligent and conservative approach to managing our risk. It is my opinion that 2006 will ultimately serve as a bridge between the First Commonwealth of yesterday and the First Commonwealth of tomorrow. And it is my expectation that we will become the first choice of our customers, our employees, and our shareholders. John J. Dolan President and Chief Executive Officer First Commonwealth Financial Corporation Joseph E. O’Dell After a 42-year banking career that began at national bank of the Commonwealth, the predecessor of first Commonwealth bank, Joe o’Dell has decided to step down as president and chief executive officer of first Commonwealth financial Corporation. o’Dell was appointed to the senior post in 1995. Under his leadership, the assets of first Commonwealth grew by more than 700 percent and the corporation unveiled a new and highly successful brand and marketing strategy. Always committed to his employees and to recognizing their service contributions, o’Dell established the Golden Tower and spirit of Community service Awards. The board of Directors expresses its deep appreciation to o’Dell for his visionary leadership and his dedication to making first Commonwealth the strong organization it is today. 4 first Commonwealth seeing business from the Client’s Viewpoint Over the course of people’s lives, their needs inevitably change. First Commonwealth is committed to building ongoing relationships that serve the changing needs of all our clients: small businesses, large corporations, children who are opening their first savings accounts, professional men and women, families of every generation, and people who want to preserve their wealth so they can secure it for their children and grandchildren. The world is also changing. Never before have individuals and businesses had so many financial choices. The telephone and Internet have become just as important to banking customers as their local branch office. The pace of life today requires more immediate access to funds, loans, and other products, and clients are calling on financial institutions to provide far more services than ever before – from insurance and credit cards to financial planning and investments. The viewpoint of our clients is of great importance to us. To fully understand their view, we put ourselves in their position. We do this through unannounced service quality shops to ensure that every client is treated with professionalism and respect. This program will be expanded in 2007 to evaluate and monitor the service quality of every interaction a client may have with First Commonwealth. Nothing short of the highest service standards will be accepted. During 2006 we spent a great deal of time evaluating what we offer our clients in terms of personnel, facilities, products, and service. We also looked at how we communicate with existing and prospective clients. This information was thoroughly evaluated during our strategic planning process, in which we defined a new vision to become first choice in our markets through the delivery of exceptional products and service by exceptional employees. JIM sWIsToCK President, Penncara energy Part-owner, Altoona Curve state College > Wealth Management > financial Planning sCoTT MeRICHKo new Alexandria > Personal and business Checking Accounts > Personal savings Account > Personal and business Revolving lines of Credit lIZ bAMboCCI WITH sonnY (AGe 2) Altoona > Personal Checking and savings Accounts > Personal Certificates of Deposit > business Revolving line of Credit > Investments of business Assets > small business loans > Capital equipment loans 2006 Annual Report 5 line of credit Jan Adamiec uses first Commonwealth for business and personal banking products and services. 6 first Commonwealth savings four-year-old savings account holder Gia bambocci already knows the value of a dollar. 2006 Annual Report 7 Vision: To become first Choice First Commonwealth, by better meeting client needs, seeks to become the financial institution of first choice in the markets we serve. We will accomplish this by listening to our customers. Research and common sense tell us that convenience and customer service are very important to both those who are choosing a new bank and those who are maintaining a current banking relationship. For this reason, First Commonwealth remains committed to providing branches and ATMs in locations that afford the greatest convenience to our customers. We are also modifying our services and expanding hours in many of our branches. With 110 offices throughout Allegheny, Washington, Lawrence, Butler, Beaver, Somerset, Bedford, Blair, Cambria, Clearfield, Elk, Indiana, Jefferson, Westmoreland, and Armstrong counties, First Commonwealth has established a solid presence in our market area. At First Commonwealth, every decision we make is based on what is best for our clients and our company. We believe success is a product of strong relationships and good corporate citizenship. First Commonwealth has always prided itself on strengthening the communities we serve, as well as being good citizens ourselves. Strong communities provide a healthy customer base and attract quality employees. We have encouraged community involvement on the part of our employees through the Spirit of Community Service and Golden Tower Awards, which recognize and celebrate those who are active community volunteers. As an institution, we are community advocates as well. The financial support we provide to community organizations, charities, and economic development initiatives helps to build vital, vibrant neighborhoods. THoMAs e. AnD PATRICIA M. TAYloR Cheswick Investments > > financial Planning sHAnnInG WAn AnD sAnGeeTA PUnJAbI seton Hill University, Greensburg > Personal Checking Accounts 8 first Commonwealth Knowing the Consumer As an industry standard, one in every seven households in America is looking for a new banking relationship each year. An ability to meet the needs of these consumers will enable First Commonwealth to increase both market share and wallet share. Although 2006 was not a year of exceptional growth for the banking industry, First Commonwealth has begun to implement strategic initiatives to increase market share and grow revenue. In particular, we look to enhance the services we provide and strengthen the relationships we maintain with the women’s market, young savers, the affluent and emerging affluent, those seeking services for the preservation and transfer of wealth, and business clients. We believe these segments provide the greatest potential for future growth. Helen Webb-MUCCI MIles Webb, JR. Co-owners, Webb’s service Center Greensburg AMY ACKeR KARen AlTMAnsHofeR Co-owners, Cartridge World Johnstown > online banking > Personal and business Checking Accounts > Personal and business loans > financial Planning > Personal and business Revolving lines of Credit > small business loan > online banking > Personal savings Account > business Checking Account > Personal Certificates of Deposit > life Insurance bob AnD bIllIe sUe HePleR Vandergrift > online banking > Investments > financial Planning > business Checking Account > business savings Account 2006 Annual Report 9 online services Robert Carter represents an up-and-coming businessman who depends on first Commonwealth. 10 first Commonwealth sbA loans Professional women like Donna Chappel include first Commonwealth in the decision-making process. 2006 Annual Report 11 Affirming our Mission Since its founding, First Commonwealth has been an organization built upon the fundamental principles of ethics and integrity. As our company has undergone organizational restructuring and rapid expansion into new markets, we remained steadfast in our commitment to our employees, our communities, and our shareholders. We will continue to innovate and work creatively to help our clients succeed…to keep businesses and organizations moving forward in good and difficult economic times…and to help individuals make the most of their financial resources. We will do everything we possibly can to earn the right to be the first choice in financial services. MATT MAnGeRY Greensburg salem High school export > Checking Account > online banking > Debit Card RobeRT C. WeHneR, senior Vice President & Cfo CARl W. boRnTRAeGeR, President & Ceo babcock lumber Company Pittsburgh > Revolving line of Credit > Term loans > Cash Management KARen ZATTA-MARTIn blanc Printing Company bridgeville > small business loans > business Checking > business savings > business Revolving line of Credit > Health Insurance > 401K Plan 12 First Commonwealth First Commonwealth Board of Directors 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 John J. Dolan, Indiana President and Chief Executive Officer, First Commonwealth Financial Corporation Johnston A. Glass, McHenry, MD Retired Dale P. Latimer, New Alexandria Chairman of the Board and Chief Executive Officer, R & L Development Company Front row (L to R): John A. Robertshaw Jr., Laurie S. Singer, Edward T. Côté, Julia E. Trimarchi Cuccaro, Esq., Robert J. Ventura, John J. Dolan Middle row (L to R): Dale P. Latimer, James W. Newill, Ray T. Charley Back row (L to R): David S. Dahlmann, Johnston A. Glass, David R. Tomb Jr., Esq. James W. Newill, Highland Beach, FL Certified Public Accountant, Former President, J. W. Newill Company 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 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, 2006. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by KPMG 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 March 1, 2007 John J. Dolan Edward J. Lipkus, III President and Chief Executive Officer Senior 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 First Commonwealth Financial Corporation: We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting that First Commonwealth Financial Corporation and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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. 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, 2006 is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, First Commonwealth Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of First Commonwealth Financial Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2006, and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated financial statements. KPMG LLP Pittsburgh, Pennsylvania March 1, 2007 14 First Commonwealth FinanCial Corporation and subsidiaries REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM the board of directors and shareholders First Commonwealth Financial Corporation We have audited the accompanying consolidated statement of financial condition of First Commonwealth Financial Corporation and subsidiaries (the Company) as of December 31, 2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The financial statements of First Commonwealth Financial Corporation and subsidiaries for the two years ended December 31, 2005, were audited by other auditors whose report dated February 27, 2006, expressed an unqualified opinion on those statements. 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 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Commonwealth Financial Corporation and subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year ended December 31, 2006 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, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. KPMG LLP Pittsburgh, Pennsylvania March 1, 2007 15 First Commonwealth FinanCial Corporation and subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS Cash and due from banks Federal funds sold Interest-bearing bank deposits Securities available for sale, at market value Securities held to maturity, at amortized cost, (Market value $80,156 in 2006 and $89,804 in 2005) loans held for sale loans: portfolio loans unearned income allowance for credit losses net loans Premises and equipment, net 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, 2006 2005 (dollars in thousands, except share data) $ 95,134 -0- 985 1,644,690 $ 84,555 1,575 473 1,851,986 78,501 -0- 3,783,874 (57) (42,648) 3,741,169 68,901 1,507 160,366 16,869 235,794 6,043,916 522,451 3,803,989 4,326,440 500,014 52,681 108,250 485,170 593,420 $ $ 87,757 1,276 3,623,102 (119) (39,492) 3,583,491 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 $ $ 5,472,555 5,505,275 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; 75,100,431 shares issued and 73,916,377 shares outstanding in 2006; 71,978,568 shares issued and 70,377,916 shares outstanding in 2005 Additional paid-in capital retained earnings Accumulated other comprehensive loss, net Treasury stock (1,184,054 and 1,600,652 shares at December 31, 2006 and 2005, respectively, at cost) unearned esop shares Total shareholders’ equity -0- 75,100 208,313 322,415 (7,914) (14,953) (11,600) 571,361 -0- 71,978 173,967 318,569 (9,655) (20,214) (13,600) 521,045 Total liabilities and shareholders’ equity $ 6,043,916 $ 6,026,320 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 Non-Interest Income Net securities gains (losses) Trust income Service charges on deposit accounts 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 operating income Total non-interest income Non-Interest Expense Salaries and employee benefits Net occupancy expense Furniture and equipment expense Data processing expense Pennsylvania shares tax expense intangible amortization Restructuring charges merger and integration charges (Gain) loss on extinguishment of debt, net Other operating expenses Total non-interest expense 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 Cash Dividends Declared per Common Share First Commonwealth FinanCial Corporation and subsidiaries CONSOLIDATED STATEMENTS OF INCOME 2006 Years Ended December 31, 2005 (dollars in thousands, except share data) 2004 $ 248,738 $ 222,090 $ 189,629 68,257 12,876 2,958 142 99 333,070 108,454 25,448 8,419 23,786 32,205 166,107 166,963 11,544 155,419 697 5,801 16,967 -0- -0- 2,804 5,742 -0- 5,583 6,653 44,247 72,988 12,077 11,703 3,456 5,420 2,607 -0- -0- (410) 29,842 137,683 61,983 9,029 52,954 70,766,348 71,133,562 0.75 0.74 0.680 $ $ $ $ 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 5,437 -0- -0- 31,756 143,954 71,093 13,257 57,836 69,276,141 69,835,285 0.83 0.83 0.665 $ $ $ $ 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- 2,125 29,495 32,892 164,555 42,359 3,707 38,652 65,887,611 66,487,516 0.59 0.58 0.645 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 (dollars in thousands) 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 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 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 loss Total comprehensive income Cash dividends declared Net increase in unearned ESOP shares Discount on dividend reinvestment plan purchases Treasury stock reissued Tax benefit of stock options Balance at December 31, 2005 Comprehensive income net income Other comprehensive income, net of tax: unrealized holding gains on securities arising during the period Less: reclassification adjustment for (gains) losses on securities included in net income Reclassification adjustment for losses realized in net income as a result of terminated cash flow hedges Total other comprehensive income Total comprehensive income Cash dividends declared Cumulative effect of change in accounting Common Stock $ 63,704 Additional paid-in Capital $ 79,581 Accumulated retained other Comprehensive Treasury Income (Loss), Net Earnings $ 15,173 $ 312,261 Stock $ (37,779) Unearned ESOP Shares $ (1,994) Total Shareholders’ Equity $ 430,946 -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- 8,274 -0- 38,652 -0- -0- -0- -0- -0- -0- 262 (816) -0- (1,768) 1,238 96,956 -0- -0- -0- -0- (43,550) -0- -0- -0- -0- -0- -0- (2,420) (2,633) (118) (5,171) -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- (514) 11,650 -0- -0- -0- -0- -0- -0- -0- -0- (4,181) -0- -0- -0- -0- -0- 38,652 (2,420) (2,633) (118) (5,171) 33,481 (43,550) (3,919) (816) (514) 9,882 1,238 105,230 $ 71,978 $ 175,453 $ 307,363 $ 10,002 $ (26,643) $ (6,175) $ 531,978 -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- 57,836 -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- 119 (891) (1,176) 462 (46,630) -0- -0- -0- -0- (24,050) 5,008 (615) (19,657) -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- 6,429 -0- -0- -0- -0- -0- -0- -0- (7,425) -0- -0- -0- 57,836 (24,050) 5,008 (615) (19,657) 38,179 (46,630) (7,306) (891) 5,253 462 $ 71,978 $ 173,967 $ 318,569 $ (9,655) $ (20,214) $ (13,600) $ 521,045 -0- -0- -0- -0- -0- -0- -0- 52,954 -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- 1,970 (451) 646 2,165 (49,108) -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0- 52,954 1,970 (451) 646 2,165 55,119 (49,108) for postretirement obligations Net 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, 2006 -0- -0- -0- -0- -0- 3,122 $ 75,100 -0- (18) (903) (1,586) 408 36,445 $ 208,313 -0- -0- -0- -0- -0- -0- $ 322,415 (424) -0- -0- -0- -0- -0- (7,914) -0- -0- -0- 5,261 -0- -0- $ (14,953) -0- 2,000 -0- -0- -0- -0- $ (11,600) (424) 1,982 (903) 3,675 408 39,567 $ 571,361 $ The accompanying notes are an integral part of these consolidated financial statements. 