First Commonwealth Financial Corporation
Old Courthouse Square
22 North Sixth Street
Indiana, Pennsylvania 15701-0400
(724) 349-7220
(800) 711-2265
www.fcbanking.com
Annual Report 2009
A Message to Shareholders
Fellow Shareholders:
Certainly 2009 was a challenging year for all businesses, in particular for financial services. As I write this letter, there remains
uncertainty surrounding regulation in our industry and the economy continues to struggle in several areas. Despite these challenges,
First Commonwealth emerged from 2009 as a fundamentally strong company, with a keen focus on the future. I feel it is important to
not only summarize for you our most recent financial results, but also to outline the steps we are taking to ensure the ongoing success
of this institution. We believe that the future looks bright for First Commonwealth.
Fundamentally Strong
First, let me say that we were pleased to announce, concurrently with our year 2009 results, that Robert E. Rout has joined our executive
management team as Executive Vice President and Chief Financial Officer. What excites me most about the addition of Bob to our
team is the confidence that this 35-year banking veteran has shown in our company and our vision. Also, we have added a number
of other seasoned and talented individuals to our staff in the credit, wealth management and finance areas primarily due to market
disruptions in our footprint. The skills and expertise that these individuals bring with them will be of great benefit as our organization
continues to grow and evolve within an ever-changing competitive landscape.
Looking back on the past year, we saw strong growth across a number of areas of our business. In 2009:
• Average transaction and savings deposits were up 17%
• Total loans increased 5%
• Net interest income increased 9%
• Net interest margin improved 14 basis points
• Households increased by 3.9% in a market with slow growth and a declining population, which indicates that we are
winning customers away from the competition
While all these metrics point to an institution that is fundamentally strong, perhaps one of the most compelling metrics is our solid
capital base. Year-end capital ratios for First Commonwealth exceed regulatory “well capitalized” requirements and at December 31,
2009, our tangible capital equity ratio was 7.5%. Certainly this capital base provides First Commonwealth with a solid foundation
from which to move our business forward in 2010 and beyond.
Unfortunately, even with these strong growth results, we were disappointed to record a net loss of $20.1 million in 2009. This was
primarily due to the $100.6 million provision for credit losses and the $36.2 million charge in net impairment losses on pooled trust
preferred securities. After recording losses in the second and third quarters, we did return to profitability in the fourth quarter of 2009.
Navigating the Impact of Credit Quality
First Commonwealth continues to feel the stress of the challenging economic environment in our commercial loan and pooled trust
preferred securities portfolios.
Nonperforming loans at December 31, 2009 totaled $149 million, which represents 3.2% of the total loan portfolio. The majority of
our nonperforming loans are large, complex commercial relationships that by their nature take time to resolve, especially in this
recessionary economic environment. We are, however, fortunate not to have yielded to the temptation of participating in sub prime
lending activities and as a result, our consumer, home equity and residential mortgage portfolios are performing relatively well.
But we are not satisfied to simply contain problem loans. Rather, we have taken steps to implement safeguards against this type
of situation occurring in the future. Toward that end, today we have stricter lending standards, controls and policies that were put in
place over the past 12 months to ensure the quality of newly originated loans. More specifically we have:
• Created a strong and independent credit function under a single, highly-qualified leader
• Focused our loan origination efforts primarily within our core Pennsylvania markets
• Improved the balance between consumer and commercial loans
Lack of liquidity in the market for pooled trust preferred securities, credit rating downgrades and market uncertainties related to the
financial industry are the factors contributing to the impairment charges for our pooled trust preferred securities. Here too we have
modified policies, procedures and controls to prohibit future investments in these types of securities. At the current time we do not
believe that a fire-sale liquidation of these securities is the best strategy and we continue to monitor that market closely.
These were hard lessons in 2009, but we are confident that the aggressive actions we have taken will mitigate the risk facing First
Commonwealth in the future.
Future Driven
As we move into the new year, I am confident that we have built a solid financial and operational platform for future success. We intend
to leverage our accomplishments to thoroughly address the opportunities that lie before us.
Looking ahead to 2010, we are committed to further aligning the bank’s goals with shareholder interests. We will accomplish this by:
• Further improving sales and service execution
• Continuing to follow our conservative approach to capital preservation
• Further driving transaction and savings deposit growth, with a focus on the small business segment to reduce short-term
Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders will be held at:
First Commonwealth Place
654 Philadelphia St., Indiana, PA
on Wednesday, April 21, 2010 at 3:00 p.m. EST
Common Stock
First Commonwealth Financial Corporation common stock is listed on the New York Stock Exchange (NYSE) 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
BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310-1900
Telephone Inquiries: 1-866-203-5173
1-201-680-6578 (outside the U.S.)
1-800-231-5469 (Hearing Impaired—TDD)
E-Mail Address:
shrrelations@bnymellon.com
BNY Mellon Shareowner Services Website:
http://www.bnymellon.com/shareowner/isd
Send Certificates for Transfer to:
BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310-1900
Send Shareholder Inquiries and Address Changes to:
BNY Mellon Shareowner Services
PO Box 358015
Pittsburgh, PA 15252
Dividend Payments
Subject to the approval of the Board of Directors, quarterly cash dividends are paid in the months of February, May, August & November.
Dividend Reinvestment
First Commonwealth Financial Corporation’s direct stock purchase and 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 BNY Mellon Shareowner Services, at 1-866-203-
5173.
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
The accompanying Form 10 – K and other reports that First Commonwealth files with 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
includes important corporate governance information, including copies of the Corporation’s Code of Conduct and Ethics, Corporate
Governance Guidelines and charters for standing committees of the Board of Directors, as well as historical stock prices and dividends
declared, press releases, and other information of interest to shareholders.
First Commonwealth’s Chief Executive Officer has certified to the NYSE that, as of the date of the certification, he was not aware of and
violation by First Commonwealth of the 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, 2009.
Future Driven
As we move into the new year, I am confident that we have built a solid financial and operational platform for future success. We intend
to leverage our accomplishments to thoroughly address the opportunities that lie before us.
Looking ahead to 2010, we are committed to further aligning the bank’s goals with shareholder interests. We will accomplish this by:
• Further improving sales and service execution
• Continuing to follow our conservative approach to capital preservation
• Further driving transaction and savings deposit growth, with a focus on the small business segment to reduce short-term
borrowing dependency
• Balancing growth between consumer and middle-market commercial lending
• Reducing our out-of-market commercial real estate exposures
• Scaling down large individual credit relationships
• Maintaining a reasonable dividend payout ratio and building capital through retained earnings
Certainly none of this can be accomplished without a talented team of employees, a strong customer base and our loyal shareholders.
We are fortunate to have all three. Thank you for your continued support as we execute upon our strategic objectives. I look forward
to updating you on our future progress.
John J. Dolan, President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file Number 001-11138
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of incorporation or
organization)
22 NORTH SIXTH STREET INDIANA, PA
(Address of principal executive offices)
25-1428528
(I.R.S. Employer Identification No.)
15701
(Zip Code)
Registrant’s telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
COMMON STOCK, $1 PAR VALUE
Name of each exchange on which registered
NEW YORK STOCK EXCHANGE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes ‘ No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer È
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
Smaller reporting company ‘
Non-accelerated filer ‘
Accelerated filer ‘
The aggregate market value of the voting and non-voting common stock, par value $1 per share, held by non-affiliates of the registrant
(based upon the closing sale price on June 30, 2009) was approximately $513,059,181.
The number of shares outstanding of the registrant’s common stock, $1.00 Par Value as of February 25, 2010, was 85,626,568.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the annual meeting
of shareholders to be held April 21, 2010 are incorporated by reference into Part III.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX
PART I
ITEM 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4.
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchase of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .
ITEM 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
4
11
15
15
16
16
17
19
20
48
49
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
119
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
ITEM 13. Certain Relationships and Related Party Transactions, and Director Independence . . .
120
ITEM 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120
PART IV
ITEM 15. Exhibits, Financial Statements and Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123
2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts may constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements include, among others, statements regarding
our strategy, evaluations of our asset quality, future interest rate trends and liquidity, prospects for growth in
assets and prospects for future operating results. Forward-looking statements can generally be identified by the
use of 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.” Forward-looking statements
are based on assumptions of management and are only expectations of future results. You should not place undue
reliance on our forward-looking statements. Our actual results could differ materially from those projected in the
forward-looking statements as a result of, among others, the risk factors described in Item 1A of this report.
Forward-looking statements speak only as of the date on which they are made. We do not undertake any
obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the
forward-looking statements are made.
3
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. Business
Overview
First Commonwealth Financial Corporation (“First Commonwealth” or “we” or “us” or “our”) is a financial
holding company that is headquartered in Indiana, Pennsylvania. We provide a diversified array of consumer and
commercial banking services through our bank subsidiary, First Commonwealth Bank (“FCB” or the “Bank”).
We also provide trust and wealth management services and offer insurance products through FCB and our other
operating subsidiaries. At December 31, 2009, we had total assets of $6.4 billion, total loans of $4.6 billion, total
deposits of $4.5 billion and shareholders’ equity of $638.8 million. Our principal executive office is located at 22
North Sixth Street, Indiana, Pennsylvania 15701, and our telephone number is (724) 349-7220.
FCB is a Pennsylvania bank and trust company. At December 31, 2009, the Bank operated 115 community
banking offices throughout western Pennsylvania and three loan production offices in downtown Pittsburgh,
State College and Canonsburg, Pennsylvania. The largest concentration of our branch offices are located within
the greater Pittsburgh metropolitan area in Allegheny, Butler, Washington and Westmoreland counties, while our
remaining offices are located in smaller cities, such as Altoona, Johnstown, and Washington, Pennsylvania, and
in towns and villages throughout predominantly rural counties. The Bank also operates a network of 124
automated teller machines, or ATMs, at various branch offices and offsite locations. All of our ATMs are part of
the STAR and MasterCard/Cirrus networks, both of which operate nationwide. The Bank is also a member of the
31-bank “Freedom ATM Alliance,” which affords cardholders surcharge-free access to a network of over 700
ATMs in over 50 counties in Pennsylvania, Maryland, New York, West Virginia and Ohio.
Historical and Recent Developments
FCB began in 1934 as First National Bank of Indiana with initial capitalization of $255 thousand. First National
Bank of Indiana changed its name to National Bank of the Commonwealth in 1971 and became a subsidiary of
First Commonwealth in 1983.
Since the formation of the holding company in 1983, we have grown steadily through the acquisition of smaller
banks and thrifts in our market area, including Deposit Bank in 1984, Dale National Bank and First National
Bank of Leechburg in 1985, Citizens National Bank of Windber in 1986, Peoples Bank and Trust Company in
1990, Central Bank in 1992, Peoples Bank of Western Pennsylvania in 1993, Unitas National Bank and Reliable
Savings Bank in 1994. In 1995, we merged all of our banking subsidiaries (other than Reliable Savings Bank)
into Deposit Bank and renamed the resulting institution “First Commonwealth Bank.” We then merged Reliable
Savings Bank into FCB in 1997. We acquired Southwest Bank in 1998 and merged it into FCB in 2002.
Our most recent acquisitions have expanded our presence in the Pittsburgh metropolitan area. In the fourth
quarter of 2003, we acquired Pittsburgh Financial Corp., the holding company for Pittsburgh Savings Bank (dba
BankPittsburgh), for a total cost of approximately $28.6 million. Pittsburgh Financial had total assets of
approximately $376 million, with 7 branch offices and one loan production office in Allegheny and Butler
counties of Pennsylvania. In the second quarter of 2004, we acquired GA Financial, Inc., the holding company
for Great American Federal, for a total cost of approximately $176.7 million. GA Financial had total assets of
approximately $892 million, with 12 branch offices located in Allegheny county. In the third quarter of 2006, we
acquired Laurel Capital Group, Inc. (“Laurel”), the holding company for Laurel Savings Bank, for a total cost of
approximately $56.1 million. Laurel had total assets of approximately $314 million, with 8 branch offices located
in Allegheny and Butler counties.
In recent years, we have primarily focused on organic growth, improving the reach of our franchise and the
breadth of our product offering. As part of this strategy, we have opened thirteen de novo branches since 2005,
4
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Historical and Recent Developments (Continued)
all of which are in the greater Pittsburgh area. As a result of our acquisition and de novo strategy, FCB operates
65 branches in the Pittsburgh metropolitan statistical area and currently ranks sixth in deposit market share.
Competition
The banking and financial services industry is extremely competitive in our market area. We face vigorous
competition for customers, loans and deposits from many companies, including commercial banks, savings and
loan associations, finance companies, credit unions, trust companies, mortgage companies, money market mutual
funds, insurance companies, and brokerage and investment firms. Many of these competitors are significantly
larger than us, have greater resources, lending limits and larger branch systems and offer a wider array of
financial services than us. In addition, some of these competitors, such as credit unions, are subject to a lesser
degree of regulation than that imposed on us.
Employees
At December 31, 2009, First Commonwealth and its subsidiaries employed 1,510 full-time employees and 199
part-time employees.
Supervision and Regulation
The following discussion sets forth the material elements of the regulatory framework applicable to financial
holding companies and their subsidiaries and provides certain specific information relevant to First
Commonwealth and its subsidiaries. The regulatory framework is intended primarily for the protection of
depositors, other customers and the federal deposit insurance fund and not for the protection of security holders.
The rules governing the regulation of financial institutions and their holding companies are very detailed and
technical. Accordingly, the following discussion is general in nature and is not intended to be complete or to
describe all the laws and regulations that apply to First Commonwealth and its subsidiaries. A change in
applicable statutes, regulations or regulatory policy may have a material adverse effect on our business, financial
condition or results of operations.
Bank Holding Company Regulation
First Commonwealth is registered as a financial holding company under the Bank Holding Company Act (“BHC
Act”) of 1956, as amended, which we refer to as the BHC Act, and is subject to supervision and regulation by the
Board of Governors of the Federal Reserve System (“FRB”).
Acquisitions. Under the BHC Act, First Commonwealth is required to obtain the prior approval of the FRB
before it can merge or consolidate with any other bank holding company or acquire all or substantially all of the
assets of any bank that is not already majority owned by it or acquire direct or indirect ownership, or control of,
any voting shares of any bank that is not already majority owned by it, if after such acquisition it would directly
or indirectly own or control more than 5% of the voting shares of such bank. Satisfactory financial condition,
particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act (“CRA”) ratings are
generally prerequisites to obtaining federal regulatory approval to make acquisitions and open branch offices.
Non-Banking Activities. First Commonwealth is generally prohibited under the BHC Act from engaging in, or
acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged
in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
Bank Holding Company Regulation (Continued)
to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the
FRB considers whether the performance of these activities by a bank holding company can reasonably be
expected to produce benefits to the public that outweigh the possible adverse effects.
Reporting. Under the BHC Act, First Commonwealth is subject to examination by the FRB and is required to file
periodic reports and other information of its operations with the FRB. In addition, under the Pennsylvania
Banking Code of 1965, the Pennsylvania Department of Banking has the authority to examine the books, records
and affairs of any Pennsylvania bank holding company or to require any documentation deemed necessary to
ensure compliance with the Pennsylvania Banking Code.
Affiliate Transactions. There are various legal restrictions on the extent to which First Commonwealth and its
non-bank subsidiaries can borrow or otherwise obtain credit from its banking subsidiaries. In general, these
restrictions require that any such extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of First Commonwealth or its non-bank subsidiaries, to ten percent of the
lending bank’s capital stock and surplus, and as to First Commonwealth and all such non-bank subsidiaries in the
aggregate, to 20 percent of such lending bank’s capital stock and surplus. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
SEC Regulations. First Commonwealth is also under the jurisdiction of the Securities and Exchange Commission
(“SEC”) and various state securities commissions for matters relating to the offer and sale of its securities and is
subject to the SEC rules and regulations relating to periodic reporting, proxy solicitation and insider trading.
Bank Regulations
FCB is a state bank chartered under the Pennsylvania Banking Code and is not a member of the FRB. As such,
FCB is subject to the supervision of, and is regularly examined by, both the Federal Deposit Insurance
Corporation (“FDIC”) and the Pennsylvania Department of Banking and is required to furnish quarterly reports
to both agencies. The approval of the Pennsylvania Department of Banking and FDIC is also required for FCB to
establish additional branch offices or merge with or acquire another banking institution. Under current
Pennsylvania law, banking institutions, such as FCB, may establish branches within any county in Pennsylvania,
subject to prior regulatory approval.
Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and
paid only out of accumulated net earnings and may not be declared or paid unless surplus is at least equal to
capital. Dividends may not reduce surplus without the prior consent of the Pennsylvania Department of Banking.
FCB has not reduced its surplus through the payment of dividends.
The FDIC also prohibits the declaration or payout of dividends at a time when FCB is in default in payment of
any assessment due the FDIC. In addition, supervisory guidance issued by the FRB requires, among other things,
that a company must consult with the FRB in advance of paying a dividend that exceeds earnings for the quarter
for which the dividend is paid or that could result in a material adverse change to the company’s capital structure.
The guidance also states that a company should, as a general matter, eliminate, defer or severely limit its
dividend if (1) the company’s net income for the past four quarters, net of dividends paid during that period, is
not sufficient to fully fund the dividend; (2) the company’s prospective rate of earnings retention is not consistent
6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
Bank Regulations (Continued)
with the company’s capital needs and current and prospective financial condition; or (3) the company will not
meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Community Reinvestment. Under the CRA, a bank has a continuing and affirmative obligation, consistent with
its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA. The CRA requires the applicable
regulatory agency to assess an institution’s record of meeting the credit needs of its community. The CRA
requires public disclosure of an institution’s CRA rating and requires that the applicable regulatory agency
provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system.
An institution’s CRA rating is considered in determining whether to grant charters, branches and other deposit
facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the
basis for denying an application. For its most recent examination, FCB received a “satisfactory” rating.
Consumer Laws. The operations of FCB are also subject to numerous federal, state and local laws and
regulations which set forth specific restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit
transactions.
Deposit Insurance. Deposits of FCB are insured up to applicable limits by the FDIC and are subject to deposit
insurance assessments to maintain the Deposit Insurance Fund. The insurance assessments are based upon a
matrix that takes into account a bank’s capital level and supervisory rating. In 2008, the FDIC instituted the
Temporary Liquidity Guarantee Program, which, among other things, provides unlimited deposit insurance for
funds deposited into non interest-bearing transaction accounts through June 30, 2010.
Capital Regulations
First Commonwealth and FCB are subject to risk-based capital standards by which all bank holding companies
and banks are evaluated in terms of capital adequacy. These standards relate a banking company’s capital to the
risk profile of its assets. The risk-based capital standards require that bank holding companies and banks must
have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, equal to at least 8% of its total risk-
adjusted assets. Tier 1 capital includes common stockholders’ equity and qualifying perpetual preferred stock
together with related surpluses and retained earnings. The remaining portion of this capital standard, known as
Tier 2 capital, may be comprised of limited life preferred stock, qualifying subordinated debt instruments, and
the allowance for credit losses.
Additionally, banking organizations must maintain a minimum leverage ratio of 3% measured as the ratio of
Tier 1 capital to adjusted average assets. This 3% leverage ratio is a minimum for the top-rated banking
organizations without any supervisory, financial or operational weaknesses or deficiencies and other banking
organizations are expected to maintain leverage capital ratios 100 to 200 basis points above the minimum
depending on their financial condition.
Federal banking agencies have broad powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,”
7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
Capital Regulations (Continued)
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.”
As of December 31, 2009, FCB was a “well-capitalized” bank as defined by the FDIC. See Note 29 “Regulatory
Restrictions and Capital Adequacy” of Notes to Consolidated Financial Statements, contained in Item 8, for a
table that provides a comparison of First Commonwealth’s and FCB’s risk-based capital ratios and the leverage
ratio to minimum regulatory requirements.
Gramm-Leach-Bliley Act
Enacted in 1999, the Gramm-Leach-Bliley Act, or GLBA, repealed the 1933 Glass-Steagall Act’s separation of
the commercial and investment banking industries. GLBA created a new category of holding company called a
“financial holding company,” which is authorized to engage in an expanded range of non-banking activities, as
described below, while preserving existing authority for bank holding companies to engage in activities that are
closely related to banking. Generally, a bank holding company may become a financial holding company upon
filing an election with the FRB if each of its depository institution subsidiaries is well-capitalized, well managed
and received a CRA rating of “satisfactory” or better at its most recent examination. First Commonwealth elected
to become a financial holding company in 2009.
Financial holding companies may engage in any activity that (i) is financial in nature or incidental to such
financial activity or (ii) is complementary to a financial activity and does not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally. GLBA specifies certain activities that
are financial in nature. These activities include: acting as principal, agent or broker for insurance; underwriting,
dealing in or making a market in securities; and providing financial and investment advice. The FRB and the
Secretary of the Treasury have authority to decide whether other activities are also financial in nature or
incidental to financial activity, taking into account changes in technology, changes in the banking marketplace,
competition for banking services and so on.
GLBA also established a system of functional regulation, under which the federal banking agencies regulate the
banking activities of financial holding companies; the Securities and Exchange Commission regulates their
securities activities; and state insurance regulators regulate their insurance activities. GLBA also provided new
protections against the transfer and use by financial institutions of consumers’ nonpublic personal information.
USA Patriot Act
Anti-terrorism legislation enacted under the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, commonly known as the Patriot Act, expanded the
scope of anti-money laundering laws and regulations and imposed additional obligations on U.S. financial
institutions, including banks. These regulations include obligations to maintain appropriate policies, procedures
and controls, which are reasonably designed to detect and report instances of money laundering and terrorist
financing.
8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, implemented a broad range of corporate governance,
accounting and reporting measures for companies that have securities registered under the Securities Exchange
Act of 1934, including publicly-held bank holding companies such as First Commonwealth. Sarbanes-Oxley
created new requirements in the areas of financial disclosure and corporate governance, including:
•
•
•
•
•
•
•
•
increased responsibility for the Chief Executive Officer and the Chief Financial Officer with respect to
the content of financial statements;
new requirements for audit committees, including independence, expertise and responsibilities;
new standards for auditors and regulation of audits, including independence and the type of non-audit
services that auditors may provide;
accelerated filing requirements for SEC reports;
disclosures concerning internal controls and procedures;
increased disclosure and reporting obligations for the reporting company and their directors and
executive officers;
disclosure of a code of ethics; and
a range of new and increased civil and criminal penalties for fraud and other violations of the securities
laws.
National Monetary Policy
In addition to being affected by general economic conditions, our earnings and growth are affected by the
policies of governments and regulatory authorities, including the FRB, the FDIC and the Pennsylvania
Department of Banking. An important function of the FRB is to regulate the money supply and credit conditions.
Among the instruments used to implement these objectives are open market operations in U.S. government
securities, setting the discount rate and changes in reserve requirements against bank deposits. These instruments
are used in varying combinations to influence overall growth and distribution of credit, bank loans, investments
and deposits, and their use may also affect interest rates charged on loans or paid on deposits.
The federal government greatly expanded the resources available to influence monetary policy during 2008 in
response to significant disruptions in credit and capital markets and the greatly weakened financial condition of
many large companies in the financial services industry. The Federal Reserve Board implemented new lending
programs to improve liquidity at financial institutions and other market participants, which include auctions of
short-term secured borrowings, the expansion of eligible collateral for certain lending programs and the
extension of borrowings to investment banks and other non-bank financial services companies. The FDIC
instituted the Temporary Liquidity Guarantee Program to strengthen liquidity in the banking system by
guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by
providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount, through
June 30, 2010. Finally, the United States Treasury implemented the Capital Purchase Program under the
Troubled-Asset Relief Program, or TARP, in which the Treasury injected capital into participating banks and
bank holding companies through the purchase of senior preferred stock to encourage lending. During 2009, First
Commonwealth participated in various lending programs by the Federal Reserve Board, including the Term
Auction Facility, and also participates in the Temporary Liquidity Guarantee Program. First Commonwealth
declined to participate in the TARP Capital Purchase Program.
9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
National Monetary Policy (Continued)
The monetary policies and regulations of the FRB have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future. The effects of such policies
upon our future business, earnings and growth cannot be predicted.
Availability of Financial Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may
read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. Our SEC filings are also available to the public on the SEC website
at www.sec.gov and on our website at www.fcbanking.com.
We also make available on our website, and in print to any shareholder who requests them, our Corporate
Governance Guidelines, the charters for our Audit, Executive Compensation and Governance Committees, and
the Code of Conduct and Ethics that applies to all of our directors, officers and employees.
Our Chief Executive Officer has certified to the New York Stock Exchange (“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, our Chief Executive Officer and Chief Financial Officer have made certain certifications
concerning the information contained in this report pursuant to Section 302 of the Sarbanes-Oxley Act. The
Section 302 certifications appear as Exhibits 31.1 and 31.2 to this annual report on Form 10-K.
10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1A. Risk Factors
As a financial services company, we are subject to a number of risks, many of which are outside of our control.
These risks include, but are not limited to:
We are subject to lending concentration risks.
As of December 31, 2009, approximately 62% of our loan portfolio consisted of commercial, financial and
agricultural, real estate construction, commercial real estate loans and lease financing (collectively, “commercial
loans”). Commercial loans are generally viewed as having more inherent risk of default than residential mortgage
loans or retail loans. Also, the commercial loan balance per borrower is typically larger than that for residential
mortgage loans and retail loans, inferring higher potential losses on an individual loan basis. Because our loan
portfolio contains a number of commercial loans with balances over a $15.0 million internal threshold, the
deterioration of one or a few of these loans could cause a significant increase in nonperforming loans. An
increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the
provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on
our financial condition and results of operations.
Our allowance for loan losses may be insufficient.
All borrowers carry the potential to default and our remedies to recover may not fully satisfy money previously
loaned. We maintain an allowance for loan losses, which is a reserve established through a provision for loan
losses charged to expense, which represents management’s best estimate of probable credit losses that have been
incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to
reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan
losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss
experience; current loan portfolio quality; present economic conditions; and unidentified losses inherent in the
current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using
existing qualitative and quantitative information, all of which may undergo material changes. Changes in
economic conditions affecting borrowers, new information regarding existing loans, identification of additional
problem loans and other factors, both within and outside of our control, may require an increase in the allowance
for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may
require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on
judgments different than those of management. An increase in the allowance for loan losses results in a decrease
in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition
and results of operations.
