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