18 First Commonwealth FinanCial Corporation and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS 2006 Years Ended December 31, (dollars in thousands) 2005 2004 $ 52,954 $ 57,836 $ 38,652 Operating Activities net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses depreciation and amortization Net (gains) losses on sales of securities and other assets Gain on extinguishment of debt net gain on sale of branches Net gain on sale of merchant services business Net amortization of premiums and discounts on securities Net amortization of premiums and discounts on long-term debt Income from increase in cash surrender value of bank owned life insurance Stock option tax benefit Changes, net of acquisition: (Increase) decrease 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: proceeds from sales Proceeds from maturities and redemptions Purchases Transactions with securities available for sale: proceeds from sales Proceeds from maturities and redemptions Purchases proceeds from sales of other assets Proceeds from sale of merchant services business Acquisition, net of cash Net (increase) decrease in interest-bearing deposits with banks Net decrease (increase) in loans Purchases of premises and equipment Net cash provided by (used in) investing activities Financing Activities Changes, net of acquisition: Repayments of other long-term debt Proceeds from issuance 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 in Federal funds purchased Net increase (decrease) in other short-term borrowings Sale of branch and deposits, net of cash received net increase in deposits Proceeds from sale of treasury stock Stock option tax benefit Net cash provided by or (used in) financing activities Net increase (decrease) in cash and cash equivalents 11,544 11,886 (985) (2,013) -0- -0- 1,873 (5,176) (5,742) -0- (1,628) 1,113 2,593 1,276 (2,726) (212) 64,757 -0- 8,739 -0- 8,287 419,770 (217,230) 7,201 -0- 60,344 (512) 34,316 (13,289) 307,626 (219,219) -0- -0- -0- (903) (48,507) 48,675 (214,326) -0- 67,021 3,472 408 (363,379) 9,004 8,628 10,884 6,687 -0- (11,832) (1,991) 5,901 (5,487) (5,391) 462 (887) 2,252 3,888 1,036 107 5,021 77,114 -0- 11,356 (20,530) 328,791 396,213 (457,967) 10,516 2,000 -0- 1,930 (131,472) (14,371) 126,466 (78,768) 37,000 -0- -0- (891) (46,193) 4,775 (285,584) (110,483) 278,053 5,050 -0- (197,041) 6,539 8,070 9,488 (4,197) -0- -0- -0- 7,794 (5,258) (5,157) 1,239 1,212 (39) (1,976) 644 (1,858) (6,855) 41,759 -0- 31,956 (5,542) 115,726 722,393 (755,364) 11,703 -0- (70,872) 4,874 (179,939) (12,041) (137,106) (476,892) 283,486 41,238 (8,292) (816) (41,736) 21,650 237,102 -0- 27,009 9,679 -0- 92,428 (2,919) Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 $ 86,130 95,134 79,591 86,130 $ 82,510 79,591 $ 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, 2006, 2005 and 2004) 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 and a financial advisor, First Commonwealth provides a full range of loan, deposit, trust, and personal financial-planning services primarily to individuals and small to middle market businesses in fifteen counties in Central and Western Pennsylvania. Insurance products and services are also provided through FCIA, a wholly owned subsidiary of FCB. 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. Certain reclassifications have been made in the consolidated financial statements for 2005 and 2004 to conform to the classifications presented for 2006. 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 December 2003, and FIN 46 (Revised 2003) (“FIN 46R”) 20 issued in December 2003. Under FIN 46R, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both. Refer to Note 17 (Variable Interest Entities) for additional information related to 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 component of other comprehensive income, which is included in 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 specific identification method to determine the net gain or loss on debt securities and the average cost method to determine the net gain or loss on the equity 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 approximate First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS level rate of return over the life of the loan or the 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 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 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 a troubled debt restructured loan when the 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. 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 troubled debt restructured 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. 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. 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. 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 deterioration of the borrower’s financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect 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 21 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 1—Statement of Accounting Policies (continued) Allowance for Credit Losses (continued) 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 as of December 31, 2006. 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 $250 thousand 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 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. 22 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 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 are not precise. Management must make estimates using assumptions and information that is often subjective and changes rapidly. Bank Owned Life Insurance First Commonwealth purchases insurance on the lives of certain groups of employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as health care. Increases in the cash surrender value are recorded in the Consolidated Statements of Income. The cash surrender value of bank owned life insurance is reflected in “Other Assets” on the Consolidated Statements of Financial Condition in the amount of $142 million and $129.9 million at December 31, 2006 and 2005, respectively. Under these policies, the beneficiaries receive a portion of the death benefit. In 2005, a $784 thousand liability was recorded to reflect the present value of the future cost of this life insurance and an expense was recognized in “Salaries and Employee Benefits” in the Consolidated Statements of Income. In 2006, an additional liability of $373 thousand was recorded in conjunction with the acquisition of Laurel Capital Group (“Laurel Capital”). This liability reflected the net present value of the future death benefits scheduled to be paid to the beneficiaries of the Laurel Capital policies. The final ratification of Emerging Issues Task Force No. 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Insurance Arrangements” will finalize the accounting treatment for these policies. First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Premises and Equipment Accounting for the Impairment of Long-Lived Assets Premises and equipment are carried at cost less accumulated depreciation and amortization on First Commonwealth’s Consolidated Statements of Financial Condition. Depreciation is computed on the straight-line and accelerated methods over the estimated useful life of the asset. An accelerated depreciation method was used for substantially all furniture and equipment. The straight-line depreciation method was used for buildings and improvements. Charges for maintenance and repairs are expensed as incurred. Leasehold improvements are expensed over the term of the lease or the estimated useful life of the improvement, whichever is shorter. When developing software, 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 software development costs and purchased software are amortized on a straight-line basis over a period not to exceed seven years. Business Combinations First Commonwealth accounts for business combinations using the purchase method in accordance with FASB Statement No. 141 (“SFAS No. 141”), “Business Combinations.” Under the purchase method, net assets of the business acquired are recorded at their fair value as of the date of acquisition. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets that are acquired are recorded as goodwill (see “Goodwill” section below). Results of the acquired business are included in First Commonwealth’s income statement from the date of the acquisition. Goodwill Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and other intangible assets (see “Other Intangible Assets” section below). Goodwill is not amortized and is subject to at least annual assessments for impairment by applying a fair value based test. First Commonwealth reviews goodwill annually for potential impairment by determining if the fair value of the reporting unit has fallen below the carrying value. Other Intangible Assets Other intangible assets consist of core deposits and covenants not to compete obtained through acquisitions. Other intangible assets are amortized using various methods over their estimated lives and are periodically evaluated for impairment. 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 (“SFAS 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 the after tax effect of changes in unrealized holding gains and losses on available for sale securities, changes in unrealized gains and losses on derivatives used in cash flow hedging relationships, and changes in the funded status of defined benefit post retirement benefit plans. Comprehensive income is reported in the accompanying Consolidated 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 28 (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 23 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 1—Statement of Accounting Policies (continued) Employee Stock Ownership Plan (continued) 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 On January 1, 2006, First Commonwealth adopted FASB Statement No. 123(R) (“SFAS No. 123(R)”), “Share Based Payment.” SFAS 123(R) requires income statement recognition of the grant date fair value for all share based payments over the vesting period of the grant, net of expected forfeitures. Upon adoption, First Commonwealth elected to use the modified prospective transition method and therefore has not restated prior periods. Under the modified prospective application, compensation cost is recognized for the portion of the outstanding awards granted prior to but not vested as of January 1, 2006. First Commonwealth’s stock-based compensation plan expired on October 15, 2005. During 2006, First Commonwealth did not have any outstanding options for which the requisite service had not already been rendered. Therefore, SFAS 123(R) had no effect on First Commonwealth’s Consolidated statements of income or the Consolidated Statements of Financial Condition. Derivative Instruments and Hedging Activities First Commonwealth accounts for derivative instruments and hedging activities in accordance with FASB Statement No. 133 (“FASB No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” as amended. First Commonwealth recognizes all derivatives as either assets 24 or liabilities on the statements of Financial Condition 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 and are subsequently reclassified to earnings when the hedged transaction affects earnings. 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, 2006, 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 September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, this Statement simplifies and codifies related guidance within generally accepted accounting principles (“GAAP”). Prior to this Statement, there were different definitions of fair value and limited guidance for applying those definitions in GAAP. Moreover, that guidance was dispersed among the many accounting pronouncements that require fair value measurements. Differences in that guidance created inconsistencies that added to the complexity in applying GAAP. In developing this Statement, the FASB considered the need for increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. SFAS 157 does not expand the use of fair value measurements. SFAS 157 will be effective for fiscal years First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS beginning after November 15, 2007. First Commonwealth does not expect implementation of SFAS 157 to have a material impact on its financial condition or results of operations. In September 2006, the FASB Emerging Issues Task Force issued EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods. Therefore, EITF 06-4 would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF 06-4 will be effective for fiscal years beginning after December 15, 2007. Management is currently evaluating how the provisions of EITF 06-4 will affect First Commonwealth’s financial condition or results of operations upon adoption. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS 158”) “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132R.” Effective for fiscal years ending after December 15, 2006, SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Effective for fiscal years ending after December 15, 2008, this Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. First Commonwealth’s adoption of SFAS 158 did not have a material impact on its financial condition or results of operations (see Note 27). In September 2006, the FASB ratified Emerging Issues Task Force 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” Effective January 1, 2007, EITF 06-5 explains how to determine “the amount that could be realized” from a life insurance contract, for purposes of recording the cash surrender value on the balance sheet. It requires policyholders to determine the amount that could be realized under a life insurance contract assuming individual policies are surrendered instead of surrendering all policies as a group. Any adjustment to the carrying amount of cash surrender value will be recorded as a direct adjustment to retained earnings and reported as a change in accounting principle. First Commonwealth does not expect implementation of EITF 06-5 to have a material impact on its financial condition or results of operations. In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) “Quantification of Misstatements.” SAB 108 specifies how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 did not have a material impact on First Commonwealth’s financial condition or results of operations. In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 applies to all tax positions accounted for in accordance with Statement 109. FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective in fiscal years beginning after December 15, 2006. First Commonwealth does not expect implementation of FIN 48 to have a material impact on its financial condition and results of operations. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” As it states in the title, SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 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, SFAS 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. SFAS 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’s adoption of SFAS 154 did not have a material impact on its financial condition or results of operations. 