The design of the allowance for loan loss methodology is a dynamic process that must be responsive to changes
in environmental factors. Accordingly, at times the allowance methodology may be modified in order to
incorporate changes in various factors including, but not limited to, levels and trends of delinquencies and
charge-offs, trends in volume and types of loans, national and economic trends and industry conditions.
We have significant exposure to a downturn in the financial services industry due to our investments in
trust preferred securities.
As of December 31, 2009, we had single issuer trust preferred securities and trust preferred collateralized debt
obligations with an aggregate book value of $91.9 million and an unrealized loss of approximately $43.4 million.
These securities were issued by banks, bank holding companies and other financial services providers. As a result
of the severe economic recession and its impact on the financial services industry, we incurred other-than-
temporary impairment charges in our securities portfolio of approximately $36.2 million during 2009. We may
11
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1A. Risk Factors (Continued)
be required to record additional impairment charges on other investment securities if they suffer a decline in
value that is considered other-than-temporary. If the credit quality of the securities in our investment portfolio
deteriorates, we may also experience a loss in interest income from the suspension of either interest or dividend
payments. Numerous factors, including lack of liquidity for resales of certain investment securities, absence of
reliable pricing information for investment securities, adverse changes in business climate or adverse actions by
regulators could have a negative effect on our investment portfolio in future periods. If an impairment charge is
significant enough it could affect the ability of FCB to upstream dividends to First Commonwealth, which could
have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also
negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for
regulatory purposes.
We depend upon the availability of liquidity to operate our businesses.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. Our access to these
funds, or liquidity, could be impaired by an inability to access the capital markets or unforeseen outflows of cash.
This situation may arise due to circumstances that we may be unable to control, such as a general market
disruption or an operational problem that affects third parties or us. Our credit ratings are important to our
liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase
our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations.
As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and
repayments and maturities of loans and investments. As we continue to grow, we are likely to become more
dependent on these sources, which include Federal Home Loan Bank (“FHLB”) advances, proceeds from the sale of
loans and liquidity resources at the holding company. At December 31, 2009, we had approximately $286.9 million
of FHLB advances outstanding and $525.0 million in term borrowings under the FRB Term Auction Facility. Our
financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest rates. Furthermore, if we are required
to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase
proportionately to cover our costs, which would adversely affect our operating margins and profitability.
Our investment in FHLB stock may be subject to impairment charges in future periods if the financial
condition of the FHLB declines further.
FCB is required to hold FHLB stock as a condition of membership in the FHLB. As of December 31, 2009, the
carrying value of our FHLB stock was $51.4 million. Ownership of FHLB stock is restricted and there is no
market for these securities. In 2009, the FHLB reported significant losses due to numerous factors, including
other-than-temporary impairment charges on its portfolio of private-label mortgage-backed securities. The FHLB
announced a capital restoration plan in February of 2009 which restricts it from repurchasing or redeeming
capital stock or paying dividends. If the FHLB’s financial condition declines further, other-than-temporary
impairment charges related to our investment in FHLB stock could occur in future periods. Please refer to the
discussion in Note 9 “Other Investments” to our Consolidated Financial Statements related to our evaluation of
impairment of FHLB stock as of December 31, 2009.
We must evaluate whether any portion of our recorded goodwill is impaired. Impairment testing may
result in a material, non-cash write-down of our goodwill assets and could have a material adverse impact
on our results of operations.
At December 31, 2009, goodwill represented approximately 2% of our total assets. We have recorded goodwill
because we paid more for some of our businesses than the fair market value of the tangible and separately
12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1A. Risk Factors (Continued)
measurable intangible net assets of those businesses. We test our goodwill and other intangible assets with
indefinite lives for impairment at least annually (or whenever events occur which may indicate possible
impairment). Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying
amount, including goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is not
considered impaired. If the fair value of the reporting unit is less than the carrying amount, goodwill is
considered impaired. Determining the fair value of our company requires a high degree of subjective
management assumptions. Any changes in key assumptions about our business and its prospects, changes in
market conditions or other externalities, for impairment testing purposes could result in a non-cash impairment
charge and such a charge could have a material adverse effect on our consolidated results of operations.
Our earnings are significantly affected by general business and economic conditions.
Our operations and profitability are impacted by general business and economic conditions in the United States
and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political
issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in
industry and finance and the strength of the United States economy, all of which are beyond our control. A
deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets,
decreases in loan collateral values and a decrease in demand for our products and services, among other things,
any of which could have a material adverse impact on our financial condition and results of operations.
We are subject to extensive government regulation and supervision.
We, primarily through FCB and certain non-bank subsidiaries, are subject to extensive federal and state
regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal
deposit insurance funds, and the banking system as a whole, not shareholders. These regulations affect our
lending practices, capital structure, investment practices, dividend policy and growth, among other things.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or
implementation of statutes could affect us in substantial and unpredictable ways. Such changes could subject us
to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of
non-banks to offer competing financial services and products, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on our business, financial condition and results of
operations. While we have policies and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur.
We may eliminate dividends on our common stock.
Although we have historically paid a quarterly cash dividend to the holders of our common stock, holders of our
common stock do not have a legal or contractual right to receive dividends. During 2009, our board of directors
reduced the quarterly cash dividend on our common stock from $0.17 per share to $0.03 per share in order to
preserve capital at FCB. In the event that our earnings fail to improve in accordance with our business plan, our
board of directors may make a decision to cease paying a dividend or reduce the quarterly dividend paid to our
shareholders. This could adversely affect the market price of our common stock.
Changes in interest rates could negatively impact our financial condition and results of operations.
Our results of operations depend substantially on net interest income, which is the difference between interest
earned on interest-earning assets (such as investments and loans) and interest paid on interest-bearing liabilities
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1A. Risk Factors (Continued)
(such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental
monetary policies and domestic and international economic and political conditions. Conditions such as inflation,
recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. If
our interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a declining interest
rate environment, net interest income could be adversely impacted. Likewise, if interest-bearing liabilities mature
or reprice more quickly than interest-earning assets in a rising interest rate environment, net interest income
could be adversely impacted.
Changes in interest rates also can affect the value of loans and other assets. An increase in interest rates that
adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in
nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our
results of operations and cash flows.
Our expanding branch network may negatively affect our financial performance.
We continue to expand our branch network by both acquiring financial institutions and establishing de novo
branches. The profitability of our expansion strategy will depend on whether the income we generate in the new
markets will offset the increased expenses of operating a larger entity with increased personnel, more branch
locations and additional product offerings. We expect that it may take a period of time before certain of our new
branches can become profitable, especially in areas in which we do not have an established physical presence.
During this period, operating these new branches may negatively impact net income.
Competition from other financial institutions in originating loans, attracting deposits and providing
various financial services may adversely affect our profitability.
We face substantial competition in originating loans and attracting deposits. This competition comes principally
from other banks, savings institutions, mortgage banking companies and credit unions, as well as institutions
offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy
advantages, including greater financial resources and higher lending limits, better brand recognition, a wider
geographic presence, more accessible branch office locations, the ability to offer a wider array of services or
more favorable pricing alternatives, as well as lower origination and operating costs. These competitors may
offer more favorable pricing through lower interest rates on loans or higher interest rates on deposits, which
could force us to match competitive rates and thereby reduce our net interest income.
Negative publicity could damage our reputation.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business.
Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse
legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in
any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and
acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by
government regulators and community organizations in response to that conduct. Because we conduct all of our
business under the “First Commonwealth” brand, negative public opinion about one business could affect our
other businesses.
An interruption to our information systems could adversely impact our operations.
We rely upon our information systems for operating and monitoring all major aspects of our business, including
deposit and loan operations, as well as internal management functions. These systems and our operations could
14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1A. Risk Factors (Continued)
be damaged or interrupted by natural disasters, power loss, network failure, improper operation by our
employees, security breaches, computer viruses, intentional attacks by third parties or other unexpected events.
Any disruption in the operation of our information systems could adversely impact our operations, which may
affect our financial condition, results of operations and cash flows.
We may undertake acquisitions in the future which could place heavy demands on our employees, disrupt
our business and cause us to not realize expected earnings.
Much of our growth has come through the acquisition of other financial institutions, and we expect to continue to
make acquisitions as opportunities arise, both within and outside our current market area. We cannot predict the
number, size or timing of acquisitions that we will undertake in future periods. We may face difficulty in
integrating an acquired company which could prevent us from realizing expected revenue growth or cost savings
or other projected benefits from the acquisition. The integration could result in higher than expected deposit
attrition, loss of key employees, disruption of our business or the business of the acquired company, or otherwise
adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated
benefits of the acquisition.
Provisions of our articles of incorporation, bylaws and Pennsylvania law, as well as state and federal
banking regulations, could delay or prevent a takeover of us by a third party.
Provisions in our articles of incorporation and bylaws, the corporate law of the Commonwealth of Pennsylvania,
and state and federal regulations could delay, defer or prevent a third party from acquiring us, despite the
possible benefit to our shareholders, or otherwise adversely affect the price of our common stock. These
provisions include, among other things, advance notice requirements for proposing matters that shareholders may
act on at shareholder meetings. In addition, under Pennsylvania law, we are prohibited from engaging in a
business combination with any interested shareholder for a period of five years from the date the person became
an interested shareholder unless certain conditions are met. These provisions may discourage potential takeover
attempts, discourage bids for our common stock at a premium over market price or adversely affect the market
price of, and the voting and other rights of the holders of, our common stock.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
Properties
Our principal office is located in the old Indiana county courthouse complex, consisting of the former courthouse
building and the former sheriff’s residence and jail building for Indiana county. This certified Pennsylvania and
national historic landmark was built in 1870 and restored by us in the early 1970s. We lease the complex from
Indiana county pursuant to a lease agreement that was originally signed in 1973 and has a current term that
expires in 2048.
The majority of our administrative personnel are also located in two owned buildings and one leased premise in
Indiana, Pennsylvania, each of which is in close proximity to our principal office.
First Commonwealth Bank has 115 banking offices of which 26 are leased and 89 are owned. We also lease three
loan production offices.
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Properties (Continued)
While these facilities are adequate to meet our current needs, available space is limited and additional facilities
may be required to support future expansion. However, we have no current plans to lease, purchase or construct
additional administrative facilities.
ITEM 3. Legal Proceedings
There are no material legal proceedings to which First Commonwealth or its subsidiaries are a party, or of which
any of their property is the subject. All legal proceedings presently pending or threatened against First
Commonwealth or its subsidiaries arose 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
and its subsidiaries.
ITEM 4. Reserved
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchase of
Equity Securities
First Commonwealth is listed on the NYSE under the symbol “FCF.” As of February 26, 2010, there were
approximately 8,740 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.
Period
High Sale Low Sale
Cash Dividends
Per Share
2009
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12.50
$10.68
$ 7.34
$ 5.77
$6.33
$5.84
$5.20
$4.03
$0.12
$0.00
$0.03
$0.03
Period
High Sale Low Sale
Cash Dividends
Per Share
2008
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12.65
$12.90
$16.18
$15.00
$9.00
$9.12
$8.00
$8.70
$0.17
$0.17
$0.17
$0.17
In the second quarter of 2009, First Commonwealth changed the timing of when dividends are declared and paid
on shares of common stock and as a result there were no dividends declared in the second quarter. Federal and
State Regulations contain restrictions on the ability of First Commonwealth to pay dividends. For information
regarding restrictions on dividends, see Part I, Item 1 “Business—Supervision and Regulation—Restrictions on
Dividends” and Part II, Item 8, “Financial Statements and Supplementary Data—Note 29 (Regulatory
Restrictions and Capital Adequacy).” In addition, under the terms of the capital securities issued by First
Commonwealth Capital Trust I, II, and III, First Commonwealth could not pay dividends on its common stock if
First Commonwealth deferred payments on the junior subordinated debt securities which provide the cash flow
for the payments on the capital securities.
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchase of
Equity Securities (Continued)
The following five-year performance graph compares the cumulative total shareholder return (assuming
reinvestment of dividends) on First Commonwealth’s common stock to the KBW Regional Banking Index and
the Russell 2000 Index. The stock performance graph assumes $100 was invested on December 31, 2004, and the
cumulative return is measured as of each subsequent fiscal year end.
Total Return Performance
140
120
100
80
60
40
e
u
l
a
V
x
e
d
n
I
First Commonwealth Financial Corporation
Russell 2000
KBW Regional Banking Index
20
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
Index
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
First Commonwealth Financial Corporation . . . . . . . . . .
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KBW Regional Banking Index . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
88.27
104.55
101.73
96.45
123.76
110.48
81.19
121.82
86.19
100.11
80.66
70.18
38.47
102.58
54.65
Period Ending
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6. 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.
Years Ended December 31,
2009
2008
2007
2006
2005
(dollars in thousands, except share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net impairment losses . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Net securities gains (losses)
Gain on sale of branches . . . . . . . . . . . . . . . . . . . .
Gain on sale of merchant services business . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Gain on extinguishment of debt
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income before income taxes . . . . . . . .
Income tax (benefit) provision . . . . . . . . . . . . . . .
$
$
293,281
86,771
206,510
100,569
327,596
138,998
188,598
23,095
105,941
(36,185)
273
-0-
-0-
55,237
-0-
-0-
171,151
(45,885)
(25,821)
165,503
(13,011)
1,517
-0-
-0-
54,325
-0-
-0-
158,615
49,719
6,632
331,095
169,713
161,382
10,042
151,340
-0-
1,174
-0-
-0-
47,696
-0-
-0-
148,007
52,203
5,953
$
$
333,070
166,107
166,963
11,544
312,068
138,618
173,450
8,628
155,419
(2)
699
-0-
-0-
43,550
-0-
410
138,093
61,983
9,029
164,822
-0-
(7,673)
11,832
1,991
44,075
5,437
-0-
138,517
71,093
13,257
57,836
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(20,064) $
43,087
$
46,250
$
52,954
$
Per Share Data
Net (loss) income . . . . . . . . . . . . . . . . . . . . . .
Dividends declared . . . . . . . . . . . . . . . . . . . .
Average shares outstanding . . . . . . . . . . . . . .
$
$
(0.24) $
$
0.18
84,589,780
0.58
0.68
74,477,795
$
$
0.64
0.68
72,816,208
$
$
0.75
0.68
70,766,348
$
$
0.83
0.67
69,276,141
Per Share Data Assuming Dilution
Net (loss) income . . . . . . . . . . . . . . . . . . . . . .
Dividends declared . . . . . . . . . . . . . . . . . . . .
Average shares outstanding . . . . . . . . . . . . . .
$
$
(0.24) $
$
0.18
84,589,780
0.58
0.68
74,583,236
$
$
0.63
0.68
72,973,259
$
$
0.74
0.68
71,133,562
$
$
0.83
0.67
69,835,285
At End of Period
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . .
Loans and leases, net of unearned income . .
Allowance for credit losses . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . .
Other long-term debt . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . .
$ 6,446,293
1,222,045
4,636,501
81,639
4,535,785
958,932
105,750
168,697
638,811
$ 6,425,880
1,452,191
4,418,377
52,759
4,280,343
1,139,737
105,750
183,493
652,779
$ 5,883,618
1,645,714
3,697,819
42,396
4,347,219
354,201
105,750
442,196
568,788
$ 6,043,916
1,723,191
3,783,817
42,648
4,326,440
500,014
108,250
485,170
571,361
$ 6,026,320
1,939,743
3,624,259
39,492
3,996,552
665,665
108,250
691,494
521,045
Key Ratios
Return on average assets . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . .
Net loans to deposits ratio . . . . . . . . . . . . . . .
Dividend per share as a percent of net
income per share . . . . . . . . . . . . . . . . . . . .
Average equity to average assets ratio . . . . .
(0.31)%
(3.06)%
100.42%
NA
10.16%
0.70%
7.45%
101.99%
117.24%
9.35%
0.80%
8.08%
84.09%
106.25%
9.87%
0.89%
9.76%
86.47%
90.67%
9.08%
0.94%
10.89%
89.70%
80.12%
8.60%
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis concerns the financial condition and the results of operations of First
Commonwealth and its subsidiaries, FCB, First Commonwealth Insurance Agency, Inc. (“FCIA”) and First
Commonwealth Financial Advisors, Inc. (“FCFA”), as of and for the years ended December 31, 2009, 2008 and
2007. The purpose of this discussion is to focus on information concerning our financial condition and results of
operations that is not readily apparent from the Consolidated Financial Statements. In order to obtain a clear
understanding of this discussion, you should refer to the Consolidated Financial Statements, the notes thereto and
other financial information presented in this Annual Report.
Company Overview
First Commonwealth provides a diversified array of consumer and commercial banking services through our
bank subsidiary, FCB. We also provide trust and wealth management services through FCFA and insurance
products through FCIA. At December 31, 2009, FCB operated 115 community banking offices throughout
western Pennsylvania and three loan production offices in downtown Pittsburgh, State College and Canonsburg,
Pennsylvania.
Our consumer services include Internet and telephone banking, an automated teller machine network, personal
checking accounts, interest-earning checking accounts, savings accounts, health savings accounts, insured money
market accounts, debit cards, investment certificates, fixed and variable rate certificates of deposit, secured and
unsecured installment loans, construction and mortgage loans, safe deposit facilities, credit lines with overdraft
checking protection, IRA accounts and student loans. Commercial banking services include commercial lending,
small and high-volume business checking accounts, on-line account management services, ACH origination,
payroll direct deposit, commercial cash management services and repurchase agreements. We also provide a
variety of trust and asset management services and a full complement of auto, home and business insurance as
well as term life insurance. We offer annuities, mutual funds, stock and bond brokerage services through an
arrangement with a broker-dealer and insurance brokers. Most of our commercial customers are small and
mid-sized businesses in central and western Pennsylvania.
As a financial institution with a focus on traditional banking activities, we earn the majority of our revenue
through net interest income, which is the difference between interest earned on loans and investments and
interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth
and maintaining or increasing our net interest margin, which is net interest income (on a fully taxable-equivalent
basis) as a percentage of our average interest-earning assets. We also generate revenue through fees earned on
various services and products that we offer to our customers and through sales of assets, such as loans,
investments or properties. These revenue sources are offset by provisions for credit losses on loans, operating
expenses and income taxes.
General economic conditions also affect our business by impacting our customers’ need for financing, thus
affecting loan growth, and impacting the credit strength of existing and potential borrowers.
Critical Accounting Policies and Significant Estimates
First Commonwealth’s accounting and reporting policies conform to accounting principles generally accepted in
the United States of America (“GAAP”) and predominant practice in the banking industry. The preparation of
financial statements in accordance with GAAP requires management to make estimates, assumptions and
judgments that affect the amounts reported in the financial statements and accompanying notes. Over time, these
estimates, assumptions and judgments may prove to be inaccurate or vary from actual results and may
significantly affect our reported results and financial position for the period presented or in future periods. We
20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies and Significant Estimates (Continued)
currently view the determination of the allowance for loan losses, fair value of financial instruments, and
goodwill and other intangible assets to be critical because they are highly dependent on subjective or complex
judgments, assumptions and estimates made by management.
Allowance for Credit Losses
We account for the credit risk associated with our lending activities through the allowance and provision for
credit losses. The allowance represents management’s best estimate of probable losses that are inherent in our
existing loan portfolio as of the balance sheet date. The provision is a periodic charge to earnings in an amount
necessary to maintain the allowance at a level that is appropriate based on management’s assessment of probable
estimated losses. Management determines and reviews with the Board of Directors the adequacy of the allowance
on a quarterly basis in accordance with the methodology described below.
•
Individual loans are selected for review in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 310, “Receivables.” These are generally
large balance commercial loans and commercial mortgages that are rated less than “satisfactory” based
on our internal credit-rating process.
• We assess whether the loans identified for review in step one are “impaired,” which means that it is
probable that all amounts will not be collected according to the contractual terms of the loan
agreement, which generally represents loans that management has placed on nonaccrual status.
•
•
•
For loans determined to be impaired we calculate the estimated fair value based on observable market
prices, discounted cash flows and the value of the underlying collateral and record an allowance if
needed.
For loans not individually evaluated for impairment we aggregate pools of homogenous smaller
balance loans having similar risk characteristics as well as larger commercial loans rated satisfactory or
better for evaluation collectively under the provisions of FASB ASC Topic 450, “Contingencies.”
These smaller balance loans generally include residential mortgages, consumer loans, installment loans
and some commercial loans.
FASB ASC Topic 450 loans are segmented into groups with similar characteristics and an allowance
for credit losses is allocated to each segment based on recent loss history and other relevant
information.
• We then review the results to determine the appropriate balance of the allowance for credit losses. This
review includes consideration of additional factors, such as the mix of loans in the portfolio, the
balance of the allowance relative to total loans and nonperforming assets, trends in the overall risk
profile in the portfolio, trends in delinquencies and nonaccrual loans, local and national economic
information and industry data, including trends in the industries we believe are higher risk.
There are many factors affecting the allowance for credit losses; some are quantitative while others require
qualitative judgment and the use of estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses based on historical loss experience and consideration of current economic 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 our earnings
or financial position in future periods. The loan portfolio represents the largest asset category on our
Consolidated Statements of Financial Condition.
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies and Significant Estimates (Continued)
Fair Values of Financial Instruments
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair
value. In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial
liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded
and the reliability of the assumptions used to determine fair value.
Level 1 valuations are obtained from readily available pricing sources for market transactions involving identical
assets or liabilities. Level 2 valuations are for instruments that trade in less active dealer or broker markets and
incorporates values obtained for identical or comparable instruments. Level 3 valuations are derived from other
valuation methodologies, including option pricing models, discounted cash flow models and similar techniques,
and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain
assumptions and projections in determining the fair value assigned to each instrument.
The fair value for pooled trust preferred collateralized debt obligations is considered a level 3 measure and is
determined by evaluating relevant credit and structural aspects of the investment, determining appropriate
performance assumptions and performing a discounted cash flow analysis. This evaluation includes detailed
credit, performance and structural evaluations for each piece of collateral. Other factors in the valuation include
consideration of the terms of the structure, the cash flow waterfall (for both interest and principal), the over
collateralization and interest coverage provided by the structure and the probability of events of default and
liquidation.
The discount rate used in the analysis combines an evaluation of current and observable market yields for
comparable structured credit products with an evaluation of the risks associated with the underlying cash flows.
The specific risks identified in a given collateralized debt obligation’s cash flows are evaluated and an
adjustment is made to the credit spreads derived from market sources on the basis of this evaluation.
Fair values for single issue trust preferred securities are obtained from pricing sources with reasonable pricing
transparency, taking into account unobservable inputs related to the risks for each issuer. These valuations are
classified as Level 3 due to the inactivity in the markets.
Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. While management believes our valuation methodologies are appropriate
and consistent with other market participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation
dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts
presented herein.
In addition to valuation, on a quarterly basis we assess whether there are any declines in value below the carrying
value of our assets that should be considered other-than-temporary. This review includes analyzing the length of
time and the extent to which the fair value has been less than cost, the financial condition and near-term
prospects of the issuer, including any specific events which may influence the operations of the issuer and the
intent and ability to hold its investment for a period of time sufficient to allow for any anticipated recovery in the
market. Our pooled trust preferred collateralized debt obligations are beneficial interests in securitized financial
assets within the scope of FASB ASC Topic 325, “Investments–Other,” and are therefore evaluated for
22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies and Significant Estimates (Continued)
Fair Values of Financial Instruments (Continued)
other-than-temporary impairment using management’s best estimate of future cash flows. Results of a discounted
cash flow test are significantly affected by variables such as the estimate of future cash flows, credit worthiness
of the underlying banks and determination of probability of default of the underlying collateral.
When evaluating equity investments for other-than-temporary impairment we review the severity and duration of
decline in fair value, research reports, analysts’ recommendations, credit rating changes, news stories, annual
reports, regulatory filings, impact of interest rate changes and other relevant information.
Methodologies and estimates used by management are discussed in detail in management’s discussion and
analysis of financial condition and results of operations and in Note 10 “Impairment of Investment Securities”
and Note 21 “Fair Values of Assets and Liabilities” of Notes to Consolidated Financial Statements.
Goodwill and Other Intangible Assets
In accordance with FASB ASC Topic 805, “Business Combinations,” and FASB ASC Topic 350, “Intangibles—
Goodwill and Other,” all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-
lived intangibles and other intangibles are recorded at fair value. We consider our accounting policies related to
goodwill and other intangible assets 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 our financial condition or results of operations.
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, 2009, goodwill totaled $160.0 million
and amortizing intangibles totaled $7.4 million.
First Commonwealth is one reporting unit and goodwill is tested for impairment in November of each year. In
2009, as a result of the negative impact other-than-temporary impairment charges and credit losses in our loan
portfolio had on our earnings and the resulting decrease in our stock price, we evaluated goodwill for impairment
more frequently, beginning June 30, 2009 and each subsequent quarter end thereafter.
Goodwill is tested for impairment using a two-step process that begins with an estimation of fair value. The first
step compares the estimated fair value of First Commonwealth with its carrying amount, including goodwill. If
the estimated fair value exceeds its carrying amount, goodwill is not considered impaired. However, if the
carrying amount exceeds its estimated fair value, a second step would be performed that would compare the
implied fair value to the carrying amount of goodwill. An impairment loss would be recorded to the extent that
the carrying amount of goodwill exceeds its implied fair value.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies and Significant Estimates (Continued)
Goodwill and Other Intangible Assets (Continued)
Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted
cash flow analysis and other variables. Estimated cash flows extend five years into the future and, by their nature,
are difficult to estimate over such an extended time-frame. Factors that may significantly affect the estimates
include, but are not limited to, balance sheet growth assumptions, credit losses in our investment and loan
portfolios, competitive pressures in our market area, changes in customer base and customer product preferences,
changes in revenue growth trends, cost structure, changes in discount rates, conditions in the banking sector and
general economic variables.