25 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 3—Supplemental Comprehensive Income Disclosures The following table identifies the related tax effects allocated to each component of other comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity: December 31, 2006 December 31, 2005 (dollars in thousands) December 31, 2004 Pretax Amount Tax (Expense) Benefit Amount Net of Tax Pretax Amount Tax (Expense) Net of Tax Benefit Amount Pretax Amount Tax (Expense) Net of Tax Benefit Amount $ 3,031 $ (1,061) $ 1,970 $ (37,000) $ 12,950 $ (24,050) $ (3,723) $ 1,303 $ (2,420) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period Less: reclassification adjustment for (gains) losses realized in net income (694) 243 (451) 7,705 (2,697) 5,008 (4,051) 1,418 (2,633) Less: reclassification adjustment for losses realized in net income as a result of terminated cash flow hedges 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) Accumulated unrealized losses for postretirement obligations at January 1 transition obligation net loss Cumulative effect of change in accounting for postretirement obligations $ $ 994 (348) 646 -0- -0- -0- -0- -0- -0- -0- 3,331 3,331 -0- (1,166) $ (1,166) $ -0- 2,165 2,165 (615) 331 (946) (30,241) (19,657) 10,584 $ (30,241) $ 10,584 $ (19,657) (182) (7,956) (118) 64 2,785 (5,171) $ (7,956) $ 2,785 $ (5,171) -0- 9 643 $ -0- $ (3) (225) $ 652 $ (228) $ -0- 6 418 424 $ -0- $ -0- -0- -0- $ -0- -0- -0- -0- -0- $ -0- $ -0- -0- -0- $ -0- -0- $ -0- $ -0- $ -0- $ -0- $ -0- $ -0- -0- -0- -0- note 4—Supplemental Cash Flow Disclosures 2006 2005 (dollars in thousands) 2004 Cash paid during the year for: interest Income taxes $ 157,669 9,554 $ $ 136,367 9,040 $ $ 110,729 6,302 $ Noncash investing and financing activities: ESOP loan reductions esop borrowings $ $ 2,000 $ -0- $ 1,061 8,486 $ $ 1,332 5,513 loans transferred to other real estate owned and repossessed assets Gross increase (decrease) in market value adjustment to $ 4,909 $ 5,388 $ 4,613 securities available for sale $ 2,337 $ (29,295) $ (7,774) Gross decrease in market value adjustment to terminated cash flow hedges Treasury stock reissued for business combination $ $ -0- $ (946) $ (182) 203 $ 203 $ 203 NOTE 5—Restructuring Charges In July 2005, an executive officer of First Commonwealth resigned and executed his right to receive severance payments under his employment contract. First Commonwealth accrued expenses of $700 thousand related to this contract. These expenses are included as restructuring charges in First 26 Commonwealth’s Consolidated Statements 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 follow First Commonwealth’s normal payroll cycle for a period of 24 months. In September 2005, First Commonwealth’s Board of Directors approved a plan to streamline its organizational structure. As part of this plan, on January 1, 2006, First Commonwealth merged 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 was part of First Commonwealth’s continuing effort to unify, streamline and simplify its business structure and operations, which has grown principally through 16 mergers and acquisitions during the past 24 years. The simplified structure is intended to expedite strategic business and operational decisions and create a more efficient organization capable of responding more rapidly to evolving and dynamic market conditions. The 2005 period includes one-time termination benefits of $4.7 million related to the reorganization initiative and are included as restructuring charges in First Commonwealth’s Consolidated Statements of Income. These charges represent one-time termination benefits including severance payments, hospitalization costs and payroll taxes for 72 employees whose positions were eliminated as part of the reorganization First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS initiative. No charges related to this plan were recorded in 2006 and none are expected in future periods. 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 following is a summary of the 2005 restructuring liability and is included in Other Liabilities on the Consolidated statements of Financial Condition: (dollars in thousands) 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 One-time benefit payments during 2006 $ $ -0- 700 4,737 (2,122) 3,315 (2,880) Restructuring liability as of December 31, 2006 $ 435 NOTE 6—Acquisitions and Dispositions The following business combination was accounted for under the purchase method of accounting. Accordingly, the results of operations of the acquired company has been included in First Commonwealth’s results of operations since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess cost over fair value of net assets acquired is recorded as goodwill. On August 28, 2006, First Commonwealth completed its acquisition of Laurel Capital Group, Inc. (“Laurel Capital”) for a total cost of approximately $56.1 million, which was paid in common stock valued at $39.5 million and $16.6 million in cash. Laurel Capital Group was the holding company for Laurel Savings Bank (“Laurel Savings”) with approximately $314 million in assets and 8 branch offices located in Allegheny and Butler counties in Pennsylvania. First Commonwealth recorded goodwill and core deposit intangibles totaling approximately $37.7 million and $3.5 million, respectively, in the Laurel Capital Group acquisition. Any subsequent adjustments to the fair values or other purchase accounting adjustments, determinable within twelve months from the acquisition dates, would result in adjustments to goodwill. NOTE 7—Merger and Integration Charges During 2004, First Commonwealth recorded merger and integration charges totaling $2.1 million ($1.4 million, net of taxes). The merger and integration charges related to the acquisition of Pittsburgh Financial Corp. (“PFC”) in 2003. The charges included $485 thousand related to the write-off of the unamortized capitalized costs for the subordinated debentures that were previously issued by PFC and were called and paid off in January of 2004. Also included in the merger and integration charges were $1.6 million 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 8—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, $17.6 million of deposit liabilities associated with the office were sold. The transaction generated a pre-tax gain of approximately $3.1 million ($2.0 million 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 $108.4 million. The transaction generated a pre-tax gain of $8.7 million ($5.7 million 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 million 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 $2.7 million before taxes ($1.8 million 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 9—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 approximately $2.0 million that was included in First Commonwealth’s Consolidated Statements of Income during 2005. NOTE 10—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 $1.6 million during 2006 and $1.9 million during 2005. 27 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 11—Derivative Instruments In December 2005, First Commonwealth terminated its three interest rate swaps (“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 $1.1 million. This penalty is being recognized as a reduction of earnings over the original remaining term of the hedged item. The unamortized penalty at December 31, 2006 was $123 thousand. NOTE 12—Securities Available For Sale Below is an analysis of the amortized cost and fair values of securities available for sale at December 31 (dollars in thousands): 2006 2005 U.S. Treasury Securities $ 7,889 $ -0- $ -0- $ 7,889 $ Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Fair Value Gross amortized unrealized unrealized Gains Losses Gross Fair Value $ -0- $ (35) $ 30,442 Cost 30,477 Obligations of U.S. Government Corporations and agencies: Mortgage Backed Securities other agencies obligations of states and Political Subdivisions Corporate Securities Other Mortgage Backed Securities 944,403 1,179 (21,664) 257,449 98 (2,078) 217,273 4,482 173,066 3,371 532 -0- (115) (366) (10) 923,918 255,469 221,640 176,071 522 1,130,425 3,141 (23,774) 1,109,792 245,803 -0- (3,923) 241,880 194,305 195,286 1,367 5,005 5,342 -0- (166) (686) (10) 199,144 199,942 1,357 Total Debt Securities 1,600,612 9,130 (24,233) 1,585,509 1,797,663 13,488 (28,594) 1,782,557 Equities 55,478 3,742 (39) 59,181 68,062 1,919 (552) 69,429 Total Securities Available for Sale $ 1,656,090 $ 12,872 $ (24,272) $ 1,644,690 $ 1,865,725 $ 15,407 $ (29,146) $ 1,851,986 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 27 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. The amortized cost and fair value of debt securities at December 31, 2006, 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 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 Fair Value amortized Cost (dollars in thousands) $ 135,621 133,721 40,037 346,298 655,677 944,935 $ 1,600,612 $ 134,607 132,797 41,273 352,392 661,069 924,440 $ 1,585,509 Gross gains (losses) realized on sales, maturities and other securities transactions related to securities available for sale were as follows: sales transactions: Gross gains Gross losses For Years Ended December 31, 2006 2005 (dollars in thousands) 2004 $ $ 84 -0- 84 469 (8,192) (7,723) $ 4,214 (302) 3,912 Maturities and other securities transactions: Gross gains Gross losses other 615 -0- (2) 613 50 -0- -0- 50 176 -0- (11) 165 Gains (losses) on securities transactions, net $ 697 $ (7,673) $ 4,077 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Securities available for sale with an approximate fair value of $1.0 billion were pledged as of December 31, 2006 and 2005, to secure public deposits and for other purposes required or permitted by law. NOTE 13—Securities Held to Maturity Below is an analysis of the amortized cost and fair values of debt securities held to maturity at December 31: 2006 2005 (dollars in thousands) Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Fair Value Gross amortized unrealized unrealized Gains Losses Gross Cost Fair Value Obligations of U.S. Government Corporations and agencies: Mortgage Backed Securities $ 1,321 $ 20 $ -0- $ 1,341 $ 2,478 $ 58 $ -0- $ 2,536 obligations of states and Political Subdivisions Debt Securities Issued by Foreign Governments 76,905 1,635 -0- 78,540 84,974 2,080 (91) 86,963 275 -0- -0- 275 305 -0- -0- 305 Total Securities Held to Maturity $ 78,501 $ 1,655 $ -0- $ 80,156 $ 87,757 $ 2,138 $ (91) $ 89,804 The amortized cost and estimated market value of debt securities at December 31, 2006, 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. (dollars in thousands) 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 Cost $ 1,275 8,958 40,868 26,079 77,180 1,321 $ 78,501 Fair Value 1,280 $ 9,086 41,958 26,491 78,815 1,341 80,156 $ There were no sales of securities held to maturity in 2006, 2005 or 2004. Securities held to maturity with an amortized cost of $78.0 million and $85.3 million were pledged as of December 31, 2006 and 2005, respectively, to secure public deposits and for other purposes required or permitted by law. 29 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 14—Other-Than-Temporary Impairment of Investments The following table presents the gross unrealized losses and fair values at December 31, 2006 by investment category and time frame for which the loss has been outstanding (dollars in thousands): 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 $ -0- $ -0- $ -0- $ -0- $ -0- $ -0- U.S. Government Corporations and Agencies 24,805 U.S. Government Agency CMO and MBS 173,507 Corporate Securities Municipal Securities Other Mortgage Backed Securities Total Debt Securities Equities Total Securities 41,674 14,039 -0- 254,025 450 (195) (697) (104) (106) -0- (1,102) (21) 205,891 661,513 13,944 692 522 882,562 138 (1,883) (20,968) (261) (9) (10) 230,696 835,020 55,618 14,731 522 (2,078) (21,665) (365) (115) (10) (23,131) 1,136,587 (24,233) (18) 588 (39) $ 254,475 $ (1,123) $ 882,700 $ (23,149) $ 1,137,175 $ (24,272) At December 31, 2006, 98.3% of the total 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 and asset backed securities comprised 1.5% of the unrealized losses and equity securities accounted for the remaining .2%. The corporate fixed income securities consist of ten issues by financial services companies and four trust preferred pools structured from issuers from the financial services industry. Three of the issues are non-rated and have unrealized losses of $20 thousand or .08% of the total. A total of 240 positions of the total fixed income securities have an unrealized loss 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 two issues and only one security has been at a loss for more than twelve months. Management does not believe any individual loss as of December 31, 2006 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, 2005 by investment category and time frame for which the loss has been outstanding (dollars in thousands): 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 $ 2,954 $ (35) $ -0- $ -0- $ 2,954 $ (35) U.S. Government Corporations and Agencies 118,692 U.S. Government Agency CMO and MBS 365,136 (1,483) (5,891) (367) (237) (10) (8,023) (552) 123,188 482,786 25,828 681 -0- (2,440) (17,883) (319) (20) -0- 241,880 847,922 51,085 28,999 1,357 632,483 (20,662) 1,174,197 -0- -0- 5,300 (3,923) (23,774) (686) (257) (10) (28,685) (552) 25,257 28,318 1,357 541,714 5,300 $ 547,014 $ (8,575) $ 632,483 $ (20,662) $ 1,179,497 $ (29,237) Corporate Securities Municipal Securities Other Mortgage Backed Securities Total Debt Securities Equities Total Securities 30 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15—Loans relationship to impaired loans: Loans at year end were divided among these general categories: December 31, 2006 2005 (dollars in thousands) 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 $ 861,427 $ 729,962 92,192 1,346,503 935,635 78,279 1,213,223 987,798 547,253 864 3,783,874 (57) $ 3,783,817 610,648 4,468 3,624,378 (119) $ 3,624,259 Most of First Commonwealth’s business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 2006 and 2005, there were no significant concentrations of credit. The following table identifies nonaccrual loans, troubled debt restructured loans, and loans that are 90 days or more past due as to principal and interest payments and still accruing at December 31: Loans on nonaccrual basis Troubled debt restructured loans total nonperforming loans 2006 2005 (dollars in thousands) $ 12,043 160 $ 12,203 11,391 173 11,564 $ $ Loans past due in excess of 90 days and still accruing $ 13,051 $ 13,977 NOTE 16—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: loans charged off Credit losses on loans 2006 2005 (dollars in thousands) 2004 $ 39,492 $ 41,063 $ 37,385 1,483 11,544 1,979 10,463 1,247 8,628 -0- 1,237 8,070 4,983 11,446 10,612 transferred to held for sale Allowance at December 31 1,387 $ 42,648 -0- $ 39,492 -0- $ 41,063 2006 2005 (dollars in thousands) 2004 Recorded investment in impaired loans at end of period Average balance of impaired $ 12,203 $ 11,564 $ 10,915 loans for the year $ 13,840 $ 11,895 $ 12,601 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 $ 2,395 $ 1,474 $ 2,252 $ 6,958 $ 5,276 $ 6,500 $ 5,245 $ 6,288 $ 4,415 $ 706 $ 506 $ 307 NOTE 17—Variable Interest Entities In December 2003, the FASB issued FIN 46R. As defined by FIN 46R, 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 $4.1 million, which consists of the limited partnership investments as of December 31, 2006. 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 18—Commitments and Letters of Credit 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 statements of financial condition. 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 (Years Ended December 31, 2006, 2005 and 2004) NOTE 18—Commitments and Letters of Credit (continued) As of December 31, 2006 and 2005, 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 11 (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 these commitments and conditional obligations. The following table identifies the notional amount of those instruments at December 31: 2006 2005 (dollars in thousands) recorded on First Commonwealth’s statements of financial condition related to these letters of credit. NOTE 19—Premises and Equipment Premises and equipment are described as follows: Estimated December 31 Useful Life 2006 2005 (dollars in thousands) land Buildings and improvements Leasehold improvements Furniture and equipment Software indefinite 10–50 Years 5–40 Years 3–10 Years 3–7 Years Subtotal Less accumulated depreciation and amortization Total premises and equipment $ 12,092 73,022 13,778 76,676 20,963 196,531 127,630 $ 68,901 $ 10,479 64,719 12,899 70,461 19,701 178,259 117,399 $ 60,860 depreciation and amortization related to premises and equipment included in non-interest expense for the years ended December 31, 2006, 2005, and 2004 amounted to $8.3 million, $8.6 million, and $8.0 million, respectively. Financial instruments whose contract amounts represent credit risk: Commitments to extend credit standby letters of credit Commercial letters of credit $ 1,032,563 $ 80,520 -0- $ $ 889,489 73,611 $ 164 $ First Commonwealth leases various premises and assorted equipment under non-cancelable agreements. Total future minimal rental commitments at December 31, 2006, were as follows: 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, 2006, for financial standby letters of credit and performance standby letters of credit include amounts of $16.3 million and $3.4 million, respectively, issued during 2006 and subject to the provisions of FIN 45. There is currently no liability 32 2007 2008 2009 2010 2011 thereafter Total Premises (dollars in thousands) Equipment $ $ 2,736 2,601 2,273 2,048 2,013 20,704 32,375 $ 573 522 391 9 -0- -0- $ 1,495 Included in the lease commitments above is $744 thousand 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 thousand 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. However, certain lease agreements provide for renewal options and increases in rental payments based upon increases in the consumer price index or the lessor’s cost of operating the facility, which are included in the minimum lease commitments. Total lease expense amounted to $4.0 million in 2006, $3.0 million in 2005, and $3.2 million in 2004. NOTE 20—Goodwill and Other Amortizing Intangible Assets Under the provision of SFAS No. 142, goodwill is no longer subject to amortization, but instead is subject to at least annual assessments for impairment by applying a fair-value based test. SFAS No. 142 also requires that an acquired First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. No impairment losses on goodwill or other intangible assets were incurred in 2006, 2005 and 2004. The following table presents the changes in the carrying amount of goodwill as of December 31: balance at beginning of period Goodwill from business combination balance at end of period 2006 2005 (dollars in thousands) 122,702 37,664 160,366 $ 122,702 -0- $ 122,702 $ $ The following table summarizes other intangible assets as of December 31: The following presents the estimated amortization expense of other intangible assets: 2007 2008 2009 2010 2011 thereafter Total other Core deposits (dollars in thousands) $ 3,112 2,936 2,733 2,031 1,534 3,842 $ 16,188 $ $ 317 272 92 -0- -0- -0- 681 NOTE 21—Interest-Bearing Deposits Components of interest-bearing deposits at December 31 were as follows: Gross Intangible assets Accumulated amortization Net Intangible assets (dollars in thousands) Interest-bearing demand deposits Savings deposits time deposits Total interest-bearing deposits $ 2006 2005 (dollars in thousands) 105,073 1,597,974 2,100,942 $ 3,803,989 94,325 $ 1,661,482 1,749,101 $ 3,504,908 December 31, 2006 Core deposits other total other intangible assets December 31, 2005 Core deposits other total other intangible assets $ 22,470 725 $ 23,195 $ (6,282) (44) $ (6,326) $ 16,188 681 $ 16,869 $ 18,970 -0- $ 18,970 $ (3,719) -0- $ (3,719) $ 15,251 -0- $ 15,251 Interest-bearing deposits at December 31, 2006 and 2005, include allocations from NOW and Super NOW accounts of $497.3 million and $463.9 million, respectively, into Savings and MMDA accounts. These reallocations are based on a formula and have been made to reduce First Commonwealth’s reserve requirement in compliance with regulatory guidelines. Core deposits are amortized over their expected life using various methods and have a weighted average amortization period of approximately nine (9) years. Other intangible assets consist of covenants not to compete and are amortized over their expected life using a straight-line method and have a weighted average amortization period of approximately two (2) years. First Commonwealth recognized amortization expense on other intangible assets of $2.6 million, $2.3 million, and $1.4 million for the years ended December 31, 2006, 2005, and 2004, respectively. Included in time deposits at December 31, 2006 and 2005, were certificates of deposit in denominations of $100 thousand or more of $792.8 million and $607.9 million, respectively. Interest expense related to $100 thousand or greater certificates of deposit amounted to $33.9 million in 2006, $20.1 million in 2005 and $15.7 million in 2004. Included in time deposits at December 31, 2006, were certificates of deposit with the following scheduled maturities (dollars in thousands): 2007 2008 2009 2010 2011 and thereafter total $ 1,568,489 312,321 84,150 70,038 65,944 $ 2,100,942 NOTE 22—Short-term Borrowings Short-term borrowings at December 31 were as follows (dollars in thousands): 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 2006 Ending Average Average Balance Balance 66,197 $ 89,200 $ 49,916 6,220 Rate 5.08% 4.96% 363,007 41,587 360,446 91,768 $ 500,014 $ 568,327 $ 682,263 4.19% 4.91% 4.48% 2005 Ending balance Average Average balance $ 40,525 $ 56,213 137,692 150,000 rate 3.38% 3.25% 2004 Ending Average Average balance balance 81,972 230,204 rate 1.46% 1.75% $ 35,750 $ 340,000 431,696 348,391 126,749 171,547 $ 665,665 $ 797,148 $ 943,447 2.90% 3.16% 3.05% 477,562 93,162 466,380 18,035 $ 946,474 $ 796,591 $ 1,015,881 1.38% 1.65% 1.51% 33 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) 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 thousand are being amortized on a straight-line basis over the term of the securities. Interest on the debentures issued to First Commonwealth Capital Trust II is paid quarterly at a floating rate of LIBOR plus 2.85% which is reset quarterly. 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 thousand 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. Deferred issuance costs of $996 thousand are being amortized on a straight-line basis over the term of the securities. NOTE 22—Short-term Borrowings (continued) Interest expense on short-term borrowings for the years ended December 31 is detailed below: Federal funds purchased borrowings from Fhlb Securities sold under $ 2006 3,360 2,474 2005 (dollars in thousands) 1,900 4,474 $ $ 1,199 4,040 2004 agreements to repurchase Treasury, tax and loan note option 15,107 4,507 12,514 5,417 6,452 298 total interest on short-term borrowings $ 25,448 $ 24,305 $ 11,989 NOTE 23—Subordinated Debentures Subordinated Debentures outstanding at December 31 are as follows: 2006 2005 Amount Rate Amount (dollars in thousands) 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% libor 30,929 +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 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. 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. 34 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 24—Other Long-term Debt Other long-term debt at December 31 follows (dollars in thousands): ESOP loan due: December 2012 Repos due: 2008 Borrowings from FHLB due: 2006 2007 2008 2009 2010 2011 2014 2016 2017 2019 2020 2022 total 2006 2005 Amount Weighted Average Weighted Average Contractual Rate Effective Rate Amount Weighted Average Weighted Average Contractual Rate Effective Rate $ 11,600 LIBOR+1.17% LIBOR+1.17% $ 13,600 LIBOR+1.25% LIBOR+1.25% 20,825 5.51% -0- 51,167 76,291 200,512 91,278 25,225 8,272 -0- -0- -0- -0- -0- $ 485,170 0.00% 3.77% 5.45% 4.22% 5.37% 5.24% 5.41% 0.00% 0.00% 0.00% 0.00% 0.00% 2.46% 0.00% 3.34% 3.49% 3.65% 3.60% 3.99% 3.79% 0.00% 0.00% 0.00% 0.00% 0.00% 21,405 5.51% 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% 2.46% 3.02% 3.56% 3.49% 3.65% 4.01% 3.99% 4.58% 5.65% 6.17% 5.72% 7.37% 5.90% The weighted-average contractual rate reflects the rate due to creditors. The weighted-average effective rate of long-term debt in the schedule above include the effect of purchase accounting valuation adjustments that were recorded in connection with prior business combinations. FHLB advances in the amount of $192.6 million 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 $160.0 million at 6% strike and $15.0 million at 7.5% strike are convertible on a quarterly basis at the FHLBs option into floating rate debt indexed to 3 month LIBOR. Should the FHLB elect to convert an advance to a floating rate, First Commonwealth has the right to pay off the advance without penalty. In 2006, FHLB advances in the amount of $102.5 million were converted by the issuer pursuant to terms of the advance and simultaneously paid off. All FHLB 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 borrowings, has been pledged as collateral with the Federal Home Loan Bank of Pittsburgh. Capital securities included in total long-term debt on the Consolidated statements of Financial Condition are excluded from this note, but are described in Note 23 (Subordinated Debentures). Scheduled loan payments for other long-term debt are summarized below: Long-term debt payments Purchase valuation amortization $ 58,221 4,753 $ $ 101,597 3,616 $ $ 189,714 2,170 $ $ $ 88,700 807 $ 26,100 124 $ $ $ 9,100 268 $ $ 473, 432 11, 738 2007 2008 2009 2010 2011 Thereafter Total (dollars in thousands) The amounts on the purchase valuation amortization row in the table above include fair market adjustments from prior business combinations. 35 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 25—Shares of Common Stock The following table summarizes the share transactions for the three years ended December 31: Temporary differences between financial statement carrying amounts and tax bases of assets and liabilities that represent significant portions of the deferred tax assets (liabilities) as of December 31: Effect of stock incentive plan, net Shares reissued to fund business combination* Shares issued in acquisition -0- (399,727) for sale other Total deferred tax assets -0- 3,121,863 (16,871) -0- Balance, December 31, 2003 Effect of stock incentive plan, net Shares reissued to fund business combination* Shares issued in acquisition Balance, December 31, 2004 Effect of stock incentive plan, net Shares reissued to fund business combination* Shares Issued 63,704,445 -0- shares in Treasury 2,992,425 (906,494) -0- 8,274,123 (16,107) 39,836 71,978,568 -0- 2,109,660 (492,137) -0- (16,871) Balance, December 31, 2005 71,978,568 1,600,652 Balance, December 31, 2006 75,100,431 1,184,054 * Treasury shares were reissued to fund the business combination with Strategic Capital Concepts, Inc. and Strategic Financial Advisors, Inc. that took place in 2002. NOTE 26—Income Taxes The income tax provision consists of: 2006 2005 (dollars in thousands) 2004 Current tax provision for income exclusive of securities transactions: Federal Securities transactions $ 11,510 245 11,755 Total current tax provision benefit of operating loss carryforwards Deferred tax provision (benefit) Total tax provision $ (919) (1,807) 9,029 $ 15,836 (2,686) 13,150 (603) 710 $ 13,257 $ 4,138 1,427 5,565 (474) (1,384) 3,707 $ 2006 (dollars in thousands) 2005 Deferred tax assets: allowance for credit losses postretirement benefits other than pensions Unfunded postretirement obligation 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 $ 14,612 1,126 228 2,425 627 225 4,943 1,043 1,151 3,990 896 31,266 $ 13,483 1,157 -0- 3,921 1,570 699 3,604 271 989 4,809 1,314 31,817 Deferred tax liabilities: Accumulated accretion of bond discount Lease financing deduction loan origination fees and costs Accumulated depreciation other Total deferred tax liabilities Net deferred tax asset (173) (254) (850) (55) (971) (2,303) 28,963 $ (122) (1,245) (1,650) (687) (709) (4,413) $ 27,404 A net operating loss carryforward from acquisition of $643 thousand is remaining at December 31, 2006. This carryforward expires in 2023. A tax credit carryforward of $1.0 million is remaining as of December 31, 2006, and expires in 2021. An AMT tax credit of $4.9 million is remaining as of December 31, 2006 with an indefinite expiration life. The deferred tax asset balance includes net deferred tax assets from the Laurel acquisition totaling $2.1 million. Management believes that it is more likely than not the results of future operations will generate sufficient taxable income to realize its net deferred tax assets. The total tax provision for financial reporting differs from the amount computed by applying the statutory Federal income tax rate to income before taxes. The differences are as follows: Tax at statutory rate Increase (decrease) resulting from: income from bank owned life insurance Other nontaxable interest Tax credits other Total tax provision Amount $ 21,694 (2,010) (8,635) (909) (1,111) 9,029 $ 2006 % of Pretax Income 35.0 (3.2) (13.9) (1.5) (1.8) 14.6 2005 (dollars in thousands) 2004 Amount $ 24,882 % of Pretax Income 35.0 Amount $ 14,826 % of Pretax Income 35.0 (1,887) (8,206) (958) (574) 13,257 $ (2.7) (11.5) (1.3) (0.8) 18.7 (1,805) (7,364) (1,428) (522) 3,707 $ (4.2) (17.4) (3.4) (1.2) 8.8 36 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 27—Retirement Plans All employees with at least one year of service are eligible to participate in the employee stock ownership plan (“ESOP”). Contributions to the plan are determined by the Board of Directors and are based upon a prescribed percentage of the annual compensation of all participants. 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 $2.2 million in 2006, $1.4 million in 2005, and $1.4 million in 2004. See Note 28 (Unearned ESOP Shares) for additional information on the ESOP. 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 $3.1 million in 2006, $3.1 million in 2005, and $3.0 million in 2004. First Commonwealth maintained a Supplemental Executive Retirement Plan or 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) 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 $431 thousand in 2006, $457 thousand in 2005, and $418 thousand in 2004. Postretirement Benefits other than Pensions from Prior Acquisitions Employees from former acquisitions were covered by postretirement benefit plans which provide medical, health, and life insurance coverage. The measurement date for these plans was October 1. Net periodic benefit cost of these plans and the discount rate used to determine net periodic cost for the years ended December 31 were as follows: Service cost interest cost on projected benefit obligation amortization of transition obligation Loss (gain) amortization Net periodic benefit cost 2006 $ $ 2004 2005 (dollars in thousands) -0- $ -0- 244 308 2 2 63 84 $ 309 $ 394 -0- 220 2 (1) $ 221 Discount rate 5.50% 6.00% 6.25% The following table sets forth the funded status of the plans and the amounts recognized on First Commonwealth’s Consolidated statements of Financial Condition as of December 31: Accumulated postretirement 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 2006 2005 (dollars in thousands) $ 3,869 -0- $ 4,607 -0- 3,869 -0- 4,607 -0- 3,869 -0- -0- 4,607 (11) (1,290) on the statements of financial condition $ 3,869 $ 3,306 Amounts recognized in accumulated other comprehensive income, net of tax as of December 31, 2006 follows: net loss transition obligation total $ 418 6 $ 424 As of December 31, 2005, there were no amounts recognized in accumulated other comprehensive income for the plans. The following table sets forth the change in benefit obligation: (dollars in thousands) 2006 2005 benefit obligation at beginning of year interest cost benefit payments Actuarial (gain) loss Benefit obligation at end of year $ 4,607 244 (398) (584) $ 3,869 $ 3,784 220 (376) 979 $ 4,607 37 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 27—Retirement Plans (continued) Postretirement Benefits other than Pensions from Prior Acquisitions (continued) The discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 6.00% for 2006 and 5.50% for 2005. The health care cost trend rates used for 2006 were projected at an initial rate of 11.00% for 2007 decreasing over time to an annual rate of 4.75% in 2014 for both indemnity plan participants and non-indemnity plan participants. For 2005, rates used 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. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) introduced a prescription drug benefit under Medicare Part D and 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 cost 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 (dollars in thousands) $ 14 $ 192 $ (13) $ (175) As of December 31, 2006, the projected benefit payments for the next ten years are as follows: (dollars in thousands) 2007 2008 2009 2010 2011 2012–2016 Projected Benefit Payments 476 488 445 433 400 1,593 $ $ $ $ $ $ The projected payments were calculated using the same assumptions as those used to calculate the benefit obligations included in this note. The estimated costs that will be amortized from accumulated other comprehensive income into net periodic cost for 2007 are as follows (dollars in thousands): 38 Net loss transition obligation Total postretirement Benefits $ $ 22 2 24 The incremental effect of applying SFAS 158 on individual line items in the Consolidated statements of Financial Position at December 31, 2006 follows: before application of SFAS 158 after application of Reclassifications SFAS 158 (dollars in thousands) Other assets Total assets Other liabilities Total liabilities $ 235,566 $ 6,043,688 $ 52,029 $ 5,471,903 Accumulated other comprehensive income Total stockholders’ equity $ (7,490) $ 571,785 NOTE 28—Unearned ESOP Shares $ $ $ $ $ $ 228 228 652 652 $ 235,794 $ 6,043,916 $ 52,681 $ 5,472,555 (424) (424) $ $ (7,914) 571,361 First Commonwealth’s ESOP borrowed funds which were guaranteed by First Commonwealth. The balance of the ESOP related loans was $11.6 million at December 31, 2006 and $13.6 million at December 31, 2005. The loans have been recorded as long-term debt in the Consolidated Statements of Financial Condition. A like amount of unearned ESOP shares was recorded as a reduction of 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 the 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 and the remaining loan is scheduled to be repaid over the next six 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.” total old shares new shares Shares in suspense December 31, 2004 Shares allocated during 2005 Shares acquired during 2005 Shares in suspense December 31, 2005 Shares allocated during 2006 Shares acquired during 2006 Shares in suspense December 31, 2006 473,116 (111,776) 625,918 987,258 (166,420) -0- 820,838 14,147 (14,147) -0- -0- -0- -0- -0- 458,969 (97,629) 625,918 987,258 (166,420) -0- 820,838 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair market value of the new shares remaining in suspense was approximately $11.0 million at December 31, 2006. Commonwealth’s net income and earnings per share would have been reduced to the pro forma amounts shown below: Interest on ESOP loans was $812 thousand in 2006, $511 thousand in 2005 and $142 thousand in 2004. During 2006, 2005 and 2004, dividends on unallocated shares in the amount of $690 thousand, $514 thousand and $195 thousand, respectively, were used for debt service while all dividends on allocated shares were allocated or paid to the participants. NOTE 29—Stock Option Plan First Commonwealth’s stock based compensation plan expired on October 15, 2005, and is described below. All of the exercise prices and related number of shares have been adjusted 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. Options granted in 2004 and 2005 vested in the year granted. All options expire ten years from the grant date. All equity compensation plans were approved by security holders. Prior to January 1, 2006, First Commonwealth had elected, as permitted by SFAS No. 123R, to apply APB Opinion 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost was recognized for its stock options prior to January 1, 2006. 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 SFAS No. 123R, First 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 December 31 (dollars in thousands, except per share data) 2005 2006 2004 $ 52,954 $ 57,836 $ 38,652 -0- (38) $ 52,954 $ 57,793 $ 38,614 (43) $ $ $ $ 0.75 $ 0.75 $ 0.74 $ 0.74 $ 0.83 $ 0.83 $ 0.83 $ 0.83 $ 0.59 0.59 0.58 0.58 First Commonwealth’s plan expired on October 15, 2005, therefore, there were no stock options granted in 2006. The weighted-average grant-date fair value of stock options granted during 2005 and 2004 was $2.44 and $2.45, respectively. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes options pricing model with the following weighted average assumptions used: Dividend yield Expected volatility Risk-free interest rate Expected option life 2006 n/a n/a n/a n/a 2005 2004 4.54% per annum 4.44% per annum 23.1% 4.2% 23.2% 4.1% 7.0 years 7.0 years a summary of the status of First Commonwealth’s outstanding stock options as of December 31, 2006, 2005, and 2004 and changes for the years ended on those dates is presented below: Outstanding at beginning of year Converted options at merger Granted Exercised Forfeited Outstanding at end of year Exercisable at end of year 2006 Weighted Average Exercise Price $ $ $ $ $ $ $ 10.63 0.00 0.00 8.69 14.16 11.01 11.01 Shares 2,164,421 -0- -0- (399,727) (37,156) 1,727,538 1,727,538 2005 2004 Shares 2,682,938 -0- 27,000 (492,137) (53,380) 2,164,421 2,164,421 weighted Average Exercise Price $ $ $ $ $ $ $ 10.61 0.00 14.55 10.26 14.69 10.63 10.63 Shares 2,965,727 611,962 24,000 (906,494) (12,257) 2,682,938 2,682,938 weighted Average Exercise Price $ $ $ $ $ $ $ 11.51 6.24 14.41 10.68 12.54 10.61 10.61 The following table summarizes information about the stock options outstanding at December 31, 2006: Range of Exercise Prices $5.14–$8.99 $9.00–$9.99 $10.00–$10.99 $11.00–$11.99 $12.00–$15.00 Total Number Outstanding At 12/31/06 290,167 71,325 190,455 598,847 576,744 1,727,538 Options Outstanding Weighted-Average Remaining Contract Life 5.3 4.9 4.2 3.8 4.6 4.4 Weighted-Average Exercise Price $ 6.48 $ 9.30 $ 10.74 $ 11.49 $ 13.09 $ 11.01 Options Exercisable Number Exercisable At 12/31/06 290,167 71,325 190,455 598,847 576,744 1,727,538 Weighted-Average Exercise Price 6.48 $ $ 9.30 $ 10.74 $ 11.49 $ 13.09 $ 11.01 39 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) NOTE 30—Contingent Liabilities there are no material legal proceedings to which First Commonwealth or its subsidiaries are a party, or of which their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of First Commonwealth or its subsidiaries. NOTE 31—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 thousand during 2006: Balances December 31, 2005 Advances Repayments Other Balances December 31, 2006 (dollars in thousands) 7,373 3,336 (7,102) 421 4,028 $ $ “Other” primarily reflects the change in those classified as a “related party” usually as a result of mergers, restructuring, resignations or retirements. NOTE 32—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, 2006, dividends from subsidiary banks were restricted not to exceed $83.4 million. 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, 2006, First Commonwealth and its banking subsidiary met all capital adequacy requirements to which they are subject. As of December 31, 2006, 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 following table. 40 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Actual Capital Amount Ratio Capital Amount Regulatory Minimum Ratio (dollars in thousands) to be well Capitalized under Prompt Corrective Action Provisions Capital Amount Ratio As of December 31, 2006 total Capital to risk weighted assets First Commonwealth Financial Corporation $ $ First Commonwealth bank 549,686 519,235 12.5% 11.9% tier i Capital to risk weighted assets First Commonwealth Financial Corporation $ $ First Commonwealth bank 507,039 476,588 11.5% 10.9% Tier I Capital to Average Assets First Commonwealth Financial Corporation $ $ First Commonwealth bank 507,039 476,588 8.6% 8.2% 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% $ $ $ $ $ $ $ $ $ $ $ $ 351,799 348,425 175,900 174,212 176,054 174,636 339,562 335,583 169,781 167,792 178,011 176,341 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 435,531 $ N/A 10.0% N/A 261,319 N/A 291,060 N/A 6.0% N/A 5.0% N/A 419,479 N/A 10.0% N/A 251,687 N/A 293,902 $ N/A 6.0% N/A 5.0% $ $ $ $ nOTE 33—Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) Statements of Financial Condition Statements of Income December 31, 2006 2005 (dollars in thousands) 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 $ 318 6,897 299 665,830 3,308 6,804 5,713 5,236 225 12,678 $ 707,308 Liabilities and Shareholders’ Equity Accrued expenses and other liabilities Dividends payable loans payable Subordinated debentures payable Shareholders’ equity Total liabilities and shareholders’ equity $ 3,531 12,566 11,600 108,250 571,361 $ 707,308 $ $ $ $ 448 27,488 341 600,452 3,306 6,436 5,846 2,514 5,098 7,603 659,532 4,673 11,964 13,600 108,250 521,045 659,532 Interest and dividends Dividends from subsidiaries Interest expense Net securities gains other income Operating expenses 34 $ Years Ended December 31, 2006 2004 2005 (dollars in thousands) 56 $ $ 54,547 50 83,715 (7,405) 84 59 (12,229) (13,977) (12,778) (9,233) -0- -0- (8,383) -0- 1 61,624 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 (loss) of subsidiaries net income 33,141 8,503 39,299 8,161 63,725 7,439 41,644 47,460 71,164 11,310 (32,512) 10,376 $ 52,954 $ 57,836 $ 38,652 41 First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Years Ended December 31, 2006, 2005 and 2004) nOTE 33—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 income taxes payable Undistributed equity in subsidiaries other net Stock option tax benefit Net cash provided by operating activities Years Ended December 31, 2006 2005 2004 (dollars in thousands) $ 52,954 $ 57,836 $ 38,652 496 -0- 458 -0- 432 (84) (1,631) 5,053 (4,600) (11,310) (15,076) 32,512 3,006 1,239 (4,412) 408 (1,017) 462 36,505 47,716 71,157 Investing Activities Transactions with securities available for sale: Purchases Proceeds from maturities and redemptions net change in loans to affiliated parties Purchases of premises and equipment Acquisition, net of cash Changes in receivable from and net investment in subsidiary Net cash provided (used) by investing activities (6,895) (27,481) (91,587) 27,500 42 (257) (15,961) 20,550 46 (465) -0- 104,058 52 (162) -0- 4,874 935 (82,284) 9,303 (6,415) (69,923) 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 -0- -0- -0- -0- 803 -0- 41,238 3,486 (9,794) (3,486) -0- (803) plan purchases Treasury stock reissued Cash dividends paid Net cash used by financing activities (45,938) (42,034) (733) 1,181 net decrease in cash Cash at beginning of year Cash at end of year $ (903) 3,472 (891) 5,050 (816) 9,679 (48,507) (46,193) (41,736) (1,429) (195) 1,376 (130) 448 318 $ 448 $ 1,181 Cash dividends declared per common share were $0.680, $0.665, and $0.645 for 2006, 2005 and 2004, respectively. During 2006 and 2004, dividends from subsidiaries included special dividends of $3.0 million and $29.5 million that were received from FraMal Holdings Corporation, a wholly owned subsidiary. During 2005, dividends from subsidiaries included a special dividend-in-kind in the amount of $4.7 million, which was received in the form of investment securities. Dividends from subsidiaries for 2004 included a special dividend in the amount of $7.6 million that was 42 received from First Commonwealth Bank, a wholly owned subsidiary. After distribution of this special dividend, which was within guidelines established by the banking regulators, First Commonwealth Bank remained classified as a well-capitalized institution. During 2004, the ESOP obtained a $14.0 million line of credit from an unrelated financial institution. The line of credit was used to purchase stock in 2004 and 2005 for the ESOP and is guaranteed by First Commonwealth. During 2005 and 2004, $8.5 million and $5.5 million, respectively, were borrowed on the line. There were no borrowings on the line during 2006. The loan was recorded as long-term debt and the offset was recorded as a reduction of common shareholders’ equity (see Note 28). As of December 31, 2006, the parent company had a line of credit to be used for general operating cash flows. The line of credit was with an unrelated financial institution for $15.0 million, and as of December 31, 2006, had no amounts outstanding. NOTE 34—Fair Values of Financial Instruments Below are various estimated fair values at December 31, 2006 and 2005, as required by Statement of Financial Accounting Standards No. 107 (“SFAS No. 107”). Such information, which pertains to First Commonwealth’s financial instruments, is based on the requirements set forth in SFAS 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 estimates 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 carrying amounts for cash and short-term instruments approximate the estimated fair values of such assets. Securities: Fair values for securities held to maturity and securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, First Commonwealth FinanCial Corporation and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: 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. loans held for sale: The carrying amounts approximate the estimated fair value. 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 as of December 31: Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 2006 2005 (dollars in thousands) Financial assets Cash and due from banks Interest-bearing bank deposits Federal funds sold Securities available for sale Securities held to maturity net loans loans held for sale Financial liabilities deposits Short-term borrowings Long-term debt $ $ $ $ $ $ $ $ $ $ 95,134 985 -0- 1,644,690 78,501 3,741,169 -0- 4,326,440 500,014 593,420 $ $ $ $ $ $ $ $ $ $ 95,134 985 -0- 1,644,690 80,156 3,763,385 -0- 4,099,299 499,681 579,993 $ $ $ $ $ $ $ $ $ $ 84,555 473 1,575 1,851,986 87,757 3,583,491 1,276 3,996,552 665,665 799,744 $ $ $ $ $ $ $ $ $ $ 84,555 473 1,575 1,851,986 89,804 3,582,597 1,276 3,771,140 665,668 790,776 43 First Commonwealth FinanCial Corporation and subsidiaries QUARTERLY SUMMARY OF FINANCIAL DATA—UNAUDITED The unaudited quarterly results of operations for the years ended December 31 are as follows: interest income Interest expense net interest income Provision for credit losses Net interest income after provision for credit losses Net securities gains Other non-interest income (Gain) loss on extinguishment of debt, net Other operating expenses Income before income taxes Applicable income taxes net income basic earnings per share Diluted earnings per share First Quarter Second Quarter (dollars in thousands, except per share data) Third Quarter Fourth Quarter 2006 $ $ $ $ 79,781 38,334 41,447 908 40,539 63 10,233 -0- 35,593 15,242 2,304 12,938 0.19 0.19 $ $ $ $ 81,693 40,400 41,293 4,298 36,995 19 11,047 (270) 33,492 14,839 2,613 12,226 0.18 0.17 $ $ $ $ 85,457 43,179 42,278 3,038 39,240 5 12,385 (1,283) 34,725 18,188 2,796 15,392 0.22 0.22 $ $ $ $ 86,139 44,194 41,945 3,300 38,645 610 9,885 1,143 34,283 13,714 1,316 12,398 0.17 0.17 Average shares outstanding Average shares outstanding assuming dilution 69,469,709 69,918,151 69,653,432 70,037,609 70,875,018 71,177,930 73,026,948 73,362,224 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 First Quarter Second Quarter Third Quarter Fourth Quarter (dollars in thousands, except per share data) 2005 $ $ $ $ 75,637 30,705 44,932 1,744 43,188 485 -0- -0- 10,955 -0- 35,393 19,235 4,016 15,219 0.22 0.22 $ $ $ $ 77,540 33,900 43,640 3,000 40,640 -0- 3,090 1,991 12,068 -0- 35,072 22,717 4,879 17,838 0.26 0.26 $ $ $ $ 79,248 36,214 43,034 2,850 40,184 34 -0- -0- 11,526 2,704 33,599 15,441 2,445 12,996 0.19 0.19 $ $ $ $ 79,643 37,799 41,844 1,034 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 44 First Commonwealth FinanCial Corporation and subsidiaries SELECTED FINANCIAL 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. 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 (Gain) loss on extinguishment of debt, net 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 2006 333,070 166,107 166,963 11,544 155,419 697 -0- -0- 43,550 -0- -0- -0- (410) 138,093 61,983 9,029 52,954 $ $ $ $ 0.75 0.680 70,766,348 $ $ 0.74 0.680 71,133,562 $ 6,043,916 $ 1,723,191 $ 3,783,817 $ 42,648 $ 4,326,440 $ $ $ $ -0- 108,250 485,170 571,361 0.89% 9.76% 86.47% 90.67% 9.08% Years Ended December 31, (dollars in thousands, except share data) 2005 2004 2003 2002 $ $ 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 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 0.83 $ $ 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 $ 6,026,320 $ 1,939,743 $ 3,624,259 $ 39,492 $ 3,996,552 $ $ $ $ -0- 108,250 691,494 521,045 0.94% 10.89% 89.70% 80.12% 8.60% $ 6,198,478 $ 2,240,477 $ 3,514,833 $ 41,063 $ 3,844,475 $ $ $ $ -0- 108,250 731,324 531,978 0.66% 7.82% 90.36% 109.32% 8.47% $ 5,189,195 $ 2,073,430 $ 2,824,882 $ 37,385 $ 3,288,275 $ $ $ $ -0- 75,304 718,668 430,946 1.12% 12.95% 84.77% 69.44% 8.68% $ 4,524,743 $ 1,680,609 $ 2,608,634 $ 34,496 $ 3,044,124 35,000 $ $ -0- $ 544,934 $ 401,390 0.96% 11.09% 84.56% 80.67% 8.64% 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, 2006, 2005 and 2004, and should be read in conjunction with the Consolidated Financial statements and related footnotes. forward-looking statements This report contains forward-looking statements that describe First Commonwealth’s future plans, strategies and expectations. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. they often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond the control of First Commonwealth and which may cause actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Such risks and uncertainties include, among other things: • Competitive pressures among depository and other financial institutions nationally and in our market areas may increase significantly. • adverse changes in the economy or business conditions, either nationally or in our market areas, could increase credit-related losses and expenses and/or limit growth. • increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and related expenses. • our inability to manage growth effectively, including the successful expansion of our customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects. • Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses. • The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment. • Our continued growth will depend in part on our ability to enter new markets successfully and capitalize on other growth opportunities. 46 • Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations. • Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers’ businesses. In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. First Commonwealth undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 and goodwill and other intangible assets 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. 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 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations 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 trends and conditions, all of which may be susceptible to significant change. To the extent that actual outcomes differ from estimates, additional provisions 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 statements of Financial Condition. Classified loans on the primary watch list are analyzed to determine the level of inherent loss in the credits under current circumstances. the allowance 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 and senior management within First Commonwealth. The process of determining the allowance also considers special circumstances which may warrant an additional allowance. the additional allowance may be needed to cover specific factors such as changes in portfolio risk or concentrations of credit and economic conditions. Portfolio risk includes unusual changes or recent trends in specific portfolios such as unexpected changes in the trends or levels of delinquency, unusual repossession activity or large levels of unsecured loans in a portfolio. First Commonwealth also maintains an unallocated allowance. Although the unallocated allowance was significantly reduced during 2004 as a result of methodology enhancements, the unallocated allowance is still used to cover any factors or conditions that may cause a potential credit loss but are not specifically identifiable or considered in the methodology defined above. These factors include, but are not limited to, potential judgment or data errors or factors inherently uncertain 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 used in determining the fair value of assets and liabilities acquired in past acquisitions are 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. the fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third-party sources, when available. When third-party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes. Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually and written down and charged to results of operations 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 and are periodically evaluated for impairment. as of december 31, 2006, goodwill was not considered impaired; however, changing economic conditions could result in impairment, which could adversely affect earnings in future periods. Results of operations—2006 compared to 2005 Executive Summary The year 2006 was extremely challenging for the banking industry and First Commonwealth. Short-term interest rates increased as a result of increases by the Federal reserve, while market-driven longer-term interest rates increased at a slower pace causing the flat and inverted yield curve environment. This resulted in net interest margin compression causing First Commonwealth’s main source of income to come under pressure. as a result of this yield curve environment, First Commonwealth has deployed funds from maturities and repayments of investment securities primarily to reduce borrowings. This strategy resulted in the reduction of interest-earning assets and expansion in the net interest margin but culminated in the decline of net interest income and net income. net income was $53.0 million in 2006, a decrease of $4.9 million from the 2005 results of $57.8 million. diluted earnings per share were $0.74 for 2006 compared to $0.83 for 2005. return on average assets was 0.89% and return on average equity was 9.76% during 2006 compared to 0.94% and 10.89%, respectively for 2005. During the year, First Commonwealth completed the acquisition of Laurel Capital Group (“Laurel Capital”) adding eight new branches in addition to opening three new offices thereby expanding its retail footprint in the Pittsburgh market. The Laurel acquisition during the third quarter of 2006 expanded First Commonwealth’s market presence in higher potential growth and more densely populated markets. earnings for 2006 included a $6.5 million decline in net interest income, a $2.9 million increase in the provision for credit losses, a $1.3 million increase in service charges on deposit accounts, a $1.1 million decrease in other operating income, a $1.1 million increase in net occupancy expense and a $1.9 million reduction in other operating expenses. A lower effective income tax rate also contributed to net income for 2006. 47 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations The following table illustrates the impact on diluted earnings per share of changes in certain components of net income for 2006 compared to 2005 and 2005 compared to 2004: Net income per diluted 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 operating income Salaries and employee benefits Occupancy and equipment costs Intangible amortization restructuring charges merger and integration charges Extinguishment of debt Other operating expenses (a) Applicable income taxes Net income per diluted share 2006 vs. 2005 $ 0.83 (0.14) (0.04) 0.12 (0.17) (0.03) (0.02) (0.01) 0.03 (0.01) 0.00 0.08 0.00 0.01 0.03 0.06 0.74 $ 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 (a) Includes $0.01 per diluted share for the 2006 vs. 2005 impact and $0.03 per diluted share for the 2005 vs. 2004 impact for plastic card interchange expense related to the merchant services business sold in 2005. 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. the amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a fully tax equivalent basis, to average earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretax equivalent amounts based on the marginal corporate Federal tax rate of 35%. The tax equivalent adjustment to net interest income for 2006 was $14.6 million compared to $13.6 million in 2005. Net interest income decreased $6.5 million in the 2006 period compared to 2005 primarily because costs on interest-bearing liabilities increased more than income earned on interest-bearing assets. interest income increased $21.0 million in 2006 over 2005 as the yield on total interest-earning assets increased 64 basis points (0.64%) from 5.70% to 6.34% which was partly offset by a $231.3 million decline in average interest-earning assets. Interest expense increased $27.5 million in 2006 from 2005 as the rate paid on total interest-bearing liabilities increased 69 basis points (0.69%) from 2.70% to 3.39% which was partly offset by a $229.5 million decrease in average interest-bearing liabilities. 48 The net interest margin in 2006 increased three basis points (0.03%) to 3.31% from the 3.28% reported in 2005. The year-to-year increase in the margin was due primarily from the balance sheet positioning strategy of limiting the reinvestment of investment securities proceeds and reducing borrowings. This strategy was in response to the flat and inverted yield curve environment. First Commonwealth uses simulation models to help manage exposure to changes in interest rates. A discussion of the effects of changing interest rates is included in the “interest sensitivity” section of this discussion. interest and fees on loans increased $26.6 million in 2006 compared to 2005 primarily due to a 56 basis point (0.56%) rise in the yield on loans from 6.36% to 6.92% and a $109.5 million increase in average loans. Loan balances increased was primarily due to the laurel acquisition. First Commonwealth continues 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 continues to be a top small business lender in western and Central pennsylvania. interest income on investments decreased $5.7 million in 2006 from 2005 primarily due to a $339.7 million decline in the average balance of investment securities partly offset by an increase in investment yields. As mentioned previously, due to the relatively flat yield curve, First Commonwealth has limited the reinvestment of investment securities proceeds in 2006 and reduced borrowings. 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 agency securities. Interest on deposits increased $29.4 million in 2006 over 2005 due to higher rates paid on deposits and increased balances. Deposits increased primarily due to the Laurel acquisition. Throughout 2006, customers registered a preference for time deposits due to the rising rate environment. Average interest-bearing deposits rose $107.4 million in 2006 compared to 2005, with increases recorded in interest-bearing demand deposits ($21.5 million) and time deposits ($246.4 million) and decreases in savings deposits ($160.4 million). The cost of deposits rose 66 basis points (0.66%) from 1.98% in 2005 to 2.64% in 2006. 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 customers with the competitive rates they are looking for while also minimizing its cost of funds. Interest expense on short-term borrowings increased $1.1 million during 2006 from 2005 due to a 143 basis point (1.43%) increase in rates, which offset the $228.8 million decline in average volume. Interest expense on long-term debt decreased $3.0 million in 2006 compared to 2005 due to declining average balances of $108.2 million that offset the 21 basis point (0.21%) rise in rates. The significant increase in short-term rates was due to the Federal Reserve increasing First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations short-term interest rates four times during 2006. In December 2006, First Commonwealth refinanced $58.9 million of FHLB long-term debt with short-term borrowings. This transaction will help mitigate the bank’s exposure to a falling rate environment. As stated earlier, due to the relatively flat yield curve, First Commonwealth has limited the reinvestment of investment securities proceeds in 2006 and reduced both short-term borrowings and long-term debt. 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: average Balance assets Interest-earning assets: 1,878 Interest-bearing deposits with banks 281,823 Tax free investment securities 1,487,267 Taxable investment securities 2,854 Federal funds sold loans, net of unearned income (b)(c)(d) 3,707,233 5,481,055 Total interest-earning assets $ noninterest-earning assets: Cash allowance for credit losses other assets Total noninterest-earning assets total assets 79,509 (40,510) 452,915 491,914 $ 5,972,969 average Balance sheets and net interest analysis (dollars in thousands) 2005 Income/ Expense Average Balance Yield or Rate (a) Average Balance 2006 income/ yield or expense Rate (a) 2004 Income/ Yield or Expense Rate (a) $ 99 12,876 71,215 142 248,738 333,070 5.27% $ 7.03 4.79 4.99 6.92 6.34 807 279,339 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 80,716 (41,834) 430,179 469,061 $ 6,181,421 74,559 (41,199) 364,092 397,452 $ 5,838,301 liabilities and shareholders’ equity Interest-bearing liabilities: Interest-bearing demand deposits (e) Savings deposits (e) Time deposits Short-term borrowings Long-term debt Total interest-bearing liabilities $ 584,717 1,138,579 1,889,731 568,327 724,846 4,906,200 $ 10,251 21,496 76,707 25,448 32,205 166,107 1.75% $ 1.89 4.06 4.48 4.44 3.39 563,254 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 1,141,059 1.45 1,513,663 3.34 796,591 3.05 4.23 868,784 4,858,769 2.70 $ 2,229 11,491 45,170 11,989 39,811 110,690 0.41% 1.01 2.98 1.51 4.58 2.28 Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (e) other liabilities shareholders’ equity Total noninterest-bearing 493,790 30,526 542,453 funding sources total liabilities and shareholders’ equity 1,066,769 $ 5,972,969 Net Interest Income and Net Yield on Interest-Earning Assets 488,305 26,062 531,318 1,045,685 $ 6,181,421 452,701 32,614 494,217 979,532 $ 5,838,301 $ 166,963 3.31% $ 173,450 3.28% $ 167,335 3.30% (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate. (b) Average balance includes loans held for sale. (c) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (d) Loan income includes net loan fees of $4.6 million in 2006, $4.3 million in 2005 and $3.5 million in 2004. (e) 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. 49 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations 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 (dollars in thousands) 2006 change from 2005 change Due change Due to Rate (a) total Change 2005 Change from 2004 Change due Change due to Volume to rate (a) Interest-earning assets: Interest-bearing deposits with banks Tax-free investment securities Taxable investment securities Federal funds sold loans total interest income Interest-bearing liabilities: Interest-bearing demand deposits Savings deposits Time deposits Short-term borrowings Long-term debt Total interest expense net interest income total change $ 70 177 (5,874) (19) 26,648 21,002 4,989 2,611 21,784 1,143 (3,038) 27,489 $ (6,487) to Volume $ 39 174 (14,406) (70) 6,965 (7,298) 200 (2,332) 8,235 (6,977) (4,576) (5,450) $ (1,848) $ 31 3 8,532 51 19,683 28,300 4,789 4,943 13,549 8,120 1,538 32,939 (4,639) $ (5) $ 1,252 180 155 32,461 34,043 3,033 7,394 9,753 12,316 (4,568) 27,928 6,115 $ (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) (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 To provide for the risk of loss inherent in extending credit, First Commonwealth maintains an allowance for credit losses. the determination of the allowance by management is 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 is an amount added to the allowance against which credit losses are charged. The provision for credit losses increased $2.9 million in 2006 over 2005 as a result of deterioration in the commercial loan category. Nonperforming loans as a percentage of total loans outstanding remained unchanged at 0.32% as of December 31, 2006 compared to December 31, 2005. The allowance for credit losses was $42.6 million at year-end 2006, which represents a ratio of 1.15% of average loans outstanding compared to 1.10% reported at December 31, 2005. net credit losses for 2006 increased $168 thousand over 2005. Net credit losses as a percentage of average loans outstanding remained unchanged in 2006 compared to 2005 at 0.28%. For an analysis of credit quality, see the “Credit review” section of this discussion. 