As of December 31, 2009, we retained a third-party valuation firm to assist in our Step 1 test for potential
goodwill impairment. The valuation incorporated both income and market based analyses and indicated the fair
value of our goodwill was 11% below carrying amount, therefore in accordance with FASB ASC Topic
350-20-35-8, a Step 2 analysis was undertaken.
The Step 2 test follows the purchase price allocation under the purchase method described in FASB ASC Topic
820-10, and fair value estimates as defined and prescribed by FASB ASC Topic 820-10-30. To determine the
implied fair value of goodwill, the fair value of all assets other than goodwill, less the fair value of liabilities is
subtracted from the fair value of the company. Significant judgment and estimates are involved in estimating the
fair value of the assets and liabilities of the company. Key valuations used in the analysis were the mark-to-fair-
value on the loan portfolio, assessment of core deposit intangibles, and the mark-to-fair-value of outstanding debt
and deposits.
As a result of the Step 2 analysis, it was determined that the fair value of our goodwill exceeded its carrying
value by at least 31% and therefore no impairment charge was required.
As of December 31, 2009, goodwill and other intangible assets were not considered impaired; however, changing
economic conditions that may adversely affect our performance and stock price could result in impairment,
which could adversely affect earnings in future periods (see additional discussion of goodwill impairment under
“Risk Factors” on page 12).
Results of Operations—2009 Compared to 2008
Summary of 2009 Results
First Commonwealth has recorded the following financial results during the year 2009 compared to the year
2008.
Net interest income increased 10%.
Net interest margin, on a tax equivalent basis, improved 14 basis points.
Total loans increased 5%.
•
•
•
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Summary of 2009 Results (Continued)
•
•
•
•
•
•
•
Average demand and savings deposits increased 17%.
Nonaccrual loans increased $92.0 million primarily due to deterioration in commercial real estate
construction loans and one large commercial and industrial loan as a result of weak economic
conditions.
Provision for credit losses increased $77.5 million.
Net loan charge-offs increased $59.0 million.
Other-than-temporary impairment losses increased $23.2 million due primarily to deterioration in our
pooled trust preferred collateralized debt obligations.
FDIC insurance costs increased $9.9 million driven by premium increases.
In order to preserve capital during the challenging economic environment, dividends declared were
reduced from $0.68 in 2008 to $0.18 in 2009.
We recorded a net loss for the year 2009 of $20.1 million or $0.24 per share, as compared to net income of $43.1
million or $0.58 per diluted share for the same period in 2008. The decrease in net income was primarily the
result of a $77.5 million increase in the provision for credit losses as well as an increase of $23.2 million in
other-than-temporary impairment losses. The higher provision was primarily related to commercial construction
loans primarily outside of Pennsylvania in addition to one commercial and industrial loan in Pennsylvania. The
other-than-temporary impairment losses resulted primarily from further credit deterioration of the company’s
pooled trust preferred collateralized debt obligation portfolio. FDIC insurance costs increased $9.9 million as a
result of increased assessment rates in addition to the special assessment of $2.9 million. Although we have
experienced increased provision for credit losses and other-than-temporary impairment losses, we achieved
growth in loans and deposits and remain well capitalized with sufficient liquidity.
Average diluted shares for the year 2009 were 14% greater than the comparable period in 2008 primarily due to
the issuance of 11.5 million shares of common stock in connection with a capital raise completed on
November 5, 2008.
Net Interest Income
Net interest income, which is our primary source of revenue, is the difference between interest income from
earning assets (loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and
long-term debt). 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 income tax rate of 35%. The tax equivalent adjustment to net interest income for 2009
was $12.3 million compared to $13.1 million in 2008.
Net interest income for 2009 was $17.9 million, or 10% higher than 2008, primarily due to the $52.2 million
decline in interest expense, resulting from a 109 basis point decrease in the cost of interest-bearing liabilities.
Interest income decreased $34.3 million as the yield on interest-earning assets declined 86 basis points, which
was partially offset by the $252.7 million increase in average interest-earning assets.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Net Interest Income (Continued)
The increase in average interest-earning assets was due to the $472.7 million, or 12%, increase in average loans,
partially offset by the $220.2 million, or 14%, decrease in average investment securities.
Interest and fees on loans decreased $19.5 million primarily due to a 107 basis point decline in the yield on loans
from 6.31% to 5.24% which was partially offset by the $472.7 million, or 12%, growth in average loans.
Interest income on investment securities decreased $14.8 million from 2008 as a result of the $220.2 million
decline in average investment securities in addition to the 30 basis point decrease in investment yields.
Interest on deposits decreased $31.7 million due to the decline in rates paid which was partially offset by the
increase in balances. The cost of interest-bearing deposits decreased 88 basis points as a result of the lower
interest rate environment and improved deposit mix changes. Average interest-bearing demand and savings
deposits increased $350.6 million, or 20%, and time deposits declined $263.5 million, or 13%. In 2009, loan
growth was funded primarily by core deposit growth and wholesale borrowings providing for a lower cost than
time deposits.
Interest expense on short-term borrowings decreased $10.6 million, or 72%, primarily as a result of the 152 basis
point decline in rates paid for these borrowings, partially offset by the $261.9 million, or 34%, increase in
average balances. Interest expense on long-term debt declined $9.9 million due to the $202.0 million decrease in
average balances and the 18 basis point decrease in rate.
Net interest margin, on a tax equivalent basis, for the year 2009 increased 14 basis points to 3.71% from 3.57%
in 2008, primarily due to declines in the cost of interest-bearing liabilities. More of the funding for loan growth is
now being provided by core deposit growth rather than higher costing borrowings and time deposits. 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 “Market Risk” section of this discussion.
26
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Net Interest Income (Continued)
The following table provides information regarding the average balances and yields and rates on interest-earning
assets and interest-bearing liabilities for each of the three years for the period ended December 31:
Average Balance Sheets and Net Interest Analysis
(dollars in thousands)
2009
2008
2007
Average
Balance
Income/
Expense
Yield or
Rate (a)
Average
Balance
Income/
Expense
Yield or
Rate (a)
Average
Balance
Income/
Expense
Yield or
Rate (a)
Assets
Interest-earning assets:
Interest-bearing deposits with banks . . . $
Tax-free investment securities . . . . . . . .
Taxable investment securities . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . .
. .
Loans, net of unearned income (b)(c)
235,256
1,102,597
-0-
4,557,227
678 $
7
10,445
50,799
-0-
232,030
0.96% $
6.83
4.61
0.00
5.24
447 $
290,595
1,267,446
94
4,084,506
10
13,143
62,895
2
251,546
2.34% $
6.96
4.96
2.49
6.31
639 $
304,842
1,278,469
3,204
3,687,037
37
13,732
63,218
157
253,951
5.82%
6.93
4.94
4.89
7.09
Total interest-earning assets . . . . . . . .
5,895,758
293,281
5.18
5,643,088
327,596
6.04
5,274,191
331,095
6.56
Noninterest-earning assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . .
77,983
(67,535)
551,806
Total noninterest-earning assets . . . . .
562,254
77,208
(43,669)
505,790
539,329
80,453
(43,811)
489,502
526,144
Total Assets . . . . . . . . . . . . . . . . . . $6,458,012
$6,182,417
$5,800,335
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) . . . $ 601,594 $
Savings deposits (d) . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . .
1,515,636
1,735,533
1,031,664
285,526
1,677
16,946
51,179
4,216
12,753
0.28% $ 603,256 $
1.12
2.95
0.41
4.47
1,163,383
1,999,016
769,770
487,533
5,302
18,860
77,355
14,828
22,653
0.88% $ 595,055 $ 10,538
25,008
1,104,789
1.62
97,224
2,138,296
3.87
11,442
279,045
1.93
25,501
563,919
4.65
1.77%
2.26
4.55
4.10
4.52
Total interest-bearing liabilities . . . . .
5,169,953
86,771
1.68
5,022,958
138,998
2.77
4,681,104
169,713
3.63
Noninterest-bearing liabilities and capital:
Noninterest-bearing demand
deposits (d) . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . .
590,554
41,487
656,018
Total noninterest-bearing funding
544,743
36,582
578,134
514,256
32,335
572,640
sources . . . . . . . . . . . . . . . . . . . . . .
1,288,059
1,159,459
1,119,231
Total Liabilities and
Shareholders’ Equity . . . . . . . . . $6,458,012
$6,182,417
$5,800,335
Net Interest Income and Net Yield on
Interest-Earning Assets . . . . . . . . . . . . . .
$206,510
3.71%
$188,598
3.57%
$161,382
3.34%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b)
Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes loan fees.
(d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into
savings deposits which were made for regulatory purposes.
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Net Interest Income (Continued)
The following table sets forth certain information regarding changes in net interest income attributable to
changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the
periods indicated:
Analysis of Year-to-Year Changes in Net Interest Income
(dollars in thousands)
2009 Change from 2008
2008 Change from 2007
Total
Change
Change Due
to Volume
Change Due
to Rate (a)
Total
Change
Change Due
to Volume
Change Due
to Rate (a)
Interest-earning assets:
Interest-bearing deposits with banks . . . . .
Tax-free investment securities . . . . . . . . . .
Taxable investment securities . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(3)
(2,698)
(12,096)
(2)
(19,516)
$
5
(3,852)
(8,176)
(2)
29,829
$
(8)
1,154
(3,920)
-0-
(49,345)
Total interest income (b) . . . . . . . . . . . .
(34,315)
17,804
(52,119)
Interest-bearing liabilities:
Interest-bearing demand deposits . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Long-term debt
(3,625)
(1,914)
(26,176)
(10,612)
(9,900)
(15)
5,710
(10,196)
5,045
(9,386)
(3,610)
(7,624)
(15,980)
(15,657)
(514)
$
(27)
(589)
(323)
(155)
(2,405)
(3,499)
(5,236)
(6,148)
(19,869)
3,386
(2,848)
$
(11)
(987)
(544)
(152)
28,181
$
(16)
398
221
(3)
(30,586)
26,487
(29,986)
145
1,326
(6,333)
20,122
(3,454)
(5,381)
(7,474)
(13,536)
(16,736)
606
(42,521)
Total interest expense . . . . . . . . . . . . . .
(52,227)
(8,842)
(43,385)
(30,715)
11,806
Net interest income . . . . . . . . . . . . . .
$ 17,912
$ 26,646
$ (8,734)
$ 27,216
$14,681
$ 12,535
(a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances.
(b) Changes in interest income have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
Provision for Credit Losses
The provision for credit losses is determined based on management’s estimates of the appropriate level of
allowance for credit losses needed to absorb probable losses inherent in the loan portfolio, after giving
consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to
the allowance against which credit losses are charged.
The provision for credit losses for the year 2009 totaled $100.6 million, an increase of $77.5 million compared to
the year 2008 as a result of increased nonperforming loans, loan growth and trends in losses.
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Provision for Credit Losses (Continued)
The table below provides a breakout of the provision for credit losses by loan category:
Provision for Credit Losses
(dollars in thousands)
2009
2008
Commercial, financial and agricultural . . . . . . . . . . . . . . . . .
Real estate-construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate-residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate-commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 34,117
44,011
3,055
14,996
4,390
34%
44%
3%
15%
4%
$ 4,477
9,173
4,745
(388)
5,088
19%
40%
21%
(2)%
22%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$100,569
100%
$23,095
100%
For the year 2009, $38.7 million or over 38% of the provision for credit losses resulted from Shared National
Credit (“SNC”) loans. All but one of these loans are located outside the state of Pennsylvania. These out of state
SNC loans collectively resulted in $37.4 million of the provision in 2009.
The provision related to real estate – construction loans was primarily the result of SNC loans that were outside
of Pennsylvania. A SNC is any loan that totals $20 million or more and is shared by three or more unaffiliated
federally supervised institutions and has been determined to be a SNC by a committee of federal regulators.
As of December 31, 2009, our SNC portfolio consists of $904.8 million in commitments, with outstanding loans
totaling $458.8 million. During the year 2009, there were no new commitments related to our SNC portfolio. As
a result, commitments related to our SNC portfolio decreased from $1,016.0 million at December 31, 2008 to
$904.8 million at December 31, 2009.
The allowance for credit losses was $81.6 million at December 31, 2009, which represents a ratio of 1.76% of
end-of-period loans outstanding compared to 1.19% reported at December 31, 2008. Management believes that
the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at
December 31, 2009.
SNC’s make up $405.9 million, or 34%, of the commercial, financial and agricultural category, $47.9 million, or
12%, of the real estate – construction category and $5.0 million or less than one percent of the real estate –
commercial portfolio.
The 2009 provision related to real estate – construction loans is primarily related to $24.2 million provided for
two construction projects in Florida, $5.0 million for a commercial residential mixed use project in Utah, $3.6
million for a senior housing/independent living facility in Ohio and $3.1 million for one in market residential
development loan.
For the year 2009, the provision related to commercial, financial and agricultural loans was primarily due to two
loan relationships: a $46.3 million loan in Pennsylvania that migrated to nonaccrual status in the fourth quarter,
and a $9.2 million loan in Maryland. The 2009 provision related to real estate – commercial loans is primarily
related to $4.1 million allocated for two loan relationships in Pennsylvania and $3.6 million related to the
allowance that was transferred from real estate – construction loans due to the completion of several construction
projects and the related transfer of $134.3 million from real estate – construction to real estate – commercial
loans.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Provision for Credit Losses (Continued)
A detailed analysis of our credit loss experience for the five years ended December 31, 2009, is shown below:
Summary of Credit Loss Experience
(dollars in thousands)
Loans outstanding at end of year . . . . . . . . . .
2009
$4,636,501
2008
$4,418,377
2007
$3,697,819
2006
$3,783,817
2005
$3,624,259
Average loans outstanding . . . . . . . . . . . . . .
$4,557,227
$4,084,506
$3,687,037
$3,707,233
$3,597,705
$
52,759
-0-
$
42,396
-0-
$
42,648
-0-
$
39,492
1,979
$
41,063
-0-
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 charge-offs . . . . . . . . . . .
Credit losses on loans
20,536
4,378
36,892
7,302
4,604
-0-
73,712
448
573
-0-
914
81
7
2,023
71,689
transferred to held for
sale . . . . . . . . . . . . . . . . . . .
Net credit losses . . . . . . . . . . . . . .
Provision charged to expense . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . .
-0-
71,689
100,569
81,639
$
$
3,640
4,166
67
3,479
2,529
-0-
13,881
426
522
-0-
187
14
-0-
1,149
12,732
-0-
12,732
23,095
52,759
$
3,185
3,902
50
1,832
2,662
23
11,654
495
672
-0-
102
90
1
1,360
10,294
-0-
10,294
10,042
42,396
2,612
4,565
50
522
2,660
54
10,463
848
590
-0-
-0-
45
-0-
1,483
8,980
1,387
10,367
11,544
42,648
$
$
2,462
5,259
598
965
2,103
59
11,446
601
550
-0-
-0-
93
3
1,247
10,199
-0-
10,199
8,628
39,492
Ratios:
Net credit losses as a percentage of
average loans outstanding . . . . . . . . .
Allowance for credit losses as a
percentage of end-of-period loans
outstanding . . . . . . . . . . . . . . . . . . . .
1.57%
0.31%
0.28%
0.28%
0.28%
1.76%
1.19%
1.15%
1.13%
1.09%
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Non-Interest Income
The components of non-interest income for the three years ended December 31 follow:
2009
2008
2007
(dollars in thousands)
Non-Interest Income
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance and retail brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . .
Income from bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card related interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,805
17,440
7,259
4,442
8,559
12,732
$ 5,639 $ 5,881
17,981
3,560
6,101
6,564
7,609
18,558
5,297
5,523
7,609
11,699
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,237
273
(36,185)
54,325
1,517
(13,011)
47,696
1,174
-0-
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,325
$ 42,831
$48,870
Total non-interest income of $19.3 million for 2009 decreased $23.5 million, or 55%, compared to 2008,
primarily related to net impairment losses on securities. Offsetting the losses were increases in insurance and
retail brokerage commissions, card related interchange income and other operating income.
Service charges on deposit accounts are the most significant component of non-interest income and decreased
$1.1 million primarily due to reduced overdraft revenue as a result of a reduction in the frequency of occurrences
as consumers changed behavior patterns.
Insurance and retail brokerage commissions, including retail advisor fees, increased $2.0 million, or 37%, as a
result of higher sales, additional producers and an enhanced calling program.
We use bank owned life insurance (“BOLI”) to help offset the rising cost of employee benefits. Income from
BOLI decreased $1.1 million, or 20%, in 2009 compared to 2008 due to reduced earnings from our insurance
carriers, primarily as a result of the declining interest rate environment.
Card related interchange income increased $950 thousand primarily due to higher usage of debit cards and an
increase in the number of activated cards. Card related interchange income includes income from debit, credit
and ATM cards that are issued to consumers and businesses. Increasing debit card usage and demand deposit
accounts has been a strategic focus for FCB.
Other operating income increased $1.0 million primarily due to a $2.1 million gain on a favorable legal
settlement during the second quarter of 2009.
Net impairment losses in 2009 of $36.2 million increased $23.2 million when compared to impairment losses
recognized in 2008. The $36.2 million net impairment charges were due to $33.7 million in credit related other-
than-temporary impairment losses on trust preferred collateralized debt obligations, and $2.5 million on bank
equity securities. The 2008 impairment write-downs were partially offset by gains of $871 thousand on the sale
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Non-Interest Income (Continued)
of equity securities and $441 thousand on the mandatory redemption of Class B Common Stock in VISA Inc.
Refer to the “Investment Portfolio” discussion in the “Financial Condition” section of “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
Non-Interest Expense
The components of non-interest expense for the three years ended December 31 follow:
2009
2008
2007
(dollars in thousands)
Non-Interest Expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collection and repossession expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 86,059
14,053
12,085
4,687
5,314
2,826
5,010
10,471
30,646
$ 83,507
15,055
11,976
4,283
5,309
3,208
2,546
608
32,123
$ 76,132
13,710
12,000
3,808
5,769
3,428
2,224
506
30,430
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$171,151
$158,615
$148,007
Total non-interest expense of $171.2 million for 2009 is an increase of $12.5 million, or 8%, over 2008 primarily
due to higher salaries and employee benefits, collection and repossession expenses and FDIC insurance.
Salaries and employee benefits increased $2.6 million, or 3%, primarily due to additional employees related to
new branch offices, enhancing the consumer infrastructure for small business banking and retail brokerage,
annual merit increases, higher 401(k) expense and higher hospitalization expense. In addition, several expense
reduction initiatives were implemented in 2009 including reduction of incentive plans, more employee sharing of
medical costs and reduced 401(k) plan contributions that are expected to have a favorable impact on these costs
in 2010.
Pennsylvania shares tax expense was $5.3 million at December 31, 2009 and 2008. The Pennsylvania shares tax
is imposed annually on the book value of shares of banks and trust companies that conduct business in
Pennsylvania. The book value is calculated using a six-year average of the book values of paid-in capital, surplus
and undivided profits, with deductions for U.S. Government obligations, and beginning on January 1, 2008,
goodwill from acquisitions after June 30, 2001. The current tax rate is 1.25 percent.
Collection and repossession expenses increased $2.5 million, or 10%, primarily due to costs associated with the
higher level of nonaccrual loans as well as two loans that were transferred to other real estate owned in the first
quarter of 2009, one of which was sold in the third quarter of 2009. Most of the increase in collection and
repossession expenses are associated with the commercial loan portfolio which experienced increased stress
during 2009. Many of these loans are larger, complex relationships that take more time and expense to resolve,
especially in the current credit environment.
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2009 Compared to 2008 (Continued)
Non-Interest Expense (Continued)
FDIC insurance increased $9.9 million due to premium increases and increased deposits, as well as the second
quarter special assessment of $2.9 million. Increased FDIC insurance premiums were assessed to all insured
banks in 2009 as the agency required increased funds to resolve problem banks around the country.
Other operating expenses decreased $1.5 million, or 5%, compared to 2008 primarily due to an impairment
charge of $1.2 million that was recorded in 2008 on low income housing partnerships because our estimated
future benefits could not support our carrying value. There was no impairment charge recorded in 2009.
Income Tax
The 2009 provision for income taxes decreased $32.5 million from 2008 due to the $95.6 million decline in
income before taxes. The effective tax rate was 56.3% for the tax benefit in the year ended December 31, 2009,
compared to 13.3% for the tax expense in 2008. Nontaxable income and tax credits had a greater impact on the
effective tax rate for the year ended December 31, 2009, due to the 2009 pretax loss compared to pretax income
for the year ended December 31, 2008.
Financial Condition
First Commonwealth’s total assets increased slightly by $20.4 million in 2009. Loan growth of $218.1 million,
was offset by a decrease of $230.1 million, or 16% in investment securities. The decline in the investment
portfolio provided liquidity to help fund loan growth and repay short-term borrowings as a balance sheet
deleveraging strategy. The current interest rate environment has reduced the risk/reward on security leverage
strategies. First Commonwealth’s total liabilities increased slightly by $34.4 million, or 1%, in 2009. Deposit
growth of $255.4 million, or 6%, was offset by a decrease in short-term borrowings of $180.8 million, or 16%.
Deposit growth was a definitive strategy by First Commonwealth in 2009 in order to improve liquidity by
reducing borrowings and to improve funding costs.
Loan Portfolio
Following is a summary of our loan portfolio as of December 31:
Loans by Classification
(dollars in thousands)
2009
2008
2007
2006
2005
Amount %
Amount %
Amount %
Amount %
Amount %
$1,208,339 26% $1,236,622 28% $ 911,758 25% $ 845,934 22% $ 724,066 20%
387,227
8
1,208,741 26
1,274,858 28
557,336 12
-0-
-0-
489,150 11
1,206,366 27
990,439 23
495,800 11
-0-
-0-
213,272
6
1,232,886 33
875,759 24
464,082 12
62 -0-
97,082
3
1,342,105 35
950,636 25
547,196 15
864 -0-
80,067
2
1,211,456 33
993,673 27
610,529 17
1
4,468
Commercial, financial,
agricultural and other . . . . . .
Real estate-construction . . . . . .
Real estate-residential . . . . . . . .
Real estate-commercial . . . . . . .
Loans to individuals . . . . . . . . .
Net leases . . . . . . . . . . . . . . . . .
Total loans and leases net of
unearned income . . . . . . . . . .
$4,636,501
$4,418,377
$3,697,819
$3,783,817
$3,624,259
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Loan Portfolio (Continued)
Total loans increased $218.1 million, or 5%, in 2009. The increase was primarily due to increases of $284.4
million, or 29%, in the real estate – commercial loans and $61.5 million, or 12%, in loans to individuals,
primarily from the $73 million, or 20%, increase in indirect loans. We implemented loan growth strategies in
2009 to provide better balancing of growth in the consumer and commercial sectors. This growth was offset by
declines in real estate – construction loans of $101.9 million, or 21%, and commercial, financial and agricultural
loans of $28.3 million, or 2%.
Total real estate – commercial loans increased $284.4 million, or 29%, in 2009. This portfolio totals $1.3 billion
or 28% of the total loan portfolio. Real estate – commercial loans of $1.1 billion, or 90% of the category total,
are located within Pennsylvania.
Total real estate – construction loans have decreased $101.9 million, or 21%, in 2009 as both a direct effort to
reduce our exposure to this segment, and as a result of declining construction activity due to the state of the
economy. This portfolio totals $387 million, or 8% of the total loan portfolio. The majority of the construction
properties are located within Pennsylvania, with 38% of the construction loans outside of Pennsylvania. At
origination, the estimated disbursement for the construction process is reviewed, including taking into
consideration weather delays, to ensure the adequacy of the interest reserve for the construction period. All
disbursements are reviewed by management as well as an independent engineer prior to the customer receiving
the funds. We also review the projects regularly for the status of the construction, the amount of disbursements
and to monitor the interest reserve. The typical period for a construction project is 18 – 24 months. Real estate –
construction loans of $113.9 million have term commitments that follow the construction period. Loans with
these term commitments will be moved to the real estate – commercial category when the construction phase of
the project is completed.
The majority of our loan portfolio is with borrowers located in Pennsylvania. As of December 31, 2009 and
2008, there were no concentrations of loans relating to any industry in excess of 10% of total loans.
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage
loans and before unearned income at December 31, 2009 were as follows (dollars in thousands):
Within
One
Year
One to
5 Years
After
5 Years
Total
Commercial and industrial
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate-construction (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate-commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 807,693
199,079
154,419
33,650
$114,754
117,856
478,779
18,346
$ 91,008
70,292
641,660
142,888
$1,013,455
387,227
1,274,858
194,884
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,194,841
$729,735
$945,848
$2,870,424
Loans at fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans at variable interest rates . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$299,245
430,490
$211,726
734,122
$729,735
$945,848
(a) The maturity of real estate – construction loans include term commitments of $113.9 million that follow the
construction period. Loans with these term commitments will be moved to the real estate – commercial
category when the construction phase of the project is completed.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Loan Portfolio (Continued)
Our internal maximum lending limit is $15.0 million per loan and $50.0 million per household. As of
December 31, 2009, we had 62 accounts that exceeded the $15.0 million level and five relationships that
exceeded the $50.0 million relationship level. We are working to reduce our exposure on these loans through
attrition and may consider select loan sales.
Nonperforming Loans
Nonperforming loans include nonaccrual loans and restructured loans. Nonaccrual loans represent loans on
which interest accruals have been discontinued. Restructured loans are those loans whose 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 under similar terms not available in the market.
We discontinue interest accruals on a loan when, based on current information and events, it is probable that we
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.
Nonperforming loans are closely monitored on an ongoing basis as part of our credit risk management and
work-out processes. The potential risk of loss on these loans is evaluated by comparing the loan balance to the
fair value of any underlying collateral or the present value of projected future cash flows. Losses are recognized
when determined to be probable and the amount is reasonably estimable.
Nonperforming loans increased $92.5 million to $148.6 million at December 31, 2009 compared to $56.1 million
at December 31, 2008. Included in nonaccrual loans at December 31, 2009 are a $46.3 million commercial and
industrial (“C&I”) credit relationship in Pennsylvania and a $39.0 million real estate-construction loan in Florida.
The Pennsylvania borrower is an individual who has had a loan relationship with the Bank since 2004 and whose
business is retail property management and development. The credit relationship in Florida is related to land to
be used in a condominium development. Unfunded commitments related to nonperforming loans was $1.7
million at December 31, 2009. At December 31, 2008 nonaccrual loans included a $31.2 million commercial
credit relationship that was transferred to other real estate owned during 2009.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Nonperforming Loans (Continued)
The following is a comparison of nonperforming and impaired assets and the effects on interest due to
nonaccrual loans at December 31:
Nonperforming and Impaired Assets and Effects
on Interest Income Due to Nonaccrual
(dollars in thousands)
2009
2008
2007
2006
2005
Nonperforming Loans:
Loans on nonaccrual basis . . . . . . . . . . .
Troubled debt restructured loans . . . . . .
$ 147,937
619
Total nonperforming loans . . . . . .
$ 148,556
$
$
55,922
132
56,054
$
$
54,119
147
54,266
$
$
12,043
160
12,203
$
$
11,391
173
11,564
Loans past due in excess of 90 days and still
accruing . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . .
Loans outstanding at end of period . . . . . . . .
Average loans outstanding . . . . . . . . . . . . . .
Nonperforming loans as a percentage of total
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . .
Net credit losses . . . . . . . . . . . . . . . . . . . . . .
Net credit losses as a percentage of average
loans outstanding . . . . . . . . . . . . . . . . . . . .
Provision for credit losses as a percentage of
net credit losses . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses as a percentage
15,154
$
$
24,287
$4,636,501
$4,557,227
16,189
$
$
3,262
$4,418,377
$4,084,506
12,853
$
$
2,172
$3,697,819
$3,687,037
13,051
$
$
1,507
$3,783,817
$3,707,233
13,977
$
$
1,655
$3,624,259
$3,597,705
3.20%
1.27%
1.47%
0.32%
$ 100,569
81,639
$
71,689
$
$
$
$
23,095
52,759
12,732
$
$
$
10,042
42,396
10,294
$
$
$
11,544
42,648
10,367
$
$
$
0.32%
8,628
39,492
10,199
1.57%
0.31%
0.28%
0.28%
0.28%
140.29%
181.39%
97.55%
111.35%
84.60%
of end-of-period loans outstanding . . . . . .
1.76%
1.19%
1.15%
1.13%
1.09%
Allowance for credit losses as a percentage
of nonperforming loans . . . . . . . . . . . . . . .
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 Securities:
Nonaccrual securities at market value . . . . . .
55%
94%
78%
349%
342%
$
$
$
7,631
521
7,110
3,258
$
$
$
6,265
550
5,715
-0-
$
$
$
4,124
381
3,743
-0-
$
$
$
3,246
706
2,540
-0-
$
$
$
2,344
506
1,838
-0-
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Nonperforming Loans (Continued)
The nonperforming loans as a percentage of total loans increased from 1.27% at December 31, 2008 to 3.20% at
December 31, 2009 due to deterioration in the real estate – construction loan portfolio primarily out of
Pennsylvania, as well as the transfer of the aforementioned $46.3 million C&I credit relationship in Pennsylvania
that migrated to nonaccrual status during the fourth quarter of 2009.
Other real estate owned increased $21.0 million to $24.3 million at December 31, 2009 compared to $3.3 million
at December 31, 2008. The increase was primarily due to one large commercial credit placed in other real estate
owned from nonaccrual loans in the first quarter of 2009.
Net credit losses were $71.7 million for the year 2009 compared to $12.7 million in the year 2008. Nearly half of
the net credit losses were from real estate-construction loans and over 80% of these were located outside of
Pennsylvania. $19.9 million, or 54%, of the out-of-state credits were in Florida and the other $16.8 million, or
46%, of the out-of-state charge-offs were in Maryland, Utah, Ohio, Oregon and Texas. Additionally, 28% of the
net credit losses were primarily related to two commercial, financial and agricultural loans in Pennsylvania.
Additional detail on credit risk is included in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” under “Credit Risk” on page 44.
Allowance for Credit Losses
Following is a summary of the allocation of the allowance for credit losses at December 31:
Allocation of the Allowance for Credit Losses
(dollars in thousands)
2009
2008
2007
2006
2005
Commercial, industrial, financial, agricultural and other
. . .
Real estate-construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate-commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate-residential
Loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,471
17,224
16,378
7,061
5,356
-0-
4,149
$18,072
10,165
8,648
7,560
4,338
-0-
3,976
$16,860
1,217
11,961
5,146
2,882
2
4,328
$17,030
1,019
13,529
4,064
3,063
14
3,929
$12,443
1,692
13,371
3,700
3,984
61
4,241
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$81,639
$52,759
$42,396
$42,648
$39,492
Allowance for credit losses as a percentage of end-of-period
loans outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.76%
1.19%
1.15%
1.13%
1.09%
The allowance for credit losses increased $28.9 million from $52.8 million at December 31, 2008 to $81.6
million at December 31, 2009. The allowance for credit losses as a percentage of end-of-period loans outstanding
increased from 1.19% at December 31, 2008 to 1.76% at December 31, 2009. The change in the allowance for
credit losses in 2009 was the result of an increase in estimated losses within the loan portfolio determined by
factors including certain loss events, portfolio migration analysis, historical loss experience, delinquency trends,
deterioration in collateral values and volatility in the economy. A significant portion of the increase can be
attributed to a $46.3 million C&I loan in Pennsylvania and a $39.0 million land loan in Florida.
The allowance for credit losses represents management’s estimate of probable losses inherent in the loan
portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Allowance for Credit Losses (Continued)
well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the
allowance through both periodic provisions charged to income and recoveries of losses previously incurred.
Reductions to the allowance occur as loans are charged off. Management evaluates the adequacy of the
allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of
historical loss experience, delinquency and nonaccrual trends, portfolio growth, underlying collateral coverage
and current economic conditions. This evaluation is subjective and requires material estimates that may change
over time. For a description of the methodology used to calculate the allowance for credit losses, please refer to
“Critical Accounting Policies and Significant Estimates – Allowance for Credit Losses.”
Management reviews the local and national economic information and industry data, including the trends in the
industries we believe are indicative of higher risk to our portfolio, and an allocation is made to the allowance for
credit losses based on this review, which is reflected in the “unallocated” line of the above table.
Investment Portfolio
Marketable securities that we hold in our investment portfolio, which are classified as “securities available for
sale,” may be a source of liquidity; however, we do not anticipate liquidating the investments prior to maturity.
As indicated in Note 21 “Fair Values of Assets and Liabilities,” $53.7 million of available for sale securities are
classified as Level 3 assets because of inactivity in the market and therefore would not be considered a source of
liquidity. As of December 31, 2009, securities available for sale had an amortized cost and fair value of $1.1
billion. Gross unrealized gains were $35.6 million and gross unrealized losses were $45.2 million.
The following is a schedule of the contractual maturity distribution of securities held to maturity and securities
available for sale at December 31, 2009:
Maturity Distribution of Securities Held to Maturity
At Amortized Cost
(dollar amounts in thousands)
U.S.
Government
Agencies and
Corporations
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 1 but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ -0-
55
63
-0-
$118
States and
Political
Subdivisions
Total
Amortized
Cost
Weighted
Average
Yield*
$
485
11,014
2,742
22,399
$
485
11,069
2,805
22,399
$36,640
$36,758
7.63%
7.51%
7.38%
6.48%
6.87%
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Investment Portfolio (Continued)
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(dollar amounts in thousands)
U.S.
Government
Agencies and
Corporations
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 1 but within 5 years . . . . . . . . . . . . . . . . . . . .
After 5 but within 10 years . . . . . . . . . . . . . . . . . . .
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,490
143,268
264,671
457,626
States and
Political
Subdivisions
$
330
12,236
23,659
134,053
Other
Securities
$
-0-
-0-
1,187
90,732
Total
Amortized
Cost (a)
Weighted
Average
Yield*
$
3,820
155,504
289,517
682,411
5.02%
3.44%
4.87%
5.17%
4.85%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$869,055
$170,278
$91,919
$1,131,252
(a) Equities are excluded from this schedule because they have an indefinite maturity.
*
Yields are calculated on a tax equivalent basis.
The decrease in average securities of $220.2 million in 2009 helped to fund loan growth and pay down short-term
borrowings. During 2009, the components of the investment portfolio with the largest decreases included $153.3
million of mortgage backed securities and $59.7 million in obligations of state and political subdivision. Pooled
trust preferred collateralized debt obligations decreased $27.8 million as a result of credit related other-than-
temporary impairment.
Our investment portfolio includes $69.4 million in pooled trust preferred collateralized debt obligations. The
valuation of these securities involves evaluating relevant credit and structural aspects, determining appropriate
performance assumptions and performing a discounted cash flow analysis.
See Note 7 “Securities Available for Sale,” Note 8 “Securities Held to Maturity,” Note 9 “Other Investments,”
Note 10 “Impairment of Investment Securities,” and Note 21 “Fair Values of Assets and Liabilities” for
additional information related to the investment portfolio.
Deposits
Total deposits increased $255.4 million, or 6%, in 2009, as non-interest bearing deposits increased $74.4 million,
or 13%, and savings deposits increased $412.7 million, or 22%. These increases were partially offset by a decline
in time deposits of $231.7 million, or 13% due to customer preferences in the current low interest rate
environment for higher liquidity and reduced maturity terms. Time deposits in denominations of $100,000 or
more decreased $191.0 million in 2009 and represented 9% of total deposits at December 31, 2009. These
deposits as of December 31, 2008 totaled $583.2 million and represented 14% of total deposits.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Deposits (Continued)
Time deposits of $100,000 or more had remaining maturities as follows as of the end of each year in the three-
year period ended December 31, 2009:
Maturity Distribution of Large Certificates of Deposit
(dollars in thousands)
2009
2008
2007
Amount
Percent
Amount
Percent
Amount
Percent
Remaining Maturity:
3 months or less . . . . . . . . . . . . . . . . . . . . . . .
Over 3 months through 6 months . . . . . . . . . .
Over 6 months through 12 months . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . .
$108,368
74,746
65,760
143,326
28% $174,150
123,589
19
156,553
17
128,944
36
30% $329,977
189,572
21
182,239
27
125,176
22
40%
23
22
15
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$392,200
100% $583,236
100% $826,964
100%
Short-Term Borrowings and Long-Term Debt
Short-term borrowings decreased $180.8 million, or 16%, from $1.1 billion as of December 31, 2008 to $958.9
million at December 31, 2009. Long-term debt decreased $14.8 million, or 5%, from $289.2 million at
December 31, 2008 to $274.4 million at December 31, 2009. The decrease in short-term borrowings was funded
primarily by increased deposits and a strategy to reduce investment portfolio leverage. For additional information
concerning our short-term borrowings, subordinated debentures and other long-term debt, please refer to Note 18
“Short-term Borrowings,” Note 19 “Subordinated Debentures” and Note 20 “Other Long-term Debt” of the
Consolidated Financial Statements.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below sets forth our contractual obligations to make future payments as of December 31, 2009. For a
more detailed description of each category of obligation, refer to the note in our Consolidated Financial
Statements indicated in the table below.
(dollars in thousands)
Footnote
Reference
1 Year
or Less
After 1
But Within
3 Years
After 3
But Within
5 Years
FHLB advances . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . .
ESOP loan . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . .
20
19
20
15
$117,142
-0-
2,000
3,730
$25,041
-0-
3,600
6,460
$12,823
-0-
-0-
5,350
After 5
Years
$
6,893
105,750
-0-
18,839
Total
$161,899
105,750
5,600
34,379
Total contractual obligations . . . . . . .
$122,872
$35,101
$18,173
$131,482
$307,628
The table above excludes unamortized premiums and discounts on FHLB advances because these premiums and
discounts do not represent future cash obligations. The table also excludes our cash obligations upon maturity of
certificates of deposit, which is set forth in Note 17 “Interest-Bearing Deposits” of the Consolidated Financial
Statements.
40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
Contractual Obligations and Off-Balance Sheet Arrangements (Continued)
The following sets forth our off-balance sheet commitments to extend credit, standby letters of credit and
commercial letters of credit as of December 31, 2009:
(dollars in thousands)
Footnote
Reference
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial letters of credit
14
14
14
Total lending-related commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$1,598,599
159,824
1,275
$1,759,698
Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily
represent future cash requirements since it is unknown if the borrower will draw upon these commitments and
often these commitments expire without being drawn upon. As of December 31, 2009, a reserve for probable
losses of $266 thousand was recorded for unused commitments and letters of credit.
Liquidity
Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers as well as our
operating cash needs with cost-effective funding. We generate funds to meet these needs primarily through the
core deposit base of FCB and the maturity or repayment of loans and other interest-earning assets, including
investments. Proceeds from the maturity and redemption of investment securities totaled $428.5 million during
2009 and were used either for liquidity or to invest in securities of similar quality as our current investment
portfolio. We also have available unused wholesale sources of liquidity, including overnight federal funds and
repurchase agreements, advances from the FHLB of Pittsburgh, borrowings through the discount window at the
FRB of Cleveland and access to certificates of deposit through brokers. We have increased our borrowing
capacity at the FRB by establishing a Borrower-in-Custody of Collateral arrangement that enables us to pledge
certain loans, not being used as collateral at the FHLB, as collateral for borrowings at the FRB. At December 31,
2009 our borrowing capacity at the FRB related to this program was $623.7 million. We can also raise cash
through the sale of earning assets, such as loans and marketable securities, or the sale of debt or equity securities
in the capital markets. In the fourth quarter of 2008, we issued 11.5 million shares of our common stock through
a public stock offering, which resulted in gross proceeds of $115.0 million and increased our capital by $108.8
million after deducting underwriting discounts, commissions and offering expenses.
Liquidity risk arises from the possibility that we may not be able to meet our financial obligations and operating
cash needs or may become overly reliant upon external funding sources. In order to manage this risk, our Board
of Directors has established an Asset and Liability Management Policy that identifies primary sources of
liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity
requirements based on limits approved by our Board of Directors. This policy designates our Asset/Liability
Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes
members of executive management, reviews liquidity on a periodic basis and approves significant changes in
strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by our
Treasury Department.
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Liquidity (Continued)
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. The level of deposits during any period is sometimes influenced by factors outside of management’s
control, such as the level of short-term and long-term market interest rates and yields offered on competing
investments, such as money market mutual funds. Deposits increased $255.4 million, or 6%, during 2009, and
comprised 78% of total liabilities at December 31, 2009, as compared to 74% at December 31, 2008.
Refer to “Financial Condition” above for additional information concerning our deposits, loan portfolio,
investment securities and borrowings.
Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices
and commodity prices. Our market risk is composed primarily of interest rate risk. Interest rate risk is comprised
of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from differences in the cash
flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are
related to different market rate indices, which do not always change by the same amount. Yield curve risk arises
when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve
changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability
products as certain borrowers have the option to prepay their loans when rates fall while certain depositors can
redeem or withdraw their deposits early when rates rise.
The process by which we manage our interest rate risk is called asset/liability management. The goals of our
asset/liability management are increasing net interest income without taking undue interest rate risk or material
loss of net market value of our equity, while maintaining adequate liquidity. Net interest income is increased by
growing earning assets and the increasing difference between the rate earned on earning assets and the rate paid
on interest bearing liabilities. Liquidity is measured by the ability to meet both depositors’ and credit customers’
requirements.
We use an asset/liability model to measure our interest rate risk. Interest rate risk measures include earnings
simulation and gap analysis. Gap analysis is a static measure that does not incorporate assumptions regarding
future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate
environment. Net interest income simulations explicitly measure the exposure to earnings from changes in
market rates of interest. Our current financial position is combined with assumptions regarding future business to
calculate net interest income under various hypothetical rate scenarios. Our net interest income simulations
assume a level balance sheet whereby new volumes equal run-offs. The ALCO reviews earnings simulations over
multiple years under various interest rate scenarios. Reviewing these various measures provides us with a
reasonably comprehensive view of our interest rate profile.
The following gap analysis compares the difference between the amount of interest-earning assets and interest-
bearing liabilities subject to repricing over a period of time. The ratio of rate sensitive assets to rate sensitive
liabilities repricing within a one year period was 0.72 and 0.74 at December 31, 2009 and 2008, respectively. A
ratio of less than one indicates a higher level of repricing liabilities over repricing assets over the next twelve
months.
Gap analysis has limitations due to the static nature of the model that holds volumes and consumer behaviors
constant in all economic and interest rate scenarios. Rate sensitive assets to rate sensitive liabilities repricing in
one year would indicate reduced net interest income in a rising interest rate scenario, and conversely, increased
net interest income in a declining interest rate scenario.
42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Market Risk (Continued)
Following is the gap analysis as of December 31, 2009 and 2008:
2009
(dollars in thousands)
0-90 Days
91-180
Days
181-365
Days
Cumulative
0-365 Days
Over 1 Year
Thru 5
Years
Over 5
Years
Loans . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . .
$ 2,298,032
140,836
327
$166,057
106,357
-0-
$326,804
135,379
-0-
$ 2,790,893
382,572
327
$1,639,953
552,411
-0-
$205,655
286,840
-0-
Total interest-sensitive assets
(ISA) . . . . . . . . . . . . . . . . .
2,439,195
272,414
462,183
3,173,792
2,192,364
492,495
Certificates of deposit
. . . . . . . . . .
Other deposits . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . .
266,221
2,283,648
1,085,158
252,528
-0-
13,460
473,039
-0-
55,223
991,788
2,283,648
1,153,841
605,442
-0-
37,864
13,676
-0-
40,476
Total interest-sensitive
liabilities (ISL) . . . . . . . . . .
3,635,027
265,988
528,262
4,429,277
643,306
54,152
Gap . . . . . . . . . . . . . . . . . . . . .
$(1,195,832) $
6,426
$ (66,079) $(1,255,485) $1,549,058
$438,343
ISA/ISL . . . . . . . . . . . . . . . . . . . . .
Gap/Total assets . . . . . . . . . . . . . . .
0.67
18.55%
1.02
0.10%
0.87
1.03%
0.72
19.48%
3.41
24.03%
9.09
6.80%
2008
(dollars in thousands)
0-90 Days
91-180
Days
181-365
Days
Cumulative
0-365 Days
Over 1 Year
Thru 5
Years
Over 5
Years
Loans . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . .
$ 2,059,435
227,511
289
$202,071
186,099
-0-
$351,213
231,478
-0-
$ 2,612,719
645,088
289
$1,607,006
358,419
-0-
$198,652
450,422
-0-
Total interest-sensitive assets
(ISA) . . . . . . . . . . . . . . . . .
2,287,235
388,170
582,691
3,258,096
1,965,425
649,074
. . . . . . . . . .
Certificates of deposit
Other deposits . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . .
379,513
1,870,943
1,179,358
336,641
-0-
43,043
576,788
-0-
10,178
1,292,942
1,870,943
1,232,579
535,510
-0-
146,830
14,103
-0-
46,314
Total interest-sensitive
liabilities (ISL) . . . . . . . . . .
3,429,814
379,684
586,966
4,396,464
682,340
60,417
Gap . . . . . . . . . . . . . . . . . . . . .
$(1,142,579) $
8,486
$ (4,275) $(1,138,368) $1,283,085
$588,657
ISA/ISL . . . . . . . . . . . . . . . . . . . . .
Gap/Total assets . . . . . . . . . . . . . . .
0.67
17.78%
1.02
0.13%
0.99
0.07%
0.74
17.72%
2.88
19.97%
10.74
9.16%
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Market Risk (Continued)
The following table presents an analysis of the potential sensitivity of our annual net interest income to gradual
changes in interest rates over a 12 month time frame versus if rates remained unchanged utilizing a flat balance
sheet, based on December 31, 2009 information (dollars in thousands).
The analysis and model becomes less reliable in a decreasing 200 basis point scenario given the current
unprecedented low interest rate environment with short-term federal funds trading in the 25 to 50 basis point
range. Results of the 200 basis point decline in interest rate scenario is affected by the fact that many of our
interest-bearing liabilities are at rates below 2% and therefore cannot decline 200 basis points, yet our interest-
sensitive assets are able to decline the full 200 basis points. As indicated in the table, “Average Balance Sheet
and Net Interest Analysis” on page 27, the cost of our interest-bearing liabilities in 2009 averaged 1.68% and
yield on our average interest-earning assets averaged 5.18%.
Net interest income change (12 months):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,413) 646
(4,076)
(3,489)
- 200
- 100
+ 100
+ 200
The ALCO is responsible for the identification and management of interest rate risk exposure. As such, the
ALCO continuously evaluates strategies to manage our exposure to interest rate fluctuations.
We recognize that asset/liability models are based on methodologies that may have inherent shortcomings.
Furthermore, asset/liability models require certain assumptions be made, such as prepayment rates on earning
assets and pricing impact on non-maturity deposits, which may differ from actual experience. These business
assumptions are based upon our experience, business plans and published industry experience. While
management believes such assumptions to be reasonable, there can be no assurance that modeled results will
approximate actual results.
Credit Risk
We maintain an allowance for credit losses at a level deemed sufficient to absorb losses inherent in the loan
portfolio at the date of each statement of financial condition. 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 impaired loans with a balance
greater than $100 thousand, loss experience trends, delinquency and other relevant factors. While allocations are
made to specific loans and pools of loans, the total allowance is available for all loan losses.
Nonperforming loans include nonaccrual loans and troubled debt restructured loans. Nonaccrual loans represent
loans on which interest accruals have been discontinued. Troubled debt restructured loans are those loans whose
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, who could not obtain comparable terms from alternate financing
sources.
We discontinue interest accruals on a loan when, based on current information and events, it is probable that we
will be unable to fully collect principal or interest due according to the contractual terms of the loan. A loan is
44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Credit Risk (Continued)
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.
Nonperforming loans are closely monitored on an ongoing basis as part of our loan review and work-out process.
The probable risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any
underlying collateral or the present value of projected future cash flows. Losses or specifically assigned
allowance for loan losses are recognized where appropriate.
The allowance for credit losses was $81.6 million at December 31, 2009, which represents a ratio of 1.76% of
loans outstanding compared to 1.19% reported at December 31, 2008. The amount of allowance related to
nonperforming loans was determined by using fair values obtained from current appraisals and updated
discounted cash flow analyses. The specific allocation in the allowance for credit losses related to nonperforming
loans provides for 22% of the total nonperforming loan balance. Management believes that the allowance for
credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at December 31, 2009.
The following table provides information on net charge-offs and nonaccrual loans by loan type as of
December 31, 2009 (dollars in thousands):
For Year Ended December 31, 2009
As of December 31, 2009
Net
Charge-offs
% of Total Net
Charge-offs
Net Charge-
offs as a % of
Average Loans
Nonaccrual
Loans
% of Total
Nonaccrual
Nonaccrual
Loans as a %
of Total Loans
Commercial, financial,
agricultural and other . . . . .
Real estate-construction . . . . .
Real estate-residential . . . . . . .
Real estate-commercial . . . . . .
Loans to individuals . . . . . . . .
Total loans, net of
$20,088
36,892
4,523
6,388
3,798
28%
52
6
9
5
0.44%
0.81
0.10
0.14
0.08
$ 52,055
66,538
2,262
27,067
15
35%
45
2
18
-0-
1.12%
1.44
0.05
0.59
0.00
unearned income . . . . .
$71,689
100
1.57
$147,937
100
3.20
As the above table illustrates, two categories of loans, real estate-construction and commercial, financial,
agricultural and other, were a significant portion of the net charge-offs and nonaccrual loans as of and for the
year ended December 31, 2009. Real estate-construction loans, which represent only 8% of total loans were 52%
of net charge-offs and 45% of total nonaccrual loans. Commercial, financial, agricultural and other loans were
26% of total loans, 28% of net charge-offs and 35% of total nonaccrual loans.
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Credit Risk (Continued)
In the real estate-construction loan category, loans generated outside of Pennsylvania represented a greater
percentage of the net charge-offs and nonaccrual loans than those generated within Pennsylvania, our core
market area. The following table for real estate-construction, real estate-commercial, and commercial, financial,
agricultural and other loans shows the percentage of such loans that were generated in and out of Pennsylvania;
the percentage of net charge-offs for the year ended December 31, 2009; and the percentage of nonaccrual loans
as of December 31, 2009 attributable to loans generated in and out of Pennsylvania.
% of Loans
In Category
% of Net
Charge-offs
In Category
% of
Nonaccrual Loans
In Category
Commercial, financial, agricultural and other
Loans generated in Pennsylvania . . . . . . . . . . . . . .
Loans generated out of Pennsylvania . . . . . . . . . . .
Real estate—construction
Loans generated in Pennsylvania . . . . . . . . . . . . . .
Loans generated out of Pennsylvania . . . . . . . . . . .
Real estate—commercial
Loans generated in Pennsylvania . . . . . . . . . . . . . .
Loans generated out of Pennsylvania . . . . . . . . . . .
81%
19%
62%
38%
90%
10%
66%
34%
19%
81%
100%
0%
96%
4%
6%
94%
100%
0%
During 2009, we implemented controls and policies to restrict the size of future loan exposures; defined our
lending market so that we are more focused on our loan originations within our core Pennsylvania markets; and
began to focus on a strategy that would avoid concentrations in credit and provide for a balanced consumer and
commercial portfolio. We are confident that these will mitigate some of the risk in our loan portfolio.
Results of Operations—2008 Compared to 2007
Net income was $43.1 million or $0.58 per diluted share compared to $46.3 million or $0.63 per diluted share in
2007. The return on average equity and average assets was 7.45% and 0.70%, respectively, compared to 8.08%
and 0.80% in 2007.
During 2008, First Commonwealth raised $115.0 million of common equity through a public stock offering and
elected not to participate in the Capital Purchase Program which is part of the federal government’s Troubled
Asset Relief Program. Compared to 2007, total loans increased $720.6 million, or 20%, net interest income
increased $27.2 million, or 17%, and net interest margin increased 23 basis points. Impairment charges of
$9.2 million, after tax, were recorded in 2008 relating to bank equity securities, trust preferred collateralized debt
obligations and low income housing partnerships. In both 2008 and 2007, we opened three new community
banking offices.