50 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations The following table presents an analysis of the consolidated allowance for credit losses and includes $1.4 million in losses on loans transferred into the held for sale category in 2006: summary of loan loss experience (dollars in thousands) 2006 $ 3,783,817 $ 3,707,233 2005 2004 2003 2002 $ 3,624,259 $ 3,514,833 $ 2,824,882 $ 2,608,634 $ 3,597,705 $ 3,251,645 $ 2,640,935 $ 2,597,862 $ 39,492 1,979 4,966 2,211 50 522 2,660 54 10,463 848 590 -0- -0- 45 -0- 1,483 8,980 1,387 10,367 11,544 $ 41,063 -0- $ 37,385 4,983 $ 34,496 3,109 $ 34,157 -0- 4,920 2,801 598 965 2,103 59 11,446 601 550 -0- -0- 93 3 1,247 10,199 -0- 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 -0- 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 -0- 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 -0- 11,884 12,223 $ 42,648 $ 39,492 $ 41,063 $ 37,385 $ 34,496 0.28% 1.15% 0.28% 1.10% 0.29% 1.26% 0.49% 1.42% 0.46% 1.33% loans outstanding at end of year average loans outstanding 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 Credit losses on loans transferred to held for sale net Credit losses Provision charged to expense balance, end of year ratios: Net credit losses as a percentage of average loans outstanding Allowance for credit losses as a percentage of average loans outstanding Non-Interest Income The following table presents the components of non-interest income for the years ended december 31: 2006 2005 (dollars in thousands) 2004 non-interest income net securities gains (losses) $ trust income Service charges on deposit accounts insurance commissions Income from bank owned life insurance Card related interchange income Other operating income subtotal Gain on sale of branches Gain on sale of merchant services business merchant discount income Total non-interest income 5,801 16,967 2,804 5,742 5,583 6,653 44,247 697 $ (7,673) $ 4,077 5,254 5,526 14,975 15,710 3,387 3,423 5,157 5,391 3,579 4,881 7,582 7,795 44,011 35,053 -0- 11,832 -0- -0- -0- -0- 3,638 $ 44,247 $ 50,225 $ 47,649 1,991 1,349 Total non-interest income decreased $6.0 million in 2006 over 2005. This decrease was primarily due to one time gains recorded in 2005 of $11.8 million from the sale of branches and $2.0 million from the sale of a merchant services business, which was offset by losses on the sales of securities of $7.7 million. trust income rose $275 thousand in 2006 from 2005 as a result of the rebound in market values of trust accounts over prior year levels. 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 customers. Service charges on deposit accounts are the most significant component of non-interest income and increased $1.3 million during 2006 compared to 2005. This increase in service charges on deposits was the result of the continued success of the High 51 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations Performance Checking products for consumer and business customers as well as the 2006 acquisition of laurel. in addition, First Commonwealth increased fee structures on deposit services during the third quarter of 2006. Management strives to implement reasonable and competitive fees for deposit services and closely monitors collection of those fees. insurance commissions declined by $619 thousand in 2006 compared to 2005 levels primarily due to the reduced retail brokerage volumes and a reduction in commercial property and casualty business that was outsourced to a third party. 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 grow revenues by meeting the insurance needs of customers. First Commonwealth uses bank owned life insurance (BOLI) to help offset the rising cost of employee benefits. Income from boli was $5.7 million and $5.4 million for the years ended December 31, 2006 and 2005, respectively. The increase was due to higher returns as well as an increase of $6.4 million of boli acquired from laurel. Card related interchange income rose $702 thousand in 2006 from 2005 due to additional volume related to card usage and the migration of business accounts from the consumer debit card product. Card related interchange income includes income from debit, credit and atm cards that are issued to consumers and businesses. Other operating income decreased $1.1 million during 2006 compared to 2005 due to lower gains recorded on the sales of mortgage and student loans and other real estate owned. Non-Interest Expense The following table presents the components of non-interest expense for the years ended December 31: 2006 2005 (dollars in thousands) 2004 non-interest expense Salaries and employee benefits Net occupancy expense Furniture and equipment expense Data processing expense Pennsylvania shares tax expense Intangible amortization (Gain) loss on extinguishment of debt, net Other operating expenses subtotal restructuring charges merger and integration charges Total non-interest expense $ 72,988 $ 73,522 $ 68,916 9,656 11,688 3,808 4,532 1,443 12,077 11,703 3,456 5,420 2,607 10,988 11,578 3,535 4,876 2,262 (410) -0- 29,842 137,683 29,495 32,892 162,430 -0- 2,125 $ 137,683 $ 143,954 $ 164,555 31,756 138,517 5,437 -0- -0- -0- Total non-interest expense for 2006 decreased $6.3 million to $137.7 million from $144.0 million reported in 2005 mainly due to the reductions in restructuring charges included in 2005 and other operating expenses. 52 Salaries and employee benefits declined $534 thousand from the $73.5 million reported in 2005 to $73.0 million in 2006. Salary expense decreased $1.8 million for the twelve month period ended December 31, 2006 but was offset by an $860 thousand increase in healthcare costs and a $644 thousand increase in retirement costs. Salaries and employee benefits also included additional costs from the laurel acquisition on August 28, 2006. Full-time equivalent employees were 1,579 at the end of 2006 compared to 1,598 at the end of 2005. Net occupancy expense increased $1.1 million during 2006 to $12.1 million compared to $11.0 million during 2005 primarily due to the addition of retail branches. During 2006, First Commonwealth opened three new offices and acquired eight offices through its merger with Laurel. Additionally, an adjustment of $463 thousand was made in the first quarter of 2006 to occupancy expense due to an ongoing monitoring of leases. Pennsylvania shares tax expense increased $544 thousand in 2006 from 2005 due to the higher value of FCb’s equity, which is calculated on a six-year moving average. FCB’s equity has increased due to higher net income and prior acquisitions. Intangible amortization increased $345 thousand in 2006 compared to 2005 as a result of the Laurel acquisition. Intangible amortization consists primarily of amortization of core deposit intangibles. restructuring charges declined $5.4 million in 2006. the 2005 period included this $5.4 million cost related to the reorganization of First Commonwealth’s organizational structure and related personnel changes. a net gain of $410 thousand was recorded in conjunction with refinancing $161.3 million of longer term FHLB advances with shorter term borrowings. Other operating expenses declined $1.9 million in 2006 compared to 2005 primarily due to a reduction of $1.3 million in other professional fees and the elimination of plastic card interchange expense totaling $884 thousand. Plastic card interchange expense is no longer incurred since the merchant services business was sold in 2005. Income Tax Income tax expense decreased $4.2 million for 2006 from 2005 primarily because pretax income for 2006 decreased $9.1 million compared to 2005. First Commonwealth’s effective tax rate was 14.6% in 2006 compared to 18.6% in 2005. This reduction in the effective tax rate was mainly due to a larger percentage of pretax income consisting of tax-free income in 2006 versus 2005. Results of operations—2005 compared to 2004 Net income was $57.8 million or $0.83 per diluted share, return on average assets was 0.94% and return on average equity was 10.89% for 2005. This compares with net income of $38.7 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations million or $0.58 per diluted share, return on average assets of 0.66% and return on average equity of 7.82% in 2004. Non-interest income increased $2.6 million in 2005 over 2004 as a result of one time net gains on asset sales. The loan portfolio grew year over year by $109.4 million, deposits increased $152.1 million while time deposits showed the greatest growth. the net interest margin contracted as a result of compression in interest rates between short-term rates and long-term rates during 2005. Short-term interest rates increased as a result of eight increases by the Federal reserve, while market driven longer term interest rates remain mostly unchanged at historical low levels causing a flat yield curve. Earnings for 2005 were impacted by net securities losses, gains from the sale of branch offices and a gain from the sale of the company’s merchant services business, as well as restructuring charges related to the reorganization of First Commonwealth’s organizational structure and related personnel changes. net interest income increased to $173.5 million for 2005 compared with $167.3 million for 2004. Higher average balances and yields in interest-earning assets increased interest income during 2005 compared with 2004. For 2005, average balances and rates of interest-bearing liabilities increased resulting in higher interest expenses. average loans increased $346.1 million for the twelve months ending december 31, 2005, while average investment securities decreased $74.9 million over the same period in 2004. Interest and fees on loans increased $32.5 million during 2005 compared with 2004, due to increased volumes of loans and higher yields. interest on investment securities increased $1.4 million during 2005 from 2004 mainly due to higher yields. Average interest-bearing liabilities for 2005 increased $277.0 million from 2004. Average interest-bearing demand deposits and savings deposits increased $182.5 million and provided a low cost source of funding. this increase was attributed to the acquisition of Ga Financial, inc. in may 2004, the addition of new branches as well as advertising and promotional efforts. Average time deposits increased $129.7 million. The increase in interest rates and growth of interest-bearing deposits resulted in an increase in interest expense on deposits of $20.2 million. Average short-term borrowings remained stable in 2005 from 2004, while average long-term debt declined $35.8 million during 2005 compared to 2004. Due to the relatively flat yield curve, First Commonwealth limited the reinvestment of investment securities proceeds and reduced borrowings. The net interest margin was 3.28% for 2005 compared with 3.30% for 2004. the change was mainly attributable to interest rates on interest-bearing liabilities rising more than the yields on interest-earning assets. net securities losses of $7.7 million were recorded in 2005 compared to net securities gains of $4.1 million in 2004. First Commonwealth funded the deposits associated with the branch sale in the fourth quarter of 2005 by selling securities with a low average yield and a short life and incurred a loss of $2.7 million. Also during 2005, First Commonwealth repositioned its mortgage backed securities investment portfolio which is expected to reduce the company’s rate exposure and improve net interest income and incurred a $5.5 million loss on the sale. Service charges on deposit accounts increased $735 thousand in 2005 from 2004 due to the continued success of the high Performance Checking products for consumer and business customers as well as the full year inclusion of the Ga Financial, inc. acquisition which occurred in may 2004. The 2005 period included an $11.8 million gain on the sale of branch offices. 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, more densely populated Pittsburgh market. The branch sales were considered to be related to continuing operations. The 2005 period also included a gain of $2.0 million on the sale of First Commonwealth’s merchant services business. the decrease of $2.3 million in merchant discount income during 2005 compared to 2004 was due to this sale. Card related interchange income increased $1.3 million in 2005 from 2004 due to the acquisition of Ga Financial, inc. and additional volume related to card usage. Non-interest expense totaled $144.0 million for 2005, a decrease of $20.6 million from 2004 primarily due to a $29.5 million loss on the extinguishment of debt that occurred in 2004, partly offset by the $5.4 million in restructuring charges incurred in 2005. Increases in salaries and employee benefits, net occupancy expense and intangible amortization during 2005 over 2004 were due in large part to the acquisition of GA Financial, inc. in may 2004. Applicable income taxes in 2005 increased $9.6 million from $3.7 million reported in 2004. Pretax income for 2004 included a $29.5 million loss on the extinguishment of debt related to the prepayment of FHLB advances. 53 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations 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, 2006: Footnote Reference 1 Year or Less After 1 But Within 3 Years After 3 but Within 5 Years After 5 Years Total (dollars in thousands) Federal Home Loan Bank advances Repurchase agreements Subordinated debentures esop loan Operating leases total contractual obligations 24 24 23 24 19 $ 56,228 -0- -0- 2,000 3,309 61,537 $ 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 21 (Interest-Bearing Deposits) to the Consolidated Financial statements. The following table summarizes First Commonwealth’s off-balance sheet commitments as of December 31, 2006. 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. (dollars in thousands) Commitments to extend credit standby letters of credit Total lending-related commitments Footnote reference 18 18 amount $ 1,032,563 80,520 $ 1,113,083 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, 2006. 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. 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 letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. 54 $ 267,325 20,000 -0- 4,000 5,787 $ 297,112 liquidity $ 110,800 -0- -0- 4,000 4,070 $ 118,870 $ 7,500 -0- 108,250 1,600 20,704 $ 138,054 $ 441,853 20,000 108,250 11,600 33,870 $ 615,573 Liquidity refers to 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 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 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 (“alCo”). 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. Total deposits increased $329.9 million or 8.3% for the year primarily from the Laurel acquisition. Noninterest-bearing deposits increased $30.8 million, while interest-bearing deposits increased $299.1 million with the largest increases being recorded in the time deposit category. Savings and mmda accounts decreased $64.0 million or 3.8% as clients registered a preference for time deposits with the rising rate First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations environment. Noncore deposits, which are time deposits in denominations of $100 thousand or more, increased $184.8 million in 2006 and represents 18.3% of total deposits at december 31, 2006. 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, 2006, 2005 and 2004 had remaining maturities as follows: Maturity Distribution of large certificates of Deposit (dollars in thousands) 2005 2004 2006 amount % amount % amount % remaining maturity: 3 months or less over 3 months through 6 months over 6 months through 12 months over 12 months total $ 321,137 148,843 183,645 139,127 $ 792,752 40% 19 23 18 100% $ 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% The following is a schedule of loans by classification for the five years ended December 31: loans by classification (dollars in thousands) 2006 amount % 2005 2004 2003 2002 amount % amount % amount % amount % Commercial, financial, agricultural and other $ 861,427 92,192 real estate–construction 935,635 real estate–commercial 1,346,503 real estate–residential 547,253 loans to individuals 864 net leases 23% 2 25 36 14 -0- $ 729,962 78,279 987,798 1,213,223 610,648 4,468 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 Gross loans and leases unearned income total loans and leases net of 3,783,874 (57) 100% 3,624,378 (119) 100% 3,515,085 (252) 100% 2,825,337 (455) 100% 2,609,440 (806) 100% unearned income $ 3,783,817 $ 3,624,259 $ 3,514,833 $ 2,824,882 $ 2,608,634 Marketable securities that First Commonwealth holds in its investment portfolio are an additional source of liquidity. These securities are classified as “securities available for sale” and 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, 2006, securities available for sale had an amortized cost of $1.7 billion and a fair value of $1.6 billion. Gross unrealized gains were $12.9 million and gross unrealized losses were $24.3 million. 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, 2006: 55 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 (dollars in thousands) u.s. treasury and other Government Corporations and Agencies $ $ 6 894 378 43 1,321 states and Political Subdivisions $ 1,000 8,958 40,868 26,079 $ 76,905 Other Securities $ $ 275 -0- -0- -0- 275 total Amortized Cost $ $ 1,281 9,852 41,246 26,122 78,501 Maturity Distribution of securities available for sale at amortized cost (dollars in thousands) u.s. treasury and other Government Corporations and Agencies $ 141,049 155,903 303,365 609,424 $ 1,209,741 states and Political Subdivisions $ -0- 4,005 40,037 173,231 $ 217,273 Other Securities $ -0- -0- -0- 229,076 $ 229,076 total Amortized Cost $ 141,049 159,908 343,402 1,011,731 $ 1,656,090 weighted Average Yield* 6.95% 7.30% 7.21% 6.39% 6.94% weighted Average Yield* 3.50% 4.67% 4.25% 5.52% 5.00% 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. exceed interest-sensitive liabilities (“ISL”) during the prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. 