Earnings for 2008 were favorably impacted by a $27.2 million increase in net interest income; a $577 thousand
increase in service charges on deposit accounts; a $1.0 million increase in card related interchange income; a
$1.7 million increase in letter of credit fees; a $2.2 million increase in fees from interest rate derivatives; and a
$564 thousand decrease in advertising.
Earnings for 2008 were negatively impacted by a $13.1 million increase in the provision for credit losses; net
securities losses of $11.5 million; a $7.4 million increase in salaries and employee benefits; a $1.3 million
increase in net occupancy expense; and a $2.5 million increase in other expenses.
Net interest income for 2008 was $27.2 million, or 17% higher than 2007, primarily due to the $30.7 million
decline in interest expense, resulting from an 86 basis point decrease in the cost of interest-bearing liabilities.
Interest income decreased $3.5 million as the yield on interest-earning assets declined 52 basis points which was
partially offset by the contribution from the $368.9 million increase in average interest-earning assets.
46
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2008 Compared to 2007 (Continued)
Net interest margin, on a tax equivalent basis, for the year 2008 increased 23 basis points to 3.57% from 3.34%
in 2007, as the cost of interest-bearing liabilities exceeded the decreases in yields on interest-earning assets.
Interest and fees on loans decreased $2.4 million primarily due to a 78 basis point decline in the yield on loans
from 7.09% to 6.31% which was partially offset by the $397.5 million, or 11%, growth in average loans. Interest
income on investment securities remained stable from 2007 as the $25.3 million decline in the average
investment securities offset the slight increase in investment yields. Interest on deposits decreased $31.3 million
due to declines in both rates paid and balances. The cost of interest-bearing deposits decreased 76 basis points, as
a result of the lower interest rate environment and deposit mix changes. Average interest-bearing deposits
decreased $72.5 million, or 2%, as time deposits declined $139.3 million and interest-bearing demand deposits
and savings deposits increased $66.8 million.
Interest expense on short-term borrowings increased $3.4 million, or 30%, primarily as a result of the $490.7
million growth in average balances, offset by a 217 basis point decline in rates paid for these borrowings. Interest
expense on long-term debt declined $2.8 million as the $76.4 million decrease in average balances offset the 13
basis point increase in rate.
The provision for credit losses increased $13.1 million in 2008 compared to 2007, and exceeded net charge-offs
by $10.4 million. The increase was primarily a result of an $8.8 million provision added in 2008 for four
out-of-market commercial real estate construction loans. Loan growth of $720.6 million also contributed to the
increase in the provision. The allowance for credit losses was $52.8 million at year-end 2008, which represents a
ratio of 1.29% of average loans compared to $42.4 million and 1.15% at December 31, 2007.
Net credit losses for 2008 increased $2.4 million. Net credit losses as a percentage of average loans outstanding
increased to 0.31% at December 31, 2008 compared to 0.28% at December 31, 2007.
Total non-interest income of $42.8 million for 2008 decreased $6.0 million, or 12%, compared to 2007, primarily
as a result of net securities losses. Offsetting the losses were increases in service charges on deposit accounts,
insurance and retail brokerage commissions, card related interchange income, letter of credit fees and fees from
interest rate derivatives.
Service charges on deposit accounts increased $577 thousand primarily due to revenue generated from overdraft
fees and the opening of three new branch offices. Insurance and retail brokerage commissions, including retail
advisor fees, increased $1.7 million, or 49%, as a result of higher sales driven by additional producers and an
enhanced calling program. Income from BOLI decreased $578 thousand, or 10%, in 2008 compared to 2007 due
to reduced crediting rates of our insurance carriers. Card related interchange income increased $1.0 million
primarily due to higher usage of debit cards and larger dollar transactions.
Increased loan volumes resulted in higher letter of credit fees as well as increased fees from interest rate
derivatives of which $1.2 million was related to interest rate swaps and $1.0 million related to risk participation
agreements.
Net securities losses for 2008 were primarily due to other-than-temporary impairment charges of $9.0 million
recorded on a trust preferred collateralized debt obligation security and $4.0 million on equity securities issued
by seven Pennsylvania based financial institutions. The 2008 impairment write-downs were partially offset by
gains of $871 thousand on the sale of equity securities and $441 thousand on the mandatory redemption of
Class B Common Stock in VISA Inc. The 2007 net securities gains were primarily due to trust preferred
investment securities being called at a premium.
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Results of Operations—2008 Compared to 2007 (Continued)
Total non-interest expense was $158.6 million for 2008 reflecting an increase of $10.6 million, or 7%, over 2007
primarily due to higher salaries and employee benefits, net occupancy expense, and low income housing
partnership impairment.
Salaries and employee benefits increased $7.4 million, or 10%, primarily as a result of higher incentive
compensation expense of $2.7 million related to the strong loan and deposit growth in 2008, $1.1 million due to
greater insurance and retail brokerage sales, as well as annual merit increases and additional personnel expenses
related to our new branch offices.
Net occupancy expense increased $1.3 million, or 10%, due to higher rental expense, utilities, and building
repairs and maintenance. Data processing expense increased $475 thousand, or 13%, primarily due to higher
debit card related processing fees as a result of increased usage and an increased card base. Advertising expense
decreased $564 thousand, or 20%, primarily due to additional expenses in 2007 associated with branding efforts.
Pennsylvania shares tax expense decreased $460 thousand, or 8%, due to a change in the tax calculation which
allows the deduction of goodwill from the equity calculation.
Other professional fees and services increased $632 thousand due to additional expenses incurred for evaluating
pooled trust preferred collateralized debt obligations for fair value and impairment, professional development and
sales training. Other operating expenses increased $843 thousand primarily due to costs associated with higher
loan originations, and higher collection and repossession expense.
An impairment charge of $1.2 million was recorded in 2008 on low income housing partnerships because our
estimated future benefits could not support our carrying value.
Income tax expense increased $679 thousand in 2008 primarily due to decreases in tax free income and tax
credits, which resulted in an increase in our effective tax rate to 13% in 2008 compared to 11% in 2007.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information appearing in Item 7 of this report under the caption “Market Risk” is incorporated herein by
reference in response to this item.
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
First Commonwealth 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, 2009.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31,
2009 has been audited by KPMG, 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, 2010
/s/
JOHN J. DOLAN
John J. Dolan
President and Chief Executive Officer
/s/ ROBERT E. ROUT
Robert E. Rout
Executive Vice President and Chief Financial Officer
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
First Commonwealth Financial Corporation:
We have audited First Commonwealth Financial Corporation and subsidiaries’ internal control over financial
reporting as of December 31, 2009, 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,
included in the accompanying management’s report on internal control. Our responsibility is to express an
opinion on 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, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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, First Commonwealth Financial Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statements of financial condition of First Commonwealth Financial Corporation
and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009, and
our report dated March 1, 2010 expressed an unqualified opinion on those consolidated financial statements.
Pittsburgh, Pennsylvania
March 1, 2010
50
/s/ KPMG LLP
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
The Board of Directors and Shareholders
First Commonwealth Financial Corporation:
We have audited the accompanying consolidated statements of financial condition of First Commonwealth
Financial Corporation and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2009. 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 2009 and
2008, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 2009 First Commonwealth Financial
Corporation changed their method of accounting for other-than-temporary impairments.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), First Commonwealth Financial Corporation’s internal control over financial reporting as of
December 31, 2009, 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,
2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Pittsburgh, Pennsylvania
March 1, 2010
/s/ KPMG LLP
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2009
2008
(dollars in thousands,
except share data)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity, at amortized cost, (Fair value $37,586 in 2009 and
$50,558 in 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
$
89,232
327
1,133,856
$
88,277
289
1,349,920
36,758
51,431
50,840
51,431
Portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,636,501
(81,639)
4,418,377
(52,759)
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,554,862
4,365,618
Premises and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortizing intangibles, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,742
24,287
159,956
7,407
317,435
72,636
3,262
159,956
10,233
273,418
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,446,293
$6,425,880
LIABILITIES
Deposits (all domestic):
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 641,231
3,894,554
$ 566,845
3,713,498
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,535,785
958,932
38,318
105,750
168,697
4,280,343
1,139,737
63,778
105,750
183,493
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
274,447
289,243
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,807,482
5,773,101
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued . . . . . . . . . . . .
Common stock, $1 par value per share, 200,000,000 shares authorized; 86,600,431 shares
issued and 85,151,875 shares outstanding at December 31, 2009; 200,000,000 shares
authorized, 86,600,431 shares issued and 85,050,744 shares outstanding at December 31,
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (1,448,556 and 1,549,687 shares at December 31, 2009 and 2008, respectively,
-0-
-0-
86,600
301,523
278,887
(6,045)
86,600
303,008
309,947
(21,269)
at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,554)
(5,600)
(17,907)
(7,600)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
638,811
652,779
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,446,293
$6,425,880
The accompanying notes are an integral part of these consolidated financial statements.
52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2009
2008
2007
(dollars in thousands, except share data)
$
232,030
$
251,546
$
253,951
50,591
10,445
208
-0-
7
60,556
13,143
2,339
2
10
60,260
13,732
2,958
157
37
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
293,281
327,596
331,095
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
Impairment losses on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncredit related losses on securities not expected to be sold
(recognized in other comprehensive income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance and retail brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card related interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collection and repossession expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,802
4,216
6,170
6,583
12,753
86,771
206,510
100,569
105,941
101,517
14,828
7,567
15,086
22,653
138,998
188,598
23,095
165,503
(72,574)
(13,011)
36,389
(36,185)
273
4,805
17,440
7,259
4,442
8,559
12,732
19,325
86,059
14,053
12,085
4,687
5,314
2,826
5,010
10,471
30,646
171,151
(45,885)
(25,821)
-0-
(13,011)
1,517
5,639
18,558
5,297
5,523
7,609
11,699
42,831
83,507
15,055
11,976
4,283
5,309
3,208
2,546
608
32,123
158,615
49,719
6,632
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(20,064) $
43,087
$
132,770
11,442
8,526
16,975
25,501
169,713
161,382
10,042
151,340
-0-
-0-
-0-
1,174
5,881
17,981
3,560
6,101
6,564
7,609
48,870
76,132
13,710
12,000
3,808
5,769
3,428
2,224
506
30,430
148,007
52,203
5,953
46,250
Average Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average Shares Outstanding Assuming Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share Data:
Basic (Loss) Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted (Loss) Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Dividends Declared per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,589,780
84,589,780
74,477,795
74,583,236
72,816,208
72,973,259
$
$
$
(0.24) $
(0.24) $
$
0.18
0.58
0.58
0.68
$
$
$
0.64
0.63
0.68
The accompanying notes are an integral part of these consolidated financial statements.
53
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I
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2009
2008
2007
(dollars in thousands)
Operating Activities
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
$ (20,064) $ 43,087
$ 46,250
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax benefit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses (gains) on securities and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . .
Changes, net of acquisition:
Decrease in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in prepaid FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,569
(29,108)
9,806
35,421
-0-
(232)
(2,059)
(4,442)
3,812
(2,568)
(2,534)
(25,918)
(5,449)
23,095
(7,436)
10,398
10,901
-0-
38
(3,956)
(5,523)
2,589
(7,264)
532
(66)
2,387
10,042
(2,474)
9,363
(1,992)
(100)
577
(4,746)
(6,101)
3,701
(64)
253
(122)
7,366
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,234
68,782
61,953
Investing Activities
Transactions with securities held to maturity:
Proceeds from maturities and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,423
21,067
7,355
Transactions with securities available for sale:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment
7,589
414,032
(211,467)
9,070
(38)
(317,932)
(6,655)
20,064
404,883
(313,592)
8,186
1,430
(740,596)
(12,094)
2,084
424,021
(336,329)
6,838
(734)
70,892
(9,810)
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(90,978)
(610,652)
164,317
Financing Activities
Repayments of other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from capital issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on dividend reinvestment plan purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option tax benefit
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,139)
2,403
-0-
-0-
(369)
(29,677)
(63,600)
(117,205)
255,671
484
(18)
149
34,699
955
88,277
(289,300)
36,310
-0-
108,830
(916)
(49,375)
109,800
675,979
(66,516)
4,360
-0-
184
(59,727)
23,500
(2,400)
-0-
(920)
(49,554)
(30,400)
(115,413)
22,369
1,817
(9,971)
86
529,356
(220,613)
(12,514)
100,791
5,657
95,134
Cash and cash equivalents at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 89,232
$ 88,277
$ 100,791
The accompanying notes are an integral part of these consolidated financial statements.
57
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
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. Although our current
estimates incorporate current conditions and how we expect them to change in the future, it is reasonably
possible that in the near term, actual conditions could be worse than anticipated in those estimates, which could
materially affect our results of operations and financial condition. Amounts subject to significant estimates are
items such as the allowance for credit losses, goodwill and intangible assets, the fair value of financial
instruments and other-than-temporary impairments. Among other effects, such changes could result in future
impairments on investment securities and goodwill and intangible assets and the establishment of additional
allowances for credit losses.
Through its subsidiaries, which include one commercial bank, an insurance agency, and a financial advisor, First
Commonwealth provides a full range of loan, deposit, trust, insurance, and personal financial planning services
primarily to individuals and small to middle market businesses in fifteen counties in central and western
Pennsylvania. Under current conditions, First Commonwealth is reporting one business segment.
First Commonwealth is subject to regulations of certain state and federal agencies. These regulatory agencies
periodically examine First Commonwealth for adherence to laws and regulations. As a consequence, the cost of
doing business may be affected.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of First Commonwealth previously
defined above. All material intercompany transactions have been eliminated in consolidation. Certain
reclassifications have been made in the Consolidated Financial Statements for 2008 and 2007 to conform to the
classifications presented for 2009.
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 or a controlling financial interest in a variable interest entity (“VIE”) by
considering the provisions of FASB ASC Topic 810, “Consolidation.” Under FASB ASC Topic 810, an entity
that holds a variable interest in a VIE is required to consolidate the VIE if the entity is determined to be the
primary beneficiary which generally means it 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 13 “Variable Interest
Entities” for additional information related to FASB ASC Topic 810.
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.
First Commonwealth has evaluated subsequent events through March 1, 2010, the date these financial statements
were issued.
58
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 1—Statement of Accounting Policies (Continued)
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 adjusted for amortization of premium and accretion
of discount on a level yield basis. 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. Pooled trust preferred
collateralized debt obligations are measured by evaluating relevant credit and structural aspects, determining
appropriate performance assumptions and performing a discounted cash flow analysis. This evaluation includes
detailed credit, performance and structural evaluations of collateral. Other factors in the pooled trust preferred
collateralized debt obligations valuation include terms of the structure, the cash flow waterfall (for both interest
and principal), the over collateralization and interest coverage tests and events of default/liquidation. 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 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 monthly
cycles.
59
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 1—Statement of Accounting Policies (Continued)
Allowance for Credit Losses (Continued)
All impaired credits in excess of $100 thousand are individually reviewed quarterly. A specific reserve is
established for impaired loans that is equal to the total amount of probable unconfirmed losses for the impaired
loans that are 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 watch list loans that are classified as substandard (and still accruing interest). The
reserve on OAEM loans is calculated as the historical average amount of probable unconfirmed losses for the
loans similar to those that are reviewed.
The allowance based on historical trends uses charge off experience to estimate probable unconfirmed losses
based on charge off history for the greater of the eight most recent quarters or the twenty most recent quarters.
The loss emergence periods, which is the average time period from when a loan becomes delinquent until it is
charged off, are calculated for each loan type and applied to the historical loss percentages. Adjusted historical
loss experience percentages are applied to non-classified loans from the watch list, as well as all other loans not
on the watch list, to obtain the portion of the allowance for credit losses which is based on historical trends.
Before applying the adjusted historical loss experience percentages, loan balances are reduced by the portion of
the loan balances which are subject to guarantee by a government agency.
Each loan category’s most recent four quarter average delinquency percentage is compared to its twenty quarter
average. An allocation is made if the four quarter delinquency percentage is higher than its twenty quarter
average.
An additional allowance may be made by management to cover specific factors such as portfolio risks 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. 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 purchased insurance on the lives of certain groups of employees. The policies accumulate
asset values to meet future liabilities including the payment of employee benefits such as health care. Increases in
the cash surrender value are recorded in the Consolidated Statements of Operations. 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 $156.9 million and $153.3 million at December 31, 2009 and 2008, respectively. Under some of
these policies, the beneficiaries receive a portion of the death benefit. The net present value of the future death
benefits scheduled to be paid to the beneficiaries was $2.9 million and $2.8 million as of December 31, 2009 and
2008, respectively, and is reflected in “Other Liabilities” on the Consolidated Statements of Financial Condition.
The accounting treatment for these policies, which was issued under FASB ASC Topic 715, “Compensation–
Retirement Benefits” was effective for fiscal years beginning after December 15, 2007. As permitted by FASB
ASC Topic 715, First Commonwealth recognized this change in accounting principle as of January 1, 2008,
through a cumulative-effect charge to retained earnings totaling $984 thousand.
62
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 1—Statement of Accounting Policies (Continued)
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation 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. A straight-line 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, except for one software license that is being amortized over ten years.
Business Combinations
First Commonwealth accounts for business combinations using the purchase method in accordance with FASB
ASC Topic 805, “Business Combinations.” Under the purchase method, net assets of the business acquired are
recorded at their fair value as of the acquisition date. 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 acquisition.
In December 2007, the FASB issued new authoritative accounting guidance under FASB ASC Topic 805, which
applies prospectively to any business combination entered into with an acquisition date that is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. See Note 2 “New
Accounting Pronouncements” for additional information.
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 and again at any quarter-end if a material event occurs during the quarter that may affect
goodwill. This review evaluates potential impairment by determining if our fair value has fallen below carrying
value.
Other Intangible Assets
Other intangible assets consist of core deposits and covenants not to compete obtained through acquisitions and
are amortized over their estimated lives using the present value of the benefit of the core deposits and straight-
line methods of amortization. Core deposit intangibles are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable.
63
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 1—Statement of Accounting Policies (Continued)
Accounting for the Impairment of Long-Lived Assets
First Commonwealth reviews long-lived assets, such as premises and equipment and intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. These changes in circumstances may include a significant decrease in the market value of an asset or
the extent or manner in which an asset is used. If there is an indication that the carrying amount of an asset may
not be recoverable, future undiscounted cash flows expected to result from the use of the asset are estimated. If
the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the
difference between the carrying value and fair market value of the asset. Long-lived assets classified as held for
sale are measured at the lower of their carrying amount or fair value less cost to sell. Depreciation or
amortization is discontinued on long-lived assets classified as held for sale.
Income Taxes
First Commonwealth records taxes in accordance with the asset and liability method of FASB ASC Topic 740,
“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. In
accordance with FASB ASC Topic 740, interest or penalties incurred for taxes will be recorded as a component
of non-interest expense.
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
postretirement plans. Comprehensive income is reported in the accompanying Consolidated Statements 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
25 “Unearned ESOP Shares” follows FASB ASC Topic 718, “Compensation—Stock Compensation” for ESOP
shares acquired after December 31, 1992 (“new 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 FASB
64
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 1—Statement of Accounting Policies (Continued)
Employee Stock Ownership Plan (Continued)
ASC Topic 718 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.
Dividends on 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.
Derivatives and Hedging Activities
First Commonwealth accounts for derivative instruments and hedging activities in accordance with FASB ASC
Topic 815, “Derivatives and Hedging.” First Commonwealth recognizes all derivatives as either assets or
liabilities on the Statements of Financial Condition and measures those instruments at fair value. For derivatives
designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the
hedged risk are recognized in earnings. 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. As of December 31, 2009, First Commonwealth has
interest derivative positions that are not designated as hedging instruments. See Note 6 “Derivative” for a
description of these 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.
65
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 1—Statement of Accounting Policies (Continued)
Fair Value Measurements
In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” First Commonwealth
groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
These levels are:
•
•
•
Level 1—Valuations for assets and liabilities traded in active exchange markets, such as the New York
Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions
involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly
traded bank stocks.
Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations
are obtained for identical or comparable assets or liabilities from alternative pricing sources with
reasonable levels of price transparency. Level 2 securities include U.S. Government securities,
municipal securities, FHLB stock, interest rate derivatives that include interest rate swaps and risk
participation agreements, certain other real estate owned and certain impaired loans.
Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies,
including option pricing models, discounted cash flow models and similar techniques, and not based on
market exchange, dealer or broker traded transactions. If the inputs used to provide the evaluation are
unobservable and/or there is very little, if any, market activity for the security or similar securities, the
securities would be considered Level 3 securities. Level 3 valuations incorporate certain assumptions
and projections in determining the fair value assigned to such assets or liabilities. The assets included
in Level 3 are select municipal securities, corporate securities, trust preferred collateralized debt
obligations, nonmarketable equity investments and certain impaired loans.
In general, fair values of financial instruments are based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon pricing models that primarily use, as inputs,
observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our
creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are
applied consistently over time. See Note 21 “Fair Values of Assets and Liabilities” for additional information.
Note 2—New Accounting Pronouncements
New FASB authoritative accounting guidance, Accounting Standards Update (“ASU”) No. 2009-5, “Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value” provides guidance for
measuring the fair value of a liability in circumstances in which a quoted price in an active market for the
identical liability is not available. The new authoritative accounting guidance also clarifies that when estimating
the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability. The new authoritative
accounting guidance under FASB ASC Topic 820 is effective for interim and annual periods beginning after
August 2009 and did not have a material impact on First Commonwealth’s financial condition or results of
operations.
66
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 2—New Accounting Pronouncements (Continued)
In June 2009, FASB issued FASB ASC Topic 105, “Generally Accepted Accounting Principles.” FASB ASC
Topic 105 established the FASB Accounting Standards Codification (the “Codification”) to become the single
source of authoritative GAAP recognized by FASB to be applied by nongovernmental entities, with the
exception of guidance issued by the SEC and its staff. All guidance contained in the Codification carries an equal
level of authority. The provisions of FASB ASC Topic 105 are effective for interim and annual periods ending
after September 15, 2009. As the Codification did not change GAAP, the adoption of FASB ASC Topic 105 had
no impact on First Commonwealth’s financial condition or results of operations.
New authoritative accounting guidance, FASB ASU No. 2009-17, “Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities” requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation
purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the
VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of
the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could
potentially be significant to the VIE. The new guidance is effective for fiscal years beginning after November 15,
2009. The adoption of FASB ASU No. 2009-17 is not expected to have a material impact on First
Commonwealth’s financial condition or results of operations.
New authoritative accounting guidance, FASB ASU No. 2009-16, “Transfers and Servicing (Topic 860)
Accounting for Transfers of Financial Assets” makes several significant amendments to FASB ASC Topic 860,
“Transfers and Servicing” including the removal of the concept of a qualifying special-purpose entity. The new
guidance also clarifies that a transferor must evaluate whether it has maintained effective control of a financial
asset by considering its continuing direct or indirect involvement with the transferred financial asset. The new
authoritative accounting guidance is effective for fiscal years beginning after November 15, 2009. Management
does not expect the adoption of FASB ASU No. 2009-16 to have a material impact on First Commonwealth’s
financial condition or results of operations.
In June 2009, the FASB issued new authoritative accounting guidance under FASB ASC Topic 855, “Subsequent
Events.” This new guidance establishes general standards of accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. FASB
ASC Topic 855 was effective for interim or annual financial periods ending after June 15, 2009. The adoption of
FASB ASC Topic 855 did not have a material impact on First Commonwealth’s financial condition or results of
operations.
In April 2009, FASB issued new authoritative accounting guidance under FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.” Effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009, the new guidance under FASB ASC
Topic 820 provides guidelines for making fair value measurements more consistent with the other principles
presented in FASB ASC Topic 820 when the volume and level of activity for assets or liabilities have
significantly decreased. The new guidance under FASB ASC Topic 820 relates to determining fair values when
there is no active market or where the price inputs being used represent distressed sales. We early adopted the
new guidance under FASB ASC Topic 820 on March 31, 2009, and the adoption did not have a material impact
on our financial condition or results of operations.
67
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 2—New Accounting Pronouncements (Continued)
In April 2009, FASB issued new authoritative accounting guidance under FASB ASC Topic 320, “Investments—
Debt and Equity Securities.” Effective for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009, the new guidance under FASB ASC Topic 320
amended other-than-temporary impairment guidance in U.S. GAAP related to the presentation and disclosure of
other-than-temporary impairment on debt and equity securities in the financial statements. We early adopted the
new guidance under FASB ASC Topic 320 on March 31, 2009. In accordance with this new accounting
guidance, the noncredit related portion of other-than-temporary impairment losses previously recognized in
earnings during 2008 was reclassified as a cumulative effect adjustment that increased retained earnings and
decreased accumulated other comprehensive income (“OCI”). Of the $13.0 million in other-than-temporary
impairment charges recognized in 2008, $6.5 million related to noncredit related impairment, and accordingly,
has been recorded, net of tax, as a cumulative effect adjustment in the Consolidated Statements of Changes in
Shareholders’ Equity as of January 1, 2009. Refer to Note 10 “Impairment of Investment Securities” for further
discussion.
In April 2009, FASB issued new authoritative accounting guidance under FASB ASC Topic 825, “Financial
Instruments.” Effective for interim and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009, the new guidance under FASB ASC Topic 825 requires
disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as
well as in annual financial statements. The new guidance under FASB ASC Topic 825 only relates to disclosures
and therefore did not have an impact on First Commonwealth’s financial condition or results of operations. We
adopted the new guidance under FASB ASC Topic 825 on June 30, 2009.
In March 2008, FASB issued new authoritative guidance under FASB ASC Topic 815, “Derivatives and
Hedging.” Effective for fiscal years and interim periods beginning after November 15, 2008, the new guidance
amends and expands the disclosure requirements of FASB ASC Topic 815 by requiring enhanced disclosures for
how and why an entity uses derivative instruments; how derivative instruments and related hedged items are
accounted for under FASB ASC Topic 815 and its related interpretations; and how derivative instruments and
related items affect an entity’s financial position, financial performance and cash flows. The adoption of the new
authoritative guidance under FASB ASC Topic 815 did not have a material impact on First Commonwealth’s
financial condition or results of operations as it only relates to disclosures.
In December 2007, the FASB issued new authoritative accounting guidance under FASB ASC Topic 805,
“Business Combinations,” which applies to any business combination entered into with an acquisition date that is
on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In
accordance with the new guidance under FASB ASC Topic 805, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at fair value on the date of acquisition with limited
exceptions. The new guidance under FASB ASC Topic 805 also changes the accounting and disclosures for
certain items related to business combinations to more accurately reflect the cost of the acquisition. The adoption
of the new guidance under FASB ASC Topic 805 will have an impact on accounting for any business
combination after January 1, 2009.
In February 2007, the FASB issued new authoritative accounting guidance under FASB ASC Topic 825,
“Financial Instruments.” Effective for fiscal years beginning after November 15, 2007, the new guidance permits
entities to irrevocably elect to measure select financial instruments and certain other items at fair value. The
68
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 2—New Accounting Pronouncements (Continued)
unrealized gains and losses will be required to be included in earnings each reporting period for the items that
fair value measurement is elected. The new guidance currently did not have an impact on First Commonwealth’s
financial condition or results of operations because management elected to not measure any existing financial
instruments at fair value per FASB ASC Topic 825 at this time; however, in the future we may elect to adopt the
new authoritative accounting guidance under FASB ASC Topic 825 for select financial instruments.
69
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O
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 4—Supplemental Cash Flow Disclosures
2009
2008
2007
(dollars in thousands)
Cash paid during the year for:
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$91,267
$ 5,100
$142,176
$ 13,500
$163,402
6,800
$
Noncash investing and financing activities:
ESOP loan reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred to other real estate owned and repossessed assets . . . . . .
Investments committed to purchase, not settled . . . . . . . . . . . . . . . . . . . . .
Loans sold, not settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross decrease (increase) in market value adjustment to securities
$ 2,000
$29,503
$
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$
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$ 16,462
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available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30,111
$ (33,108) $ 11,264
Correction of Prior Period Error in Cash Flow
For reporting periods prior to March 31, 2009, we have identified an error in the line classification on our
Consolidated Statements of Cash Flows. In these periods, we presented the change in “Payable due to
investments purchased/not settled” in the Operating Activities section of the Consolidated Statements of Cash
Flows, instead of in the Investing Activities section.
The error has been corrected in the Consolidated Statements of Cash Flows presented on page 57 by removing
the transaction from the Operating Activities section and including it in the Investing Activities section. Also,
unsettled transactions related to the purchase or sale of investment securities are now presented as part of the
noncash transaction disclosure table presented above.
We have not amended or restated any prior period filings as this error does not impact our reported net income,
net cash flows, or shareholders’ equity. The effect of the correction of this error on Net cash (used in) provided
by operating activities and Net cash (used in) provided by investing activities for prior reporting periods is
reflected below.
For Years Ended
December 31,
2008
2007
(dollars in thousands)
Consolidated Statements of Cash Flow
Net Cash (used in) provided by operating activities:
Original
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 52,320
$ 68,782
$ 69,746
$ 61,953
Net Cash (used in) provided by investing activities:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original
Revised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(594,190)
$(610,652)
$156,524
$164,317
71
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 4—Supplemental Cash Flow Disclosures (Continued)
The effect of this correction on the Supplemental Disclosure for prior periods is as follows:
For Years Ended
December 31,
2008
2007
(dollars in thousands)
Supplemental Cash Flow Disclosure
Investments purchased, not settled:
Original
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$-0-
$-0-
$
-0-
$16,462
Note 5—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 average balances of $2.3 million during 2009 and $1.3 million during 2008
with the Federal Reserve Bank.
Note 6—Derivatives
First Commonwealth is a party to interest rate derivatives that are not designated as hedging instruments. These
derivatives relate to interest rate swaps that First Commonwealth enters into with customers to allow customers
to convert variable rate loans to a fixed rate. First Commonwealth pays interest to the customer at a floating rate
on the notional amount and receives interest from the customer at a fixed rate for the same notional amount. At
the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered
into with another financial institution. First Commonwealth pays the other financial institution interest at the
same fixed rate on the same notional amount as the swap entered into with the customer, and receives interest
from the financial institution for the same floating rate on the same notional amount. The changes in the market
value of the swaps offset each other, except for the credit risk of the counterparties, which was calculated by
taking into consideration the risk rating, probability of default and loss given default for all counterparties.
We have four risk participation agreements with financial institution counterparties for interest rate swaps related
to loans in which we are a participant. The risk participation agreements provide credit protection to the financial
institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.
The fee received, less the estimate of the liability for the credit exposure, was recognized in earnings at the time
of the transaction.
A liability of $866 thousand was recorded for credit risk on an aggregate notional amount outstanding of $229.4
million for interest rate derivatives and $125.9 million for risk participation agreements at December 31, 2009.
The fair value of our derivatives is included in a table in Note 21 “Fair Values of Assets and Liabilities” in the
line items “Other Assets” and “Other Liabilities.”
72
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 6—Derivatives (Continued)
The table below presents the amount representing the change in value of derivative assets and derivative
liabilities attributable to credit risk included in “Other income” on the Consolidated Statements of Operations:
For the Year Ended
December 31,
2009
2008
(dollar amounts in thousands)
Non-hedging interest rate derivatives:
Decrease in other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 661
$205
Note 7—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):
2009
2008
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Obligations of U.S.
Government Agencies:
Mortgage Backed
Securities-
Residential . . . . . . . . $
Obligations of U.S.
Government-Sponsored
Enterprises:
Mortgage Backed
Securities-
Residential . . . . . . . .
Mortgage Backed
Securities-
Commercial . . . . . . .
Other Government-
Sponsored
Enterprises . . . . . . . .
Obligations of States and
Political Subdivisions . . .
Corporate Securities . . . . . .
Pooled Trust Preferred
Collateralized Debt
Obligations . . . . . . . . . . .
Total Debt
44,357
$ 2,995
$
-0- $
47,352 $
54,500
$ 1,714
$
(7) $
56,207
749,417
28,665
(289)
777,793
902,642
22,289
(652)
924,279
281
1
(6)
276
323
-0-
(5)
318
75,000
147
(172)
74,975
75,000
1,906
-0-
76,906
170,278
22,545
3,476
52
(897)
(3,767)
172,857
18,830
215,965
23,970
2,098
179
(5,922)
(4,368)
212,141
19,781
69,374
-0-
(39,644)
29,730
97,136
371
(50,427)
47,080
Securities . . . . . . . . .
Equities . . . . . . . . . . . . . . . .
1,131,252
12,231
35,336
218
(44,775)
(406)
1,121,813
12,043
1,369,536
13,627
28,557
100
(61,381)
(519)
1,336,712
13,208
Total Securities
Available for Sale . . $1,143,483
$35,554
$(45,181) $1,133,856 $1,383,163
$28,657
$(61,900) $1,349,920
73
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 7—Securities Available for Sale (Continued)
Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and obligations of
U.S. Government-sponsored enterprises. These obligations have contractual maturities ranging from less than
one year to approximately 30 years and have an anticipated average life to maturity ranging from less than one
year to approximately eight 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.
Expected maturities will differ from contractual maturities because issuers may have the right to call or repay
obligations with or without call or prepayment penalties. Other fixed income securities within the portfolio also
contain prepayment risk.
The amortized cost and fair value of debt securities at December 31, 2009, by contractual maturity, are shown
below:
Amortized
Cost
Fair Value
(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 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
330
87,236
24,846
224,785
337,197
794,055
$
333
87,772
25,975
182,312
296,392
825,421
Total Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,131,252
$1,121,813
(a) Mortgage Backed Securities include an amortized cost of $44 million and a fair value of $47 million for
Obligations of U.S. Government agencies issued by Ginnie Mae. Obligations of U.S. Government-
sponsored enterprises includes obligations issued by Fannie Mae and Freddie Mac which had an amortized
cost of $750 million and a fair value of $778 million.
74
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 7—Securities Available for Sale (Continued)
Gross gains (losses) realized on sales, maturities and other-than-temporary impairment charges related to
securities available for sale were as follows:
For Years Ended December 31,
2009
2008
2007
(dollars in thousands)
Sales transactions:
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15
-0-
15
$ 1,343
-0-
$ 346
-0-
1,343
Maturities and impairment:
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . .
205
-0-
(36,185)
97
-0-
(13,011)
(35,980)
(12,914)
346
811
-0-
-0-
811
(Losses) gains on securities transactions, net
. . . . . . . . . . . . . . . . . .
$(35,965)
$(11,571)
$1,157
Securities available for sale with an approximate fair value of $637 million and $672 million were pledged as of
December 31, 2009 and 2008, respectively, to secure public deposits and for other purposes required or permitted
by law.
Note 8—Securities Held to Maturity
Below is an analysis of the amortized cost and fair values of debt securities held to maturity at December 31
(dollars in thousands):
2009
2008
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Obligations of U.S.
Government Agencies:
Mortgage Backed
Securities—Residential
$
29
$
3
$ -0-
$
32 $
45
$ 3
$ -0-
$
48
Obligations of U.S.
Government-Sponsored
Enterprises:
Mortgage Backed
Securities—Residential
89
7
-0-
96
164
8
-0-
172
Obligations of States and
Political Subdivisions . . . . . .
36,640
912
(94)
37,458
50,631
588
(881)
50,338
Total Securities Held to
Maturity . . . . . . . . . . . . . . . . $36,758
$922
$(94)
$37,586 $50,840
$599
$(881) $50,558
75
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 8—Securities Held to Maturity (Continued)
The amortized cost and estimated fair value of debt securities at December 31, 2009, 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.
Amortized
Cost
Fair
Value
Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 1 but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(dollars in thousands)
485
$
11,473
2,893
22,607
485
11,014
2,742
22,399
Mortgage Backed Securities (a)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,640
118
37,458
128
Total Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$36,758
$37,586
(a) Mortgage Backed Securities include an amortized cost of $29 thousand and a fair value of $32 thousand for
Obligations of U.S. Government agencies issued by Ginnie Mae. An obligation of U.S. Government-
sponsored enterprises includes obligations issued by Fannie Mae and Freddie Mac which had an amortized
cost of $89 thousand and a fair value of $96 thousand.
There were no sales of securities held to maturity in 2009, 2008 or 2007.
Securities held to maturity with an amortized cost of $37 million and $51 million were pledged at December 31,
2009 and 2008, respectively, to secure public deposits and for other purposes required or permitted by law.
Note 9—Other Investments
As a member of the FHLB, First Commonwealth is required to purchase and hold stock in the FHLB to satisfy
membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to
another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB
stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer
price is determined by FHLB membership rules and not by market participants. As of December 31, 2009 and
December 31, 2008, our FHLB stock totaled $51.4 million and is included in “Other investments” on the
Consolidated Statements of Financial Condition.
In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as the repurchase of
excess stock from members. The FHLB cited a significant reduction in the level of core earnings resulting from
lower short-term interest rates, the increased cost of liquidity, and constrained access to the debt markets at
attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase of
excess capital stock. The FHLB last paid a dividend in the third quarter of 2008. Management reviewed the
FHLB’s Form 10-Q for the period ended September 30, 2009 filed with the SEC on November 12, 2009.
76
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 9—Other Investments (Continued)
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of
the par value. First Commonwealth evaluates impairment quarterly. The decision of whether impairment exists is
a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as
the following:
•
•
•
•
•
its operating performance;
the severity and duration of declines in the fair value of its net assets related to its capital stock amount;
its commitment to make payments required by law or regulation and the level of such payments in relation
to its operating performance;
the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB;
and
its liquidity and funding position.
After evaluating all of these considerations, First Commonwealth concluded that the par value of its investment
in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities for the
year ended December 31, 2009. Our evaluation of the factors described above in future periods could result in the
recognition of impairment charges on FHLB stock.
Note 10—Impairment of Investment Securities
As required by FASB ASC Topic 320, “Investments – Debt and Equity Securities,” credit related other-than-
temporary impairment on debt securities is recognized in earnings while noncredit related other-than-temporary
impairment on debt securities not expected to be sold is recognized in OCI. In 2009, we recorded $33.7 million
in other-than-temporary impairment charges on eleven trust preferred collateralized debt obligations and $2.5
million on equity securities related to five Pennsylvania based financial institutions. All of the securities for
which other-than-temporary impairment was recorded were classified as available for sale securities.
Additionally, $36.4 million in noncredit related other-than-temporary impairment was recorded in OCI on our
trust preferred collateralized debt obligations.
In accordance with the new guidance, the noncredit related portion of other-than-temporary impairment losses
recognized in prior year earnings was reclassified as a cumulative effect adjustment that increased retained
earnings and decreased accumulated OCI at the beginning of 2009. In 2008, $13.0 million in other-than-
temporary impairment charges were recognized, of which $6.5 million related to noncredit related impairment on
debt securities. Therefore, the cumulative effect adjustment to retained earnings totaled $6.5 million, or $4.2
million net of tax.
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 equity securities.
First Commonwealth reviews the investment portfolio on a quarterly basis for indications of impairment. This
review includes analyzing the length of time and the extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuer, including any specific events which may influence the
operations of the issuer and the intent and ability to hold its investment for a period of time sufficient to allow for
77
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
any anticipated recovery in the market. We evaluate our intent and ability to hold debt securities based upon our
investment strategy for the particular type of security and our cash flow needs, liquidity position, capital
adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be
influenced by additional bank failures, prolonged recession in the U.S. economy, changes in real estate values,
interest deferrals on our investments, and whether the federal government continues to provide assistance to
financial institutions. Our pooled trust preferred collateralized debt obligations are beneficial interests in
securitized financial assets within the scope of FASB ASC Topic 325, “Investments – Other,” and are therefore
evaluated for other-than-temporary impairment using management’s best estimate of future cash flows. If these
estimated cash flows determine that it is probable an adverse change in cash flows has occurred, then other-than-
temporary impairment would be recognized in accordance with FASB ASC Topic 320. There is a risk that this
review could result in First Commonwealth recording other-than-temporary impairment charges in the future.
See Note 21 “Fair Values of Assets and Liabilities” for additional information.
78
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
The following table presents the gross unrealized losses and fair values at December 31, 2009 for both available
for sale and held to maturity securities by investment category and time frame for which the securities have been
in a continuous unrealized loss position (dollars in thousands):
Description of Securities
Obligations of U.S. Government-
Sponsored Enterprises:
Mortgage Backed Securities—
Less Than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Residential . . . . . . . . . . . . . . . . . . . .
$ 35,202
$ (286) $
307
$
(3) $ 35,509
$
(289)
Mortgage Backed Securities—
Commercial . . . . . . . . . . . . . . . . . . .
169
(5)
43
(1)
212
(6)
Other Government—Sponsored
Enterprises . . . . . . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . .
Pooled Trust Preferred
49,828
5,070
(172)
(641)
-0-
12,521
-0-
(3,126)
49,828
17,591
(172)
(3,767)
Collateralized Debt Obligations . . . . . . .
4,985
(3,698)
24,745
(35,946)
29,730
(39,644)
Obligations of State and Political
Subdivisions . . . . . . . . . . . . . . . . . . . . . .
25,832
(150)
21,154
(841)
46,986
(991)
Total Debt Securities . . . . . . . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121,086
1,476
(4,952)
(402)
58,770
46
(39,917)
(4)
179,856
1,522
(44,869)
(406)
Total Securities . . . . . . . . . . . . . . . . . . . . . .
$122,562
$(5,354) $58,816
$(39,921) $181,378
$(45,275)
At December 31, 2009, 3% of the total unrealized losses were comprised of fixed income securities issued by
U.S. Government agencies, U.S. Government-sponsored enterprises and investment grade municipalities.
Corporate fixed income comprised 8% of the total unrealized losses, while pooled trust preferred collateralized
debt obligations accounted for 88% and equity securities accounted for the remaining 1%. The unrealized losses
in the equity securities category consist of four issues, of which one has been in a continuous unrealized loss
position for more than twelve months. As of December 31, 2009, the unrealized loss position in this security was
$4 thousand.
Corporate securities had a total unrealized loss of $3.8 million as of December 31, 2009. Included in this
category are single issue trust preferred securities and corporate debentures issued primarily by money center and
large regional banks. As of December 31, 2009, our single issue trust preferred securities had an amortized cost
of $21.4 million and an estimated fair value of $17.6 million, while our corporate debentures had a book and fair
value of $1.2 million. After a review of each of the issuer’s asset quality, earnings trend and capital position, it
was determined that none of these issues were other-than-temporarily impaired. Additionally, all interest
payments on these securities are being made as contractually required.
79
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
The following table presents the gross unrealized losses and fair values at December 31, 2008 for both available
for sale and held to maturity securities by investment category and time frame for which the securities had been
in a continuous unrealized loss position outstanding (dollars in thousands):
Description of Securities
Obligations of U.S. Government
Agencies:
Mortgage Backed Securities—
Less Than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Residential . . . . . . . . . . . . . . . . . . .
$
679
$
(6) $
-0-
$
-0-
$
679
$
(6)
Obligations of U.S. Government-
Sponsored Enterprises:
Mortgage Backed Securities—
Residential . . . . . . . . . . . . . . . . . . .
19,742
(41)
64,487
(611)
84,229
(652)
Mortgage Backed Securities—
Commercial . . . . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . .
Pooled Trust Preferred
323
(1,277)
(5)
(2,233)
-0-
8,082
-0-
(2,506)
323
6,805
(5)
(4,739)
Collateralized Debt Obligations . . . . . .
15,209
(1,457)
31,871
(48,599)
47,080
(50,056)
Obligations of States and Political
Subdivisions . . . . . . . . . . . . . . . . . . . . .
146,050
(6,702)
1,719
(102)
147,769
(6,804)
Total Debt Securities . . . . . . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . .
180,726
1,691
(10,444)
(519)
106,159
-0-
(51,818)
-0-
286,885
1,691
(62,262)
(519)
Total Securities . . . . . . . . . . . . . . . . . . . . .
$182,417
$(10,963) $106,159
$(51,818) $288,576
$(62,781)
80
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
The following table provides additional information related to our corporate securities as of December 31, 2009:
Corporate Securities
(Single Issue Trust Preferred Securities and Corporate Debentures)
(dollars in thousands)
Name of Issuer
Name of Issuer’s Parent Company
BP Bank America Inst . . . . . . . . . . . . . . . . . Bank of America Corp
BP MBNA Capital
. . . . . . . . . . . . . . . . . . . Bank of America Corp
NB Capital Trust II . . . . . . . . . . . . . . . . . . . Bank of America Corp
. . . . . . . . . . . . . . . . . Capital One Financial Corp
North Fork Cap Trust
. . . . . . . . . . . . . . . . . . . Capital One Financial Corp
Reliance Cap Trust
. . . . . . . . . . . . . . . . . . .
FCB/SC Cap Trust
Fifth Third Cap . . . . . . . . . . . . . . . . . . . . . .
Signal Capital Trust I
. . . . . . . . . . . . . . . . .
PBI Capital Trust . . . . . . . . . . . . . . . . . . . . .
KeyCorp Capital II . . . . . . . . . . . . . . . . . . . KeyCorp
Union State Capital Trust I . . . . . . . . . . . . . KeyCorp
BSB Cap Trust
. . . . . . . . . . . . . . . . . . . . . . M&T Bank Corp
First Empire Cap MTB . . . . . . . . . . . . . . . . M&T Bank Corp
PNC Capital Trust . . . . . . . . . . . . . . . . . . . .
Susquehanna Cap . . . . . . . . . . . . . . . . . . . .
First Union Instit Cap I . . . . . . . . . . . . . . . . Wells Fargo Co.
First Citizens Bancorporation
Fifth Third Bancorp
FirstMerit Corp
Fulton Financial Corp
PNC Financial Services Group
Susquehanna Bancshares
Total Single Issue Trust Preferred
Securities . . . . . . . . . . . . . . . . . . . . .
Fulton Financial Corp . . . . . . . . . . . . . . . . .
Provident Bk MD . . . . . . . . . . . . . . . . . . . . M&T Bank Corp
PNC Bank NA . . . . . . . . . . . . . . . . . . . . . . .
Fulton Financial Corp
PNC Financial Services Group
Total Corporate Debentures . . . . . . . .
Total Corporate Securities . . . . . . . . . .
Book
Value
$ 1,026
1,028
3,078
1,265
488
493
250
1,294
247
1,851
1,034
464
4,887
453
500
3,000
Fair
Value
Unrealized
Gain
(Loss)
$
889
956
2,781
1,121
367
409
245
981
194
1,609
928
224
3,030
451
458
2,948
$ (137)
(72)
(297)
(144)
(121)
(84)
(5)
(313)
(53)
(242)
(106)
(240)
(1,857)
(2)
(42)
(52)
21,358
17,591
(3,767)
446
245
496
449
259
531
1,187
1,239
3
14
35
52
$22,545
$18,830
$(3,715)
Current
Moody’s/
Fitch Issuer
Ratings
Baa3/BB /* +
Baa3/BB /* +
Baa3/BB /* +
Baa2 /*-/BBB
NA
NA
Baa2 /*-/BBB
NA
N/A
Baa2 /*-/BBB
NA
NA
Baa1 /*-/BBB
Baa1 /*-/ A
Ba2/NA
Baa2/A
Baa2/BBB+
NA/BBB+
A2/A
As of December 31, 2009, the book value of our pooled trust preferred collateralized debt obligations totaled
$69.4 million with an estimated fair value of $29.7 million, which includes securities comprised of 372 banks and
other financial institutions. Two of our pooled securities are senior tranches and the remainder are mezzanine
tranches. During 2009, all of the pooled issues were downgraded by Moody’s Investor Services. Two of the pooled
issues, representing $12.2 million of the $69.4 million book value, remain above investment grade. At the time of
initial issue, the subordinated tranches ranged in size from approximately 7% to 35% of the total principal amount
of the respective securities and no more than 5% of any pooled security consisted of a security issued by any one
institution. As of December 31, 2009, after taking into account management’s best estimates of future interest
deferrals and defaults, eleven of our securities had no excess subordination in the tranches we own and three of our
securities had excess subordination which ranged from 25% to 83% of the current performing collateral. As of
December 31, 2009, four of our pooled trust preferred collateralized obligations with a fair value of $3.3 million are
not receiving interest payments and therefore are reflected in the “Nonperforming and Impaired Assets and Effects
on Interest Income Due to Nonaccrual” table on page 36 as nonperforming securities.
81
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
The following table provides additional information related to our pooled trust preferred collateralized debt
obligations as of December 31, 2009:
Pooled Trust Preferred Security Detail
(dollars in thousands)
Deal
Class
Senior
PreTSL I . . . . . . . . . . . . . . . . . .
PreTSL IV . . . . . . . . . . . . . . . . Mezzanine
PreTSL V . . . . . . . . . . . . . . . . . Mezzanine
PreTSL VI . . . . . . . . . . . . . . . . Mezzanine
. . . . . . . . . . . . . . . Mezzanine
PreTSL VII
PreTSL VIII . . . . . . . . . . . . . . . Mezzanine
PreTSL IX . . . . . . . . . . . . . . . . Mezzanine
PreTSL X . . . . . . . . . . . . . . . . . Mezzanine
PreTSL XII
. . . . . . . . . . . . . . . Mezzanine
PreTSL XIII . . . . . . . . . . . . . . . Mezzanine
PreTSL XIV . . . . . . . . . . . . . . . Mezzanine
MMCap I . . . . . . . . . . . . . . . . .
MMCap I . . . . . . . . . . . . . . . . . Mezzanine
MMComm IX . . . . . . . . . . . . . Mezzanine
Senior
Book
Value
$ 3,681
1,830
456
304
5,002
1,619
2,251
1,300
7,211
13,963
14,526
8,478
895
7,858
Fair
Value
$ 3,165
714
184
159
1,820
310
898
213
2,402
4,994
4,507
6,855
335
3,174
Unrealized
Gain
(Loss)
Moody’s/
Fitch
Ratings
Number
of
Banks
$
(516)
(1,116)
(272)
(145)
(3,182)
(1,309)
(1,353)
(1,087)
(4,809)
(8,969)
(10,019)
(1,623)
(560)
(4,684)
A1/A
Ca/B
Ba3/CC
Caa1/CCC
Ca/CC
C/CC
Ca/CC
Ca/CC
Ca/CC
Ca/CC
Ca/CC
A3/A
Ca/CCC
Caa3/CC
32
6
4
5
19
36
49
57
77
65
64
29
29
34
Deferrals
and
Defaults as
a % of
Current
Collateral
Excess
Subordination
as a % of
Current
Performing
Collateral
24.86%
27.07
43.12
68.71
62.56
43.67
28.11
43.50
25.81
16.99
18.75
17.20
17.20
38.04
82.78%
25.02
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
74.08
0.00
0.00
Total
. . . . . . . . . . . . . . . . . . . .
$69,374
$29,730
$(39,644)
Lack of liquidity in the market for trust preferred collateralized debt obligations, credit rating downgrades and
market uncertainties related to the financial industry are factors contributing to the impairment on these
securities.
On a quarterly basis we evaluate our debt securities for other-than-temporary impairment. In 2009, $33.7 million
in credit related other-than-temporary impairment charges were recognized on our pooled trust preferred
collateralized debt obligations. When evaluating these investments we determine a credit related portion and a
noncredit related portion of other-than-temporary impairment. The credit related portion is recognized in
earnings and represents the expected shortfall in future cash flows. The noncredit related portion is recognized in
other comprehensive income and represents the difference between the fair value of the security and the amount
of credit related impairment. A discounted cash flow analysis provides the best estimate of credit related other-
than-temporary impairment for these securities.
Additional information related to the discounted cash flow analysis follows:
Our pooled trust preferred collateralized debt obligations are measured for other-than-temporary impairment
within the scope of FASB ASC Topic 325 by determining whether it is probable that an adverse change in
estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash
flows from the cash flows previously projected involves comparing the present value of remaining cash
flows previously projected against the present value of the cash flows estimated at December 31, 2009. We
82
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
consider the discounted cash flow analysis to be our primary evidence when determining whether credit
related other-than-temporary impairment exists.