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 cumulative gap at the 365-day repricing period was negative in the amount of $1.5 billion or 25.25% of total assets at december 31, 2006. The primary components of ISA include adjustable rate loans and investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and borrowings. 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”) the following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated: 56 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations 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 $ 1,278,277 223,603 985 1,502,865 542,030 1,703,163 550,284 2,795,477 $ (1,292,612) 2006 (dollars in thousands) 91-180 Days 181-365 Days $ 209,613 123,501 -0- 333,114 484,103 -0- 4,464 488,567 $ (155,453) $ 352,700 167,478 -0- 520,178 554,257 -0- 44,022 598,279 $ (78,101) cumulative 0-365 Days $ 1,840,590 514,582 985 2,356,157 1,580,390 1,703,163 598,770 3,882,323 $ (1,526,166) 0.54 21.39% 0.68 2.57% 0.87 1.29% 0.61 25.25% 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 (dollars in thousands) 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% 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 statements of financial condition 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 over a 12 month time frame 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, 2006, indicated that a 200 basis point (2.00%) increase in interest rates would decrease net interest income by 119 basis points (1.19%) below the base case scenario and a 200 basis point (2.00%) decrease in interest rates would decrease net interest income by 147 basis points (1.47%) below the base case scenario over the next twelve months, both within policy limits. First Commonwealth’s 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 57 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations of currently known and forecasted economic conditions and to establish strategies which provide First Commonwealth with an appropriate return for the assumption of those risks. the alCo strategies are established by First Commonwealth’s senior management. First Commonwealth terminated its interest rate swaps during the fourth quarter of 2005. however, the alCo continues to evaluate the use of additional derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities. Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at december 31, 2006 were as follows (dollars 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 $ 374,790 91 28,122 92,495 23,300 $ 518,798 $ 170,966 200 20,915 197,516 18,182 $ 407,779 150,175 257,604 $ 407,779 $ 111,793 -0- 43,155 645,624 162,105 $ 962,677 256,619 706,058 $ 962,677 Total $ 657,549 291 92,192 935,635 203,587 $ 1,889,254 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 58 credits by a committee consisting of senior lenders of First Commonwealth as well as the asset Quality manager and a member of First Commonwealth’s board of directors. Commercial and industrial loans are generally granted to small and middle market customers for working capital, operations, and expansion or asset acquisition purposes. Operating cash flows of the business enterprise are identified as the principal source of repayment, with business assets held as collateral. Collateral margins and loan terms are based upon the purpose and structure of the transaction as set forth in loan policy. Commercial real estate loans are granted for the acquisition or improvement of real property. Generally, commercial real estate loans do not exceed 75% of the appraised value of property pledged to secure the transaction. Repayment of such loans is expected from the operations of the subject real estate and is carefully analyzed prior to approval. Real estate construction loans are granted for the purposes of constructing improvements to real property, both commercial and residential. On-site inspections are conducted by qualified individuals prior to periodic permanent project financing, which is generally committed prior to the commencement of construction financing. Real estate loans secured by 1-4 family residential housing properties are granted subject to statutory limits in effect for the bank regarding the maximum percentage of appraised value of the mortgaged property. Residential loan terms are normally established in compliance with secondary market requirements. Residential mortgage portfolio interest rate risk is controlled by secondary market sales, variable interest rate loans and balloon maturities. Loans to individuals represent financing extended to consumers for personal or household purposes, including automobile financing, education, home improvement and personal First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations 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 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 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. 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 Commercial, industrial, financial, agricultural and other real estate–construction real estate–commercial real estate–residential loans to individuals Lease financing receivables unallocated total 2006 17,547 1,074 14,090 4,872 3,391 15 1,659 42,648 $ $ 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 indicates 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. allocation of the allowance for credit losses (dollars in thousands) 2005 2004 2003 2002 $ 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 $ Allowance as percentage of average total loans 1.15% 1.10% 1.26% 1.42% 1.33% The increase in the allowance for 2006 was primarily due to a higher provision for credit losses compared to 2005 and the addition of $2.0 million from the laurel acquisition. the decrease in the allowance for credit losses in 2005 was due to 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. Management continued to monitor the performance of a $29.0 million commercial credit relationship, which was previously disclosed to have deteriorated in the second quarter of 2006. this credit was secured by commercial real estate and equipment and was not 90 days past due or on a nonaccrual status at december 31, 2006. 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 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. 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. Restructured 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. 59 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations loans on nonaccrual basis troubled debt restructured 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 effects on interest income Due to nonaccrual (dollars in thousands) 2006 $ 12,043 160 $ 12,203 0.32% 349.49% 1,507 3,246 706 2,540 $ $ $ 2005 2004 2003 $ 11,391 173 $ 11,564 0.32% 341.51% $ 1,655 $ 2,344 506 $ 1,838 $ 10,732 183 $ 10,915 0.31% 376.21% $ 1,814 $ 1,757 307 1,450 $ $ 12,459 195 $ 12,654 0.45% 295.44% $ 1,866 $ 1,962 1,185 777 $ 2002 $ 23,450 207 $ 23,657 0.91% 145.82% $ 1,651 $ 1,542 286 $ 1,256 the reduction of income due to troubled debt restructured loans was less than $50 thousand in any year presented. Nonperforming loan levels remained relatively stable from december 31, 2005 to december 31, 2006. 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 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 as well as the 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 at december 31, 2006, shareholders’ equity was $571.4 million, a $50.3 million increase from december 31, 2005. This increase was primarily due to net income of $53.0 million and common stock of $39.6 million issued in the laurel acquisition offset by dividends declared of $49.1 million during 2006. A strong capital base provides First Commonwealth with a foundation to expand lending, to protect depositors, and to provide for growth while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects. In consideration of these factors, management’s primary emphasis with respect to First 60 Commonwealth’s capital position is to maintain an adequate and stable ratio of equity to assets. see note 32 (regulatory Restrictions and Capital Adequacy) to the Consolidated Financial Statements for an analysis of 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 are credit risk, market risk, liquidity risk, compliance/legal risk, operational risk, reputation risk and strategic risk. Credit risk, market risk and liquidity risk were previously discussed. The remaining major risk categories are defined as follows: compliance/legal risk is the risk arising from violations of, or noncompliance with laws, rules, regulations, prescribed practices, or ethical standards; operational risk is the threat created by inadequate information systems, operational problems, weak internal control systems, fraud, or any other unforeseen catastrophes; reputation risk is the risk to earnings or capital arising from negative public opinion; and strategic risk is 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. First Commonwealth embraces a risk management culture, which begins with the Risk Committee that provides oversight and monitoring of key risk areas. The Risk Committee has representation from all of the disciplines across the organization. This committee 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 First Commonwealth FinanCial Corporation and subsidiaries ManageMent’s Discussion anD analysis of financial conDition anD Results of opeRations 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 non-interest 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. 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 reviews external financial reporting and evaluates the internal controls and the disclosure process to ensure accuracy, completeness, and timeliness of these reports. management continually reviews the mitigants and controls to ensure their continuity. The Internal Audit Department has specific procedures to analyze and quantify risks in the seven major risk categories. 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. The Internal Audit Department schedule would be adjusted to address these higher risk areas developing within First Commonwealth. The Internal Audit Department prepares a consolidated Quarterly Risk Report based on the seven major risks. This report provides the Internal Audit Department’s overall observations on the effectiveness of the organization’s risk management, control, and governance process. The report is presented to the Audit Committee, Senior management and the board. 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. 61 First Commonwealth FinanCial Corporation and subsidiaries common stock information First Commonwealth is listed on the NYSE under the symbol “FCF.” As of February 22, 2007, there were approximately 20,500 holders of record of First Commonwealth’s common stock. 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 for each quarter during the last two fiscal years. high sale low sale $ 14.70 $ 14.61 $ 13.30 $ 14.11 $ $ $ $ 12.80 12.14 12.25 12.61 high sale low sale $ 15.40 $ 14.10 $ 14.70 $ 13.77 $ $ $ $ 13.39 12.73 12.90 12.63 Cash dividends per share $ $ $ $ 0.170 0.170 0.170 0.170 Cash dividends per share $ $ $ $ 0.165 0.165 0.165 0.170 period 2006 First Quarter second Quarter third Quarter Fourth Quarter period 2005 First Quarter second Quarter third Quarter Fourth Quarter 62 First Commonwealth FinanCial Corporation and subsidiaries First Commonwealth Financial Corporation Russell 2000 First Commonwealth Peer Group* first commonwealth financial corporation total return performance e u l a V x e d n I 200 150 100 50 period ending Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 First Commonwealth Financial Corporation russell 2000 First Commonwealth Peer Group* 100.00 100.00 100.00 104.73 79.52 106.18 136.27 117.09 140.92 153.93 138.55 161.11 135.87 144.86 155.72 12/31/06 148.46 171.47 165.91 * First Commonwealth Peer Group includes F.N.B. Corporation, Fulton Financial Corporation, S&T Bancorp, Inc., Susquehanna bancshares, inc., and ameriserv Financial, inc. 63 Vision first commonwealth will be the financial services organization of first choice for our marketplace. 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, 2006. Annual Meeting The Annual Meeting of Shareholders will be held at: First Commonwealth Place 654 Philadelphia St., Indiana, PA On Monday, April 16, 2007 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. 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. 64 corporate information Corporate Description First Commonwealth Financial Corporation is a Pennsylvania corporation and a registered bank holding company engaged in the retail and commercial banking business through its wholly owned subsidiary, First Commonwealth Bank. Personal financial planning, employee benefit services, and investment and insurance products are also offered through First Commonwealth Financial Corporation’s wholly owned subsidiary, First Commonwealth Financial Advisors, and its indirect wholly owned subsidiary, First Commonwealth Insurance Agency. As of December 31, 2006, First Commonwealth had consolidated total assets of $6.0 billion, deposits of $4.3 billion and shareholders’ equity of $571.4 million. First Commonwealth Bank is a Pennsylvania-chartered commercial bank headquartered in Indiana, Pennsylvania. First Commonwealth Bank conducts business through 110 retail branch offices in the Pennsylvania counties of Allegheny, Armstrong, Beaver, Bedford, Blair, Butler, Cambria, Clearfield, Elk, Indiana, Jefferson, Lawrence, Somerset, Washington, and Westmoreland. First Commonwealth Bank offers a full range of financial services including general retail banking services such as demand, savings, and time deposits and mortgage, consumer installment, and commercial loans. 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 John J. Dolan President and Chief Executive Officer Gerard M. Thomchick Senior Executive Vice President and Chief Operating Officer Thaddeus J. Clements Senior Vice President, Strategic Resources William R. Jarrett Executive Vice President and Chief Risk Officer Sue A. McMurdy Executive Vice President and Chief Information Officer David R. Tomb, Jr., Esq. Senior Vice President, Secretary and Treasurer R. John Previte Senior Vice President, Investments Edward J. Lipkus III, CPA Senior Vice President, Chief Financial Officer and Controller For other information call our Convenience Banking Center at 1-800-711-BANK (2265) or visit our Web site: www.fcbanking.com Golden Tower Awards spirit of community service Awards JAnuARy ................................ BoB Polczynski JAnuARy ............................ AMy Will, Jill FRiTz FeBRuARy .................................... John DolAn FeBRuARy ...........MARk oResick, BRAD PeTeRson MARch....................................... ellen BeiBeR MARch.................. sonnie TRouT, Joyce GRAhAM APRil .............................................Alex liMA APRil ....................PATTie WenDel, MonA DoRko MAy ........................................... PAM MAuReR MAy ......................... PAul DoWDs, linDA sTiles June ...................................... DeBoRAh kRise June ....................... nAncy BARBeR, DonnA oTT July .................................... GReTchen TAyloR July ...................... BARB GeTTeMy, DoTTy RoDDy AuGusT ........................................lAuRie neAl AuGusT ...........Reese DouGhTy, MARilyn JAckson sePTeMBeR .....................................Joe WeiBle sePTeMBeR ........... JAMie PAGliARi, John FeRRARi ocToBeR ......................................... lisA kinG ocToBeR ...............cARlA cRisMAn, chAD yAncey noVeMBeR ................................... cRAiG TuMAs noVeMBeR ............. BeTTy sMAil, TAMMie DoWney DeceMBeR ............................. MeRissA DeVRies DeceMBeR ...... TeResA ThoMPson, GReTchen TAyloR First Commonwealth Financial Corporation old courthouse square 22 north sixth street indiana, Pennsylvania 15701-0400 (724) 349-7220 (800) 711-2265 www.fcbanking.com 

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