Results of a discounted cash flow test are significantly affected by other variables such as the estimate of
future cash flows, credit worthiness of the underlying banks and determination of probability of default of
the underlying collateral. The following provides additional information for each of these variables:
•
•
•
Estimate of Future Cash Flows—Cash flows are constructed in an INTEX cash flow model. INTEX is
a proprietary cash flow model recognized as the industry standard for analyzing all types of
collateralized debt obligations. It includes each deal’s structural features updated with trustee
information, including asset-by-asset detail, as it becomes available. The modeled cash flows are then
used to estimate if all the scheduled principal and interest payments of our investments will be
returned.
Credit Analysis—A quarterly credit evaluation is performed for each of the 372 banks comprising the
collateral across the various pooled trust preferred securities. Our credit evaluation considers all
evidence available to us and includes the nature of the issuer’s business, its years of operating history,
corporate structure, loan composition, loan concentrations, deposit mix, asset growth rates, geographic
footprint and local economic environment. Our analysis focuses on profitability, return on assets,
shareholders’ equity, net interest margin, credit quality ratios, operating efficiency, capital adequacy
and liquidity.
Probability of Default—A probability of default is determined for each bank and is used to calculate
the expected impact of future deferrals and defaults on our expected cash flows. Each bank in the
collateral pool is assigned a probability of default for each year until maturity. Banks currently in
default or deferring interest payments are assigned a 100% probability of default. All other banks in the
pool are assigned a probability of default based on their unique credit characteristics and market
indicators. A 10% projected recovery rate is applied to projected deferrals and a 0% projected recovery
rate is applied to defaults. The probability of default is updated quarterly. As of December 31, 2009,
default probabilities for performing collateral ranged from 0.35% to 55%.
Our credit evaluation provides a basis for determining deferral and default probabilities for each underlying
piece of collateral. Using the results of the credit evaluation, the next step of the process is to look at pricing
of senior debt or credit default swaps for the issuer (or where such information is unavailable, for companies
having similar credit profiles as the issuer). The pricing of these market indicators provides the information
necessary to determine appropriate default probabilities for each bank.
In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides
an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current
default assumptions to the level of defaults which results in an adverse change in estimated cash flows. This
stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security.
The results of the stress test allows management to identify those pools that are at a greater risk for a future break
in cash flows so that we can monitor banks in those pools more closely for potential deterioration of credit
quality.
Based upon the analysis performed by management as of December 31, 2009, it is probable that all but three of
our pooled trust preferred securities are expected to experience principal and interest shortfalls. These securities
83
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 10—Impairment of Investment Securities (Continued)
are identified in the table on page 82 with 0% “Excess Subordination as a % of Current Performing Collateral.”
The $33.7 million in credit related other-than-temporary impairment charges recognized in 2009 are primarily
the result of additional interest deferrals within these pools. Our analysis as of December 31, 2009 indicates it is
probable that we will collect all contractual principal and interest payments on the three remaining pooled trust
preferred securities.
The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities
held and not intended to be sold:
Balance, beginning (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit losses on debt securities for which other-than-temporary impairment was not
previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional credit losses on debt securities for which other-than-temporary
impairment was previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year
Ended
December 31, 2009
(dollars in
thousands)
$ 2,516
28,163
5,482
$36,161
(a) The beginning balance represents credit related impairment losses taken before January 1, 2009.
On a quarterly basis, management evaluates equity securities for other-than-temporary impairment. In 2009, $2.5
million in other than-temporary impairment charges were recognized on equity securities related to five
Pennsylvania based financial institutions. When evaluating equity investments for other-than-temporary
impairment we review the severity and duration of decline in fair value, research reports, analysts’
recommendations, credit rating changes, news stories, annual reports, regulatory filings, impact of interest rate
changes, and other relevant information. Based on the results of this review, management believes that the equity
securities in an unrealized loss position as of December 31, 2009, will equal or exceed our cost basis within a
reasonable period of time.
84
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 11—Loans
Loans at year end were divided among these general categories at December 31:
Commercial, financial, agricultural and other . . . . . . . . . . . . . . . . . . . . . . .
Real estate loans:
2009
2008
(dollars in thousands)
$1,208,339
$1,236,622
Construction and land development
. . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family dwellings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
387,227
1,208,741
1,274,858
489,150
1,206,366
990,439
Loans to individuals for household, family and other personal
expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
557,336
495,800
Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,636,501
$4,418,377
Total loans include $4.8 million of unamortized origination and other fees, net of costs, at December 31, 2009,
compared to $4.0 million of unamortized costs, net of fees, at December 31, 2008. The increase in net
unamortized fees from 2008 to 2009 was due to the 2008 loan growth of $218.1 million. Also included in total
loans is $169 thousand of unamortized premiums at December 31, 2009 and $113 thousand of unamortized
discounts at December 31, 2008.
The majority of First Commonwealth’s business activity was with customers located within Pennsylvania. The
portfolio is well diversified, and as of December 31, 2009 and 2008, there were no significant concentrations of
credit by industry and property type.
The following table summarizes 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2008
(dollars in thousands)
$147,937
619
$55,922
132
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$148,556
$56,054
Loans past due in excess of 90 days and still accruing . . . . . . . . . . . . . . . . . . . .
$ 15,154
$16,189
85
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 12—Allowance for Credit Losses
The following table illustrates the changes in First Commonwealth’s allowance for credit losses during the
periods presented:
2009
2008
2007
Allowance for Credit Losses, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions:
(dollars in thousands)
$42,396
$ 52,759
$42,648
Recoveries of previously charged off loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions charged to operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,023
100,569
1,149
23,095
1,360
10,042
Deductions:
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73,712
13,881
11,654
Allowance for Credit Losses, at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 81,639
$52,759
$42,396
The following table identifies impaired loans, and information regarding the relationship of impaired loans to the
allowance for credit losses as of December 31:
2009
2008
2007
Recorded investment in impaired loans at end of period . . . . . . . . . . . . . . . . . . . .
Average balance of impaired loans for the year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses related to impaired loans . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with an allocation in the allowance for credit losses . . . . . . . . . . .
Impaired loans with no allocation in the allowance for credit losses . . . . . . . . . .
Income recorded on impaired loans on a cash basis . . . . . . . . . . . . . . . . . . . . . . .
(dollars in thousands)
$56,054
$51,141
$20,300
$50,404
$ 5,650
550
$
$148,556
$ 83,843
$ 33,265
$108,318
$ 40,238
521
$
$54,266
$34,641
$13,847
$43,923
$10,343
381
$
Impaired loans with no allocation in the allowance for credit losses increased $34.6 million in 2009. Contributing
to this increase was the charge-off in 2009 of $23.7 million in impaired loans in accordance with the FDIC’s
“Policy Statement on Prudent Commercial Real Estate Loan Workouts.” This guidance suggests that in instances
where a confirmed loss has been identified that loans should be written down to their most recent as is appraisal
value.
Note 13—Variable Interest Entities
In December 2003, the FASB issued FASB Accounting Standards Codification (“ASC”) 810-10,
“Consolidation.” As defined by ASC 810-10, a Variable Interest Entity (“VIE”) is a corporation, partnership,
trust or any other legal structure used for business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support
its activities. Under ASC 810-10, an entity that holds a variable interest in a VIE is required to consolidate the
VIE if the entity is deemed to be the primary beneficiary, which generally means it 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, and receives federal affordable housing tax credits and rehabilitation tax credits for
these limited partnership investments. First Commonwealth’s carrying value, or its maximum potential exposure
to these partnerships is $1.3 million, which consists of eleven limited partnership investments as of December 31,
2009. Management evaluates the limited partnerships annually for impairment and recorded a $1.2 million
86
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 13—Variable Interest Entities (Continued)
impairment charge in 2008. Based on FASB ASC Topic 810, First Commonwealth has determined that these
investments will not be consolidated but will continue to be accounted for under the equity method whereby First
Commonwealth’s portion of partnership losses are recognized as earned.
Note 14—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. 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 is
represented by the contract or notional amount of those instruments. First Commonwealth uses the same credit
policies for underwriting all loans, including these commitments and conditional obligations.
As of December 31, 2009 and 2008, 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 6
“Derivatives” for a description of interest rate swaps provided to customers.
The following table identifies the notional amount of those instruments at December 31:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial letters of credit
$1,598,599
83,630
$
76,194
$
1,275
$
$1,509,876
$ 116,794
81,345
$
20
$
2009
2008
(dollars in thousands)
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 counterparty. Collateral that is held varies but may include accounts receivable, inventory,
property, plant and equipment, and 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.
87
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 14—Commitments and Letters of Credit (Continued)
Current notional amounts outstanding at December 31, 2009, for financial standby letters of credit and
performance standby letters of credit include amounts of $14.8 million and $4.8 million, respectively, issued
during 2009 and subject to the provisions of FASB ASC Topic 460, “Guarantees,” which clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. A liability of $250 thousand has been recorded, which represents the fair
value of letters of credit issued in 2009.
Management evaluated the unused commitments and letters of credit to determine if a reserve should be
recorded. The calculation included the probability of default, loss given default and the estimated utilization for
the next twelve months for each loan category and the letters of credit. As of December 31, 2009, a liability of
$266 thousand was recorded.
Note 15—Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite
10-50 Years
5-40 Years
3-10 Years
3-10 Years
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Total premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2008
(dollars in thousands)
$ 11,946
79,806
15,803
83,774
27,562
$ 11,876
79,467
14,696
82,080
25,484
218,891
148,149
213,603
140,967
$ 70,742
$ 72,636
Depreciation related to premises and equipment included in non-interest expense for the years ended
December 31, 2009, 2008, and 2007 amounted to $8.5 million, $8.4 million and $8.8 million, respectively.
First Commonwealth leases various premises and assorted equipment under non-cancelable agreements. Total
future minimal rental commitments at December 31, 2009, were as follows:
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises
Equipment
(dollars in thousands)
$325
207
207
207
18
-0-
$ 3,405
3,195
2,851
2,625
2,500
18,839
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,415
$964
88
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 15—Premises and Equipment (Continued)
Included in the lease commitments above is $594 thousand in lease payments to be paid under a sale-leaseback
arrangement. The sale-leaseback transaction occurred in 2005 and resulted in a gain of $297 thousand on the sale
of a branch that is being recognized over the 15 year lease term through 2020.
Increases in utilities and taxes that may be passed on to the lessee under the terms of various lease agreements are
not reflected in the above table. However, certain lease agreements provide for increases in rental payments
based upon historical increases in the consumer price index or the lessor’s cost of operating the facility, and are
included in the minimum lease commitments. Additionally, the table above includes rent expense that is
recognized for rent holidays and during construction periods. Total lease expense amounted to $4.3 million in
2009, $4.5 million in 2008, and $3.7 million in 2007.
Note 16—Goodwill and Other Amortizing Intangible Assets
FASB ASC Topic 350, “Intangibles – Other” requires that goodwill be reviewed annually, or more frequently if
circumstances indicate that it might be impaired, by comparing the fair value of the goodwill to its recorded, or
carrying value. If the carrying value of goodwill exceeds its fair value, an impairment charge must be recorded.
We consider First Commonwealth Financial Corporation to be one reporting unit. The carrying amount of
goodwill as of December 31, 2009 and 2008 was $160.0 million. No impairment charges on goodwill or other
intangible assets were incurred in 2009, 2008 or 2007.
We test goodwill for impairment as of November 30 each year and again at any quarter-end if any material
events occur during a quarter that may affect goodwill. We have evaluated our goodwill for impairment at
June 30, 2009 and each subsequent quarter end as a result of the negative impact other-than-temporary
impairment charges and credit losses in our loan portfolio have had on our earnings. These losses along with
ongoing uncertainty in the general economy and the financial markets, which may continue to negatively impact
our performance and stock price, resulted in a need to evaluate our goodwill. Our annual evaluation in 2008 was
as of November 30, 2008.
Goodwill is tested for impairment using a two-step process that begins with an estimation of fair value as of
December 31, 2009. We retained a third-party valuation firm to assist in our Step 1 test for potential goodwill
impairment.
When determining fair value in Step 1, we utilized an income approach and two market approaches and then
applied weighting factors to each result. These weighting factors represent our best judgment of the weighting a
market participant would utilize in arriving at a fair value.
The income approach uses a dividend discount analysis. This approach calculates cash flows based on anticipated
financial results for the next five years assuming a change of control transaction. The analysis then calculates the
present value of all excess cash flows generated by the company, which are in excess of the minimum tangible
capital ratio, plus the present value of a terminal sale value. There are numerous estimates and assumptions
included in this approach, including discount rate, balance sheet growth, credit costs in our loan and investment
portfolio, the level of future interest rates as well as other economic conditions. Additionally, the change of
control transaction incorporates assumptions related to projected levels of earnings, integration cost savings and
certain transaction costs.
89
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 16—Goodwill and Other Amortizing Intangible Assets (Continued)
One of the market approaches used in the Step 1 test calculates the fair value of First Commonwealth by using
median pricing multiples in recent actual acquisitions of companies similarly sized and then applying these
multiples to the organization. Since no company or transaction is identical to First Commonwealth, the results of
this analysis are only an indication of comparable value. The results of this market approach could be adversely
affected if pricing multiples for future acquisitions differ materially from those paid currently. The second
market approach calculates the change of control price a market participant would pay by adding a change of
control premium to the current trading value of the company. This approach assumes that current share price
reflects an accurate fair value for the company.
Based upon the Step 1 preliminary impairment testing, it was determined that First Commonwealth’s carrying
value exceeded its fair value by 11%, therefore in accordance with ASC Topic 350-20-35-8, a Step 2 analysis
was undertaken.
The Step 2 test follows the purchase price allocation under the purchase method described in ASC 820-10, and
fair value estimates as defined and prescribed by ASC 820-10-30. To determine the implied fair value of
goodwill, the fair value of all assets other than goodwill, less the fair value of liabilities is subtracted from the
fair value of the company. Significant judgment and estimates are involved in estimating the fair value of the
assets and liabilities of the company. Key valuations were the mark-to-fair-value on the loan portfolio,
assessment of core deposit intangibles, and the mark-to-fair-value of outstanding debt and deposits.
As a result of the Step 2 analysis, it was determined that the fair value of our goodwill exceeded its carrying
value by at least 31% and therefore no impairment charge was required. Management will continue to monitor
events that could impact this conclusion in the future.
FASB ASC Topic 350, “Intangibles – Other” also requires that an acquired 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.
The following table summarizes other intangible assets as of December 31:
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
(dollars in thousands)
December 31, 2009
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,470
725
$(15,063)
(725)
$ 7,407
-0-
Total other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,195
$(15,788)
$ 7,407
December 31, 2008
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,470
725
$(12,329)
(633)
$10,141
92
Total other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,195
$(12,962)
$10,233
90
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 16—Goodwill and Other Amortizing Intangible Assets (Continued)
Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits
and straight-line methods of amortization. The core deposits have a remaining amortization period of ten
(10) years and a weighted average amortization period of approximately nine (9) years. In 2008, other intangible
assets consisted of covenants not to compete which were fully amortized in 2009. First Commonwealth
recognized amortization expense on other intangible assets of $2.8 million, $3.2 million, and $3.4 million for the
years ended December 31, 2009, 2008, and 2007, respectively.
The following presents the estimated amortization expense of core deposits:
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core
Deposits
(dollars in
thousands)
$2,031
1,534
1,467
1,064
615
696
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,407
Note 17—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31, were as follows:
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 107,612
2,175,953
1,610,989
$
97,011
1,773,843
1,842,644
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,894,554
$3,713,498
2009
2008
(dollars in thousands)
Interest-bearing deposits at December 31, 2009 and 2008, include allocations from NOW and Super NOW
accounts of $515.8 million and $498.3 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.
Included in time deposits at December 31, 2009 and 2008, were certificates of deposit in denominations of $100
thousand or more of $392.2 million and $580.2 million, respectively.
Interest expense related to certificates of deposit $100 thousand or greater amounted to $14.8 million in 2009,
$27.8 million in 2008 and $41.5 million in 2007.
91
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 17—Interest-Bearing Deposits (Continued)
Included in time deposits at December 31, 2009, were certificates of deposit with the following scheduled
maturities (dollars in thousands):
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 850,329
355,660
203,794
29,546
171,660
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,610,989
Note 18—Short-term Borrowings
Short-term borrowings at December 31, were as follows (dollars in thousands):
2009
2008
2007
Ending
Balance
Average
Balance
Average
Rate
Ending
Balance
Average
Balance
Average
Rate
Ending
Balance
Average
Balance
Average
Rate
Federal funds
purchased . . . . . . . . . $ 630,000 $ 584,691
0.29% $ 168,600 $105,761
2.36% $ 58,800 $ 52,834
5.22%
Borrowings from
FHLB . . . . . . . . . . . .
125,000
274,699
0.48%
800,000
387,137
1.62%
-0-
733
5.32%
Securities sold under
agreements to
repurchase . . . . . . . .
Treasury, tax and loan
note option . . . . . . . .
199,526
168,527
0.72%
169,263
151,034
2.21% 151,401
183,880
3.56%
4,406
3,747
0.00%
1,874
125,838
2.18% 144,000
41,598
Total . . . . . . . . . . . . . $ 958,932 $1,031,664
0.41% $1,139,737 $769,770
1.93% $354,201 $279,045
Maximum total at any
month-end . . . . . . . . $1,155,933
$1,139,737
$507,260
5.06%
4.10%
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
2009
2008
2007
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury, tax and loan note option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(dollars in thousands)
$ 2,492
6,263
3,331
2,742
$ 2,756
39
6,544
2,103
$1,678
1,328
1,210
-0-
Total interest on short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,216
$14,828
$11,442
92
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 19—Subordinated Debentures
Subordinated Debentures outstanding at December 31 are as follows:
Subordinated Debentures:
Owed to First Commonwealth Capital Trust I and
due 2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owed to First Commonwealth Capital Trust II
2009
2008
Amount
Rate
Amount
Rate
(dollars in thousands)
$ 33,583
9.50% $ 33,583
9.50%
and due 2034 . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,929 LIBOR +2.85%
30,929 LIBOR +2.85%
Owed to First Commonwealth Capital Trust III
and due 2034 . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,238 LIBOR +2.85%
41,238
5.89%
Total junior subordinated debentures owed to
unconsolidated subsidiary trusts . . . . . . . . . . . . . . . .
$105,750
$105,750
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
5.89% 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. 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. Deferred issuance costs of $471
thousand are being amortized on a straight-line basis over the term of the securities.
Interest on debentures issued to First Commonwealth Capital Trust I is paid semiannually at a fixed rate of
9.50%. 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. Deferred issuance costs of $996 thousand
are being amortized on a straight-line basis over the term of the securities.
93
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 19—Subordinated Debentures (Continued)
On November 26, 2007, First Commonwealth purchased in the secondary market $2.5 million of its Capital Trust
I capital securities that were issued on September 8, 1999 with a maturity date of September 1, 2029.
Simultaneously, First Commonwealth retired $2.5 million principal amount of junior subordinated debentures
issued to the Trust that became due and payable upon redemption of the capital securities. There were no such
transactions during 2008 or 2009.
Note 20—Other Long-term Debt
Other long-term debt at December 31 follows (dollars in thousands):
2009
Weighted
Average
Contractual
Rate
Amount
Weighted
Average
Effective
Rate
Amount
2008
Weighted
Average
Contractual
Rate
Weighted
Average
Effective
Rate
$ 5,600
LIBOR+1.00% LIBOR+1.00% $
7,600
LIBOR+1.00% LIBOR+1.00%
-0-
117,108
24,409
5,086
7,981
6,175
2,338
0.00%
4.86
5.24
3.26
5.41
4.49
5.09
0.00%
3.58
3.99
3.26
3.79
4.49
5.09
12,957
118,548
24,692
5,229
8,082
6,385
-0-
$183,493
5.93%
4.88
5.24
3.26
5.41
4.49
0.00
3.59%
3.58
3.99
3.26
3.79
4.49
0.00
ESOP loan due:
December 2012 . . . . . . .
Borrowings from FHLB due:
2009 . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . .
2028 . . . . . . . . . . . . . . . .
2029 . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . .
$168,697
The weighted average contractual rate reflects the rate due to creditors. The weighted average effective rate of
long-term debt in the schedule above includes the effect of purchase accounting valuation adjustments that were
recorded in connection with prior business combinations.
FHLB advances in the amount of $64.6 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 $35.0 million at a 6.0% strike rate and
$15.0 million at a 7.5% strike rate are convertible on a quarterly basis at the FHLB’s 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 2008, higher costing FHLB advances of
$190.0 million that were due to mature in the first seven months of 2009 were refinanced with lower costing
overnight borrowings resulting in a prepayment penalty of $1.2 million.
All of First Commonwealth’s FHLB stock, along with an interest in mortgage loans and mortgage backed
securities–residential has been pledged as collateral with the FHLB of Pittsburgh.
Capital securities included in total long-term debt on the Consolidated Statements of Financial Condition are
excluded from the above, but are described in Note 19 “Subordinated Debentures.”
94
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 20—Other Long-term Debt (Continued)
Scheduled loan payments for other long-term debt are summarized below:
2010
2011
2012
2013
2014
Thereafter
Total
Long-term debt payments . . . . . . . . . . . . . . . . . .
Purchase valuation amortization . . . . . . . . . . . . .
$119,142
807
$
$26,561
124
$
(dollars in thousands)
$4,969
$ 117
$7,854
37
$
$2,080
$ 113
$6,893
-0-
$
$167,499
1,198
$
The amounts on the purchase valuation amortization row in the table above include fair market adjustments from
prior business combinations.
Note 21—Fair Values of Assets and Liabilities
FASB ASC Topic 820, “Fair Value Measurements and Disclosures” defines fair value and the methods used for
measuring fair value as well as requiring additional disclosures. Authoritative guidance issued under FASB ASC
Topic 820 became effective January 1, 2009 and requires disclosures for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). All nonfinancial assets are included either as a separate line item on the Consolidated
Statements of Financial Condition or in the “Other assets” category of the Consolidated Statements of Financial
Condition. Currently, First Commonwealth does not have any nonfinancial liabilities to disclose.
FASB ASC Topic 825, “Financial Instruments” permits entities to irrevocably elect to measure select financial
instruments and certain other items at fair value. The unrealized gains and losses are required to be included in
earnings each reporting period for the items that fair value measurement is elected. First Commonwealth has
elected not to measure any existing financial instruments at fair value under FASB ASC Topic 825; however, in
the future we may elect to adopt this guidance for select financial instruments.
In accordance with FASB ASC Topic 820, First Commonwealth groups financial assets and financial liabilities
measured at fair value in three levels, based on the principal markets in which the assets and liabilities are
transacted and the observability of the data points used to determine fair value. These levels are:
• Level 1—Valuations for assets and liabilities traded in active exchange markets, such as the New York
Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions
involving identical assets or liabilities. Level 1 securities include equity holdings comprised of publicly
traded bank stocks.
• Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are
obtained for identical or comparable assets or liabilities from alternative pricing sources with reasonable
levels of price transparency. Level 2 includes U.S. Government securities, municipal securities, FHLB
stock, interest rate derivatives that include interest rate swaps and risk participation agreements, certain
other real estate owned, and certain impaired loans.
95
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
• Level 3—Valuations for assets and liabilities that are derived from other valuation methodologies, including
option pricing models, discounted cash flow models and similar techniques, and not based on market
exchange, dealer, or broker traded transactions. If the inputs used to provide the evaluation are unobservable
and/or there is very little, if any, market activity for the security or similar securities, the securities would be
considered Level 3 securities. Level 3 valuations incorporate certain assumptions and projections in
determining the fair value assigned to such assets or liabilities. The assets included in Level 3 are select
municipal securities, corporate securities, pooled trust preferred collateralized debt obligations,
nonmarketable equity investments, and certain impaired loans.
In accordance with FASB ASC Topic 820, fair values for investment securities were based on quoted market
prices, if available, and were classified as Level 1. If quoted market prices were not available, the valuation for
investments utilized pricing models that varied based on asset class and included available trade, bid and other
observable market information. Securities priced using this information are classified as Level 2.
Corporate securities include single issue trust preferred securities whose fair values were obtained from pricing
sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks
for each issuer. These valuations were classified as Level 3 due to the inactivity in the markets.
Our pooled trust preferred collateralized debt obligations are collateralized by the trust preferred securities of
individual banks, thrifts and bank holding companies in the U.S. There has been little or no active trading in
these securities for approximately eighteen months; therefore it was more appropriate to determine fair value
using a discounted cash flow analysis. Detail on our process for determining the appropriate cash flows for this
analysis is provided in Note 10, “Impairment of Investment Securities.” The discount rate applied to the cash
flows is determined by evaluating the current market yields for comparable corporate and structured credit
products along with an evaluation of the risks associated with the cash flows of the comparable security. Due to
the fact that there is no active market for the trust preferred collateralized debt obligations, one key reference
point is the market yield for the single issue trust preferred securities issued by banks and thrifts for which there
is more activity than for the pooled securities. Adjustments are then made to reflect the credit and structural
differences between these two security types.
Interest rate derivatives are reported at fair value utilizing Level 2 inputs and are included in Other Assets and
Other Liabilities. First Commonwealth values its interest rate swap positions using a yield curve by taking
market prices/rates for an appropriate set of instruments. The set of instruments currently used to determine the
US Dollar yield curve includes cash LIBOR rates from overnight to three months, Eurodollar futures contracts,
and swap rates from three years to thirty years. These yield curves determine the valuations of interest rate
swaps. Interest rate derivatives are further described in Note 6 “Derivatives.”
For purposes of potential valuation adjustments to our derivative positions, First Commonwealth evaluates the
credit risk of its counterparties as well as our own credit risk. Accordingly, we have considered factors such as
the likelihood of default, expected loss given default, net exposures, and remaining contractual life, among other
things, in determining if any fair value adjustments related to credit risk are required. We review our
counterparty exposure quarterly, and, when necessary, appropriate adjustments are made to reflect the exposure.
We also utilize this approach to estimate our own credit risk on derivative liability positions. To date, we have
not realized any losses due to a counterparty’s inability to pay any net uncollateralized position.
96
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at
December 31, 2009:
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Securities Available for Sale
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential . . . . . . . . . . . . . . .
$
-0-
$
47,352
$
-0-
$
47,352
Obligations of U.S. Government-Sponsored Enterprises:
Mortgage Backed Securities – Residential . . . . . . . . . . . . . . .
Mortgage Backed Securities – Commercial . . . . . . . . . . . . . .
Other Government-Sponsored Enterprises . . . . . . . . . . . . . . .
Obligations of States and Political Subdivisions . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pooled Trust Preferred Collateralized Debt Obligations . . . . . . . .
Total Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Securities Available for Sale . . . . . . . . . . . . . . . . . . . . .
Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
-0-
-0-
-0-
-0-
3,001
3,001
-0-
-0-
777,793
276
74,975
-0-
-0-
-0-
777,793
276
74,975
169,257
3,600
172,857
-0-
-0-
18,830
29,730
18,830
29,730
1,069,653
52,160
1,121,813
7,472
1,570
12,043
1,077,125
53,730
1,133,856
51,431
10,626
-0-
-0-
51,431
10,626
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,001
$1,139,182
$53,730
$1,195,913
Other Liabilities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
-0-
-0-
$
$
11,491
11,491
$
$
-0-
-0-
$
$
11,491
11,491
(a) Non-hedging interest rate derivatives
97
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at
December 31, 2008:
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Securities Available for Sale
Obligations of U.S. Government Agencies:
Mortgage Backed Securities – Residential . . . . . . . . . . . . . . .
$
-0-
$
56,207
$
-0-
$
56,207
Obligations of U.S. Government – Sponsored Enterprises:
Mortgage Backed Securities – Residential . . . . . . . . . . . . . . .
Mortgage Backed Securities – Commercial . . . . . . . . . . . . . .
Other Government-Sponsored Enterprises . . . . . . . . . . . . . . .
Obligations of States and Political Subdivisions . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pooled Trust Preferred Collateralized Debt Obligations . . . . . . . .
Total Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Securities Available for Sale . . . . . . . . . . . . . . . . . . . . .
Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
-0-
-0-
-0-
-0-
6,370
6,370
-0-
-0-
924,279
318
76,906
212,141
-0-
-0-
-0-
-0-
-0-
-0-
19,781
47,080
924,279
318
76,906
212,141
19,781
47,080
1,269,851
66,861
1,336,712
5,268
1,570
13,208
1,275,119
68,431
1,349,920
51,431
19,552
-0-
-0-
51,431
19,552
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,370
$1,346,102
$68,431
$1,420,903
Other Liabilities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
-0-
-0-
$
$
19,757
19,757
$
$
-0-
-0-
$
$
19,757
19,757
(a) Non-hedging interest rate derivatives
98
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as
follows at December 31, 2009:
Securities Available for Sale
Balance, beginning of year . . . . . . . . . . . . . . . . . . . .
Realized and unrealized credit losses included
in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains unrealized in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, settlements, pay downs, and
Obligations of
States and
Political
Subdivisions
Corporate
Securities
Pooled Trust
Preferred
Collateralized
Debt
Obligations
(dollars in thousands)
Equities
Total Fair
Value
$
-0-
$19,780
$ 47,080
$1,570
$ 68,430
-0-
(33,645)
-0-
(33,645)
-0-
171
441
16,752
-0-
-0-
-0-
17,364
(1,848)
3,429
maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . .
-0-
3,429
(1,391)
-0-
(457)
-0-
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$3,600
$18,830
$ 29,730
$1,570
$ 53,730
In 2009, some Obligations of State and Political Subdivisions were transferred from Level 2 to Level 3. The
primary reason for the transfer into Level 3 was the inactivity in the market for these securities which resulted in
a lack of observable market activity or comparable trades that could be used to establish a benchmark for
valuation.
Losses of $36.0 million included in earnings for the period are attributable to the change in realized gains (losses)
relating to assets held at December 31, 2009 and are reported in the lines “Net impairment losses” and “Net
securities (losses) gains” in the Consolidated Statements of Operations.
99
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as
follows at December 31, 2008:
Securities Available for Sale
Balance, beginning of year . . . . . . . . . . . . . . . . . . . .
Realized and unrealized credit losses included
in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses unrealized in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, settlements, pay downs, and
Obligations of
States and
Political
Subdivisions
Corporate
Securities
Pooled Trust
Preferred
Collateralized
Debt
Obligations
(dollars in thousands)
Equities
Total Fair
Value
$
-0-
$ 1,034
$
-0-
$1,570
$
2,604
-0-
-0-
-0-
(9,013)
(850)
(25,966)
-0-
-0-
-0-
-0-
-0-
(9,013)
(26,816)
(748)
(3,629)
106,032
maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 2 . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . .
-0-
(3,629)
3,629
(506)
-0-
20,102
(242)
-0-
82,301
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . .
$
-0-
$19,780
$ 47,080
$1,570
$ 68,430
Securities totaling $106.0 million transferred to Level 3 during 2008 included $102.2 million of trust preferred
securities. The primary reason for the transfer into Level 3 was due to the inactivity in the market that resulted in
a lack of observable market activity or comparable trades that could be used to establish a benchmark for
valuation.
Losses of $9.0 million included in earnings for the period are attributable to the change in realized losses relating
to assets held at December 31, 2008 and are reported in securities gains (losses) in the non-interest income
section of the Consolidated Statements of Operations.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the
instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment).
The table below presents the balances of assets measured at fair value on a nonrecurring basis at December 31,
2009:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ -0-
-0-
$ -0-
100
Level 1
Level 2
Level 3
(dollars in thousands)
$65,971
-0-
$57,423
23,988
Total Fair
Value
$123,394
23,988
$81,411
$65,971
$147,382
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
Impaired loans over $100 thousand are individually reviewed to determine the amount of each loan considered to
be at risk of noncollection. The impaired loans are collateral based and the fair value is determined by reviewing
real property appraisals, equipment valuations, accounts receivable listings and other financial information.
Fair value for other real estate owned is determined by an independent market based appraisal less costs to sell
and is classified as level 2.
Certain other assets and liabilities, including goodwill and core deposit intangibles, are measured at fair value on
a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to
fair value adjustments only in certain circumstances. A goodwill impairment test for First Commonwealth was
completed as of December 31, 2009. Based on this analysis, the fair value of First Commonwealth exceeded its
book value. Additional information related to this measurement is provided in Note 16 – “Goodwill and Other
Amortizing Intangible Assets.” There were no other assets or liabilities measured at fair value on a nonrecurring
basis during 2009.
FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial assets and
financial liabilities, including those financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial
assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are as discussed
above. The methodologies for other financial assets and financial liabilities are discussed below.
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 available for sale and securities held to maturity are based on quoted market
prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of
comparable instruments. Pooled trust preferred collateralized debt obligations values are derived from other
valuation methodologies, including option pricing models, discounted cash flow models and similar techniques,
and not based on market exchange, dealer, or broker traded transactions. These valuations incorporate certain
assumptions and projections in determining the fair value assigned to each instrument. The carrying value of
nonmarketable equity securities, such as FHLB stock, is considered a reasonable estimate of fair value.
Loans: The fair values of all loans are estimated by discounting the estimated future cash flows using interest
rates currently offered for loans with similar terms to borrowers of similar credit quality adjusted for past due and
nonperforming loans which is not an exit price under FASB ASC Topic 820, “Fair Value Measurements and
Disclosures.”
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 cash flows for loan commitments,
fair values were not estimated for either period. FASB ASC Topic 460, “Guarantees” clarified that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
101
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 21—Fair Values of Assets and Liabilities (Continued)
issuing the guarantee. The carrying amount and estimated fair value for standby letters of credit was $250
thousand in 2009 and $387 thousand in 2008. See Note 14, “Commitments and Letters of Credit,” for additional
information.
Deposit liabilities: Management estimates the fair value of deposits 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 fair values of borrowings from the FHLB 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 and subordinated debt: The fair value of long-term debt and subordinated debt is estimated by
discounting the future cash flows using First Commonwealth’s estimated incremental borrowing rate for similar
types of borrowing arrangements.
The following table presents carrying amounts and estimated fair values of First Commonwealth’s financial
instruments at December 31, 2009 and 2008:
2009
2008
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(dollars in thousands)
Financial assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing bank deposits . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,232
$
$
327
$1,133,856
$
36,758
$4,636,501
89,232
$
$
327
$1,133,856
$
37,586
$4,655,167
88,277
$
$
289
$1,401,351
$
50,840
$4,418,377
88,277
$
$
289
$1,401,351
$
50,558
$4,446,002
Financial liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,535,785
$ 958,932
$ 168,697
$ 105,750
$4,619,070
$ 950,799
$ 172,249
70,874
$
$4,280,343
$1,152,700
$ 170,530
$ 105,750
$4,107,868
$1,128,622
$ 175,206
44,096
$
102
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 22—Shares of Common Stock
The following table summarizes the share transactions for the three years ended December 31, 2009:
Shares
Issued
Shares
in Treasury
Balance, December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock – Nonvested* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued for Capital Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock – Nonvested* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend reinvestment plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors stock plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,100,431
-0-
-0-
-0-
75,100,431
11,500,000
-0-
-0-
86,600,431
-0-
-0-
-0-
-0-
1,184,054
1,000,000
(177,235)
(35,000)
1,971,819
-0-
(409,478)
(12,654)
1,549,687
4,122
(4,476)
(97,905)
(2,872)
Balance, December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,600,431
1,448,556
*
See Note 26 “Stock Option Plan”
Note 23—Income Taxes
The income tax provision consists of:
Current tax provision for income exclusive of securities transactions:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,123
164
$14,002
66
$ 8,427
-0-
Total current tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,287
(29,108)
14,068
(7,436)
8,427
(2,474)
Total tax (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(25,821) $ 6,632
$ 5,953
2009
2008
2007
(dollars in thousands)
We adopted new authoritative accounting guidance issued under FASB ASC Topic 740, “Income Taxes” as of
January 1, 2007, and had no material unrecognized tax benefits or accrued interest and penalties as of
December 31, 2009. We do not expect the total amount of unrecognized tax benefits to significantly increase in
the next twelve months, and will record interest and penalties as a component of non-interest expense. Federal
and state income tax years 2006 through 2008 are open for examination as of December 31, 2009.
103
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 23—Income Taxes (Continued)
Temporary differences between the financial statement carrying amounts and the tax bases of assets and
liabilities that represent significant portions of the deferred tax assets (liabilities) at December 31, were as
follows:
Deferred tax assets:
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan origination fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest on nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing partnership investments . . . . . . . . . . . . . . . . . . . . . . .
Write-down of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2008
(dollars in thousands)
$28,574
1,011
11,049
2,371
601
2,140
661
1,697
449
14,360
3,370
1,996
$18,466
1,060
8,511
-0-
-0-
2,213
442
1,076
452
4,365
11,635
1,081
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,279
49,301
Deferred tax liabilities:
Basis difference in assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unfunded postretirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated accretion of bond discount
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from unconsolidated subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,366)
(115)
(79)
(534)
(387)
(2,481)
(931)
(183)
(119)
(519)
(388)
(2,140)
Net deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$65,798
$47,161
The net deferred tax asset of $65.8 million as of December 31, 2009 includes an $11.0 million alternative
minimum tax credit carryforward with an indefinite life, a $2.4 million net operating loss carryforward that
expires in 2029, and a $601 thousand tax credit carryforward, of which $154 thousand expires in 2028 and $447
thousand expires in 2029. There is also a $14.4 million deferred tax asset for the write-down of securities, of
which $1.8 million are potential capital losses that can only be utilized if capital gains are realized. Management
believes that future taxable income will be sufficient to fully realize all of the deferred taxes, including the
potential capital losses. The amount of future taxable income used in management’s analysis required the use of
estimates, including balance sheet growth, interest rates and credit related losses.
104
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 23—Income Taxes (Continued)
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 (dollars in thousands):
2009
2008
2007
Tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) resulting from:
Amount
$(16,060)
Income from bank owned life insurance . . . . . . .
Other nontaxable interest . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,555)
(7,537)
(447)
(222)
Total tax (benefit) provision . . . . . . . . . . . . .
$(25,821)
% of
Pretax
Income
Amount
% of
Pretax
Income
Amount
% of
Pretax
Income
35
3
16
1
1
56
$17,402
35
$18,271
35
(1,933)
(7,935)
(549)
(353)
$ 6,632
(4)
(16)
(1)
(1)
13
(2,135)
(8,692)
(967)
(524)
$ 5,953
(4)
(17)
(2)
(1)
11
Note 24—Retirement Plans
All employees with at least one year of service are eligible to participate in the 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 $972 thousand, $1.5
million and $2.2 million in 2009, 2008 and 2007, respectively. See Note 25 “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 receives an employer contribution in an amount equal to 3%
of their compensation. In addition, each participating employee may contribute up to 80% of their compensation
to the plan of which up to 4% is matched 100% by the employer’s contribution. Effective September 2009, the
employer match was reduced to 50% of the first 4% of compensation. The 401(k) plan expense was $3.6 million
in 2009, $3.3 million in 2008, and $3.2 million in 2007.
First Commonwealth maintained a Supplemental Executive Retirement Plan (“SERP”) to provide deferred
compensation for those employees whose total annual or annualized Plan compensation for a calendar year
exceeded the maximum limit of compensation that can be recognized for tax-qualified retirement plans. The
purpose of this Plan is to restore some of the benefits lost by eligible employees compared to other employees
due to limits and restrictions incorporated into First Commonwealth’s 401(k) Plan and ESOP.
Participants in the SERP are eligible to defer (on a pre-tax basis) from 1% to 25% of their Plan compensation
(compensation in excess of the tax-qualified plan limit). First Commonwealth will make a matching contribution
to the Plan for each payroll up to the first 4% of their Plan compensation. First Commonwealth will also make a
contribution to the Plan for each payroll equal to 3% of their Plan compensation. In addition, First
Commonwealth will make a contribution to the Plan at the end of the Plan Year on Plan compensation equal to
that percentage of compensation that will be contributed to the ESOP. In April 2009 First Commonwealth
temporarily suspended all employer contributions.
105
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 24—Retirement Plans (Continued)
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 $130 thousand in 2009, $369 thousand in 2008, and $211 thousand in 2007.
Postretirement Benefits Other than Pensions from Prior Acquisitions
Employees from former acquisitions were covered by postretirement benefit plans which provide medical and
life insurance coverage. The measurement date for these plans was December 31.
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:
2009
2008
2007
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(dollars in thousands)
$ -0-
183
2
9
$ -0-
141
2
(28)
$ -0-
223
2
22
Net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 115
$ 194
$ 247
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.21% 6.00% 6.00%
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:
2009
2008
(dollars in thousands)
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,562
-0-
$2,507
-0-
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,562
-0-
2,562
-0-
-0-
2,507
-0-
2,507
-0-
-0-
Accrued benefit liability recognized on the statements of financial condition . . .
$2,562
$2,507
Amounts recognized in accumulated other comprehensive income, net of tax as
of December 31 follows:
Net (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (216)
3
$ (343)
4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (213)
$ (339)
106
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 24—Retirement Plans (Continued)
Postretirement Benefits Other than Pensions from Prior Acquisitions (Continued)
The following table sets forth the change in benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2008
(dollars in thousands)
$3,234
$2,507
183
142
(309)
(255)
(601)
168
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,562
$2,507
The discount rate used in determining the actuarial present value of the accumulated postretirement benefit
obligation was 5.21% for 2009 and 6.00% for 2008 and 2007. The discount rate was determined using rates of
return on high quality fixed income investments whose cash flows match the timing of expected benefit
payments. The health care cost trend rates used for 2009 were projected at an initial rate of 10.00% for 2010
decreasing over time to an annual rate of 4.75% in 2016 for both indemnity plan participants and non-indemnity
plan participants. For 2008, rates used were projected at an initial rate of 10.00% for 2009 decreasing over time
to an annual rate of 4.75% in 2016 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 . . . . . . . . . . . . . . . . . . . . . . .
$
6
$108
$ (5)
$(99)
1-Percentage
Point Increase
1-Percentage
Point Decrease
(dollars in thousands)
107
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 24—Retirement Plans (Continued)
Postretirement Benefits Other than Pensions from Prior Acquisitions (Continued)
As of December 31, 2009, the projected benefit payments for the next ten years are as follows:
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015-2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected
Benefit
Payments
(dollars in thousands)
$ 340
$ 310
$ 304
$ 287
$ 278
$1,146
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 2009 are as follows (dollars in thousands):
Net (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement
Benefits
$(10)
2
$ (8)
Note 25—Unearned ESOP Shares
First Commonwealth’s ESOP borrowed funds that are guaranteed by First Commonwealth, and had a balance of
$5.6 million at December 31, 2009 and $7.6 million at December 31, 2008. The loan is scheduled to be repaid
over the next three years and payments will be made from contributions to the ESOP by First Commonwealth
and from dividends on unallocated ESOP shares. The loan has been recorded as long-term debt in the
Consolidated Statements of Financial Condition, with a like amount of unearned ESOP shares recorded as a
reduction of shareholders’ equity. The 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.
108
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 25—Unearned ESOP Shares (Continued)
The following is an analysis of ESOP shares held in suspense:
Shares in suspense December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares allocated during 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired during 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
820,838
(161,300)
-0-
Shares in suspense December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
659,538
Shares allocated during 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired during 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(147,421)
-0-
Shares in suspense December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
512,117
Shares allocated during 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired during 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(136,192)
-0-
Shares in suspense December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
375,925
The fair market value of the new shares remaining in suspense was approximately $1.7 million at December 31,
2009.
Interest on the ESOP loan was $95 thousand in 2009, $347 thousand in 2008 and $696 thousand in 2007. During
2009, 2008 and 2007, dividends on unallocated shares in the amount of $154 thousand, $476 thousand and $586
thousand, respectively, were used for debt service while all dividends on allocated shares were allocated or paid
to the participants.
Note 26—Stock Option Plan
Restricted Stock
On April 1, 2008, we issued 12,654 shares of our common stock to an executive of the Bank as an inducement
for his employment and not under any stock incentive plan adopted by the company. The shares were issued
pursuant to a Restricted Stock Agreement dated April 1, 2008. The restricted stock was determined to have a fair
value of $12.35 per share and was based on the closing price of our common stock on the grant date. The
restricted stock vests equally over a three year period. The first vesting occurred April 1, 2009.
On November 12, 2007, we issued 35,000 shares of our common stock to an executive of the Bank as an
inducement for his employment and not under any stock incentive plan adopted by the company. The shares were
issued pursuant to a Restricted Stock Agreement dated October 19, 2007. The restricted stock was determined to
have a fair value of $10.95 per share and was based on the closing price of our common stock on the grant date.
The restricted stock vests equally over a three year period. The first vesting occurred November 12, 2008.
Compensation expense related to restricted stock was $180 thousand, $167 thousand and $17 thousand in 2009,
2008 and 2007, respectively.
109
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 26—Stock Option Plan (Continued)
Restricted Stock (Continued)
A summary of the status of First Commonwealth’s nonvested restricted stock awards as of December 31, 2009,
2008, and 2007 and changes for the years ended on those dates is presented below:
2009
2008
2007
Weighted
Average
Grant
Date Fair
Value
Shares
Weighted
Average
Grant
Date Fair
Value
Shares
Outstanding at beginning of year . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,988
-0-
$11.44
$ 0.00
(15,885) $11.32
$ 0.00
-0-
$10.95
35,000
12,654
$12.35
(11,666) $10.95
$ 0.00
-0-
Weighted
Average
Grant
Date Fair
Value
$ 0.00
$10.95
$ 0.00
$ 0.00
Shares
-0-
35,000
-0-
-0-
Outstanding at end of year
. . . . . . . . . . . . . . . . . . .
20,103
$11.53
35,988
$11.44
35,000
$10.95
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 2005 vested in the year granted. All options expire ten years from the grant date.
All equity compensation plans were approved by security holders.
A summary of the status of First Commonwealth’s outstanding stock options as of December 31, 2009, 2008, and
2007 and changes for the years ended on those dates is presented below:
2009
2008
2007
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Outstanding at beginning of year . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . .
758,480
-0-
$10.26
$ 0.00
(4,476) $11.56
(25,452) $12.34
1,319,661
-0-
$10.86
$ 0.00
(409,478) $10.65
(151,703) $14.38
1,727,538
-0-
$11.01
$ 0.00
(177,235) $10.25
(230,642) $12.48
Outstanding at end of year . . . . . . . . . . . . . .
728,552
$10.18
758,480
$10.26
1,319,661
$10.86
Exercisable at end of year . . . . . . . . . . . . . .
728,552
$10.18
758,480
$10.26
1,319,661
$10.86
110
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 26—Stock Option Plan (Continued)
Stock Option Plan (Continued)
The following table summarizes information about the stock options outstanding at December 31, 2009:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$5.14-$8.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.00-$9.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.00-$10.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11.00-$11.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12.00-$15.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
Outstanding
At 12/31/09
202,153
50,087
68,302
197,388
210,622
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
728,552
Weighted
Average
Remaining
Contract
Life
2.4
3.4
1.3
1.4
3.3
2.3
Weighted
Average
Exercise
Price
$ 6.59
$ 9.27
$10.73
$11.50
$12.44
$10.18
Number
Exercisable
At 12/31/09
202,153
50,087
68,302
197,388
210,622
728,552
Weighted
Average
Exercise
Price
$ 6.59
$ 9.27
$10.73
$11.50
$12.44
$10.18
Note 27—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 28—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 related parties (dollars in thousands):
Balances December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,702
8,456
(7,865)
(46)
Balances December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,247
The “Other” line primarily reflects decreases due to changes in the individuals designated as a “related party”
during the year.
111
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 29—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. The dividend restrictions have not had, and are not expected to have,
a significant impact on First Commonwealth’s ability to meet its cash obligations.
Dividends in 2009 were $0.18 compared to $0.68 in 2008. The reduction in dividends was made in order to
preserve capital in the current economic environment. The preservation of our capital will support growth in
loans and the strategic expansion of our franchise.
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, 2009, First
Commonwealth and its banking subsidiary met all capital adequacy requirements to which they are subject.
112
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 29—Regulatory Restrictions and Capital Adequacy (Continued)
As of December 31, 2009, First Commonwealth Bank was considered well capitalized under the regulatory
framework for prompt corrective action. To be considered well capitalized, the bank must maintain minimum
Total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the table below:
Actual
Regulatory
Minimum
Well Capitalized
Regulatory
Guidelines
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
(dollars in thousands)
8.0%
8.0% $556,529
N/A N/A
10.0%
4.0%
4.0% $333,917
N/A N/A
6.0%
4.0%
4.0% $312,249
N/A N/A
5.0%
8.0%
8.0% $529,063
N/A N/A
10.0%
4.0%
4.0% $317,437
N/A N/A
6.0%
3.0%
3.0% $303,955
N/A N/A
5.0%
As of December 31, 2009
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation . . . . .
First Commonwealth Bank . . . . . . . . . . . . . . . . . .
$649,373
$599,841
11.5% $450,300
10.8% $445,223
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation . . . . .
First Commonwealth Bank . . . . . . . . . . . . . . . . . .
$579,014
$530,275
10.3% $225,150
9.5% $222,612
Tier I Capital to Average Assets
First Commonwealth Financial Corporation . . . . .
First Commonwealth Bank . . . . . . . . . . . . . . . . . .
$579,014
$530,275
9.2% $252,351
8.5% $249,799
As of December 31, 2008
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation . . . . .
First Commonwealth Bank . . . . . . . . . . . . . . . . . .
$661,002
$613,619
12.4% $427,170
11.6% $423,251
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation . . . . .
First Commonwealth Bank . . . . . . . . . . . . . . . . . .
$608,201
$560,860
11.4% $213,585
10.6% $211,625
Tier I Capital to Average Assets
First Commonwealth Financial Corporation . . . . .
First Commonwealth Bank . . . . . . . . . . . . . . . . . .
$605,201
$560,860
9.9% $244,896
9.2% $243,164
113
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 30—Condensed Financial Information of First Commonwealth Financial Corporation (parent
company only)
Statements of Financial Condition
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2009
2008
(dollars in thousands)
$
8,029
46
623,934
3,291
7,773
12,749
-0-
2,633
95,105
$ 23,023
54
643,021
3,304
7,546
12,662
4,324
2,844
99,151
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$753,560
$795,929
Liabilities and Shareholders’ Equity
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,399
-0-
5,600
105,750
638,811
$ 15,341
14,459
7,600
105,750
652,779
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .
$753,560
$795,929
Statements of Operations
Years Ended December 31,
2009
2008
2007
Interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(dollars in thousands)
2
$
31,048
(6,265)
29,125
(42,916)
3
68,359
(8,258)
29,365
(44,410)
19
64,560
(9,507)
118
(13,954)
Income before taxes and equity in undistributed earnings of subsidiaries . . . . .
Applicable income tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,994
7,226
45,059
8,433
Income before equity in undistributed earnings of subsidiaries . . . . . . . . . . . . .
Equity in undistributed loss of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,220
(38,284)
53,492
(10,405)
41,236
8,454
49,690
(3,440)
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(20,064) $ 43,087
$ 46,250
114
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 30—Condensed Financial Information of First Commonwealth Financial Corporation (parent
company only) (Continued)
Statements of Cash Flows
Operating Activities
Years Ended December 31,
2009
2008
2007
(dollars in thousands)
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net (loss) income to net cash provided by
$(20,064) $ 43,087
$ 46,250
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (loss) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in prepaid income taxes . . . . . . . . . . . . . . . . . . . .
Undistributed equity in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-net
3,330
8
-0-
(23)
38,285
(4,030)
3,314
11
-0-
(276)
10,283
9,359
652
(85)
(100)
2,023
3,900
(3,452)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . .
17,506
65,778
49,188
Investing Activities
Transactions with securities available for sale:
Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities and redemptions of investment securities . . . . . . . . . . . . .
Net change in loans to affiliated parties . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of premises and equipment
. . . . . . . . . . . . . . . . . . . . .
Change in receivable from and net investment in subsidiaries . . . . . . . . . .
Additional investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
8
(3,282)
(6)
211
-0-
-0-
4,000
8
(3,856)
(6,299)
(2,182)
(88,512)
(3,998)
6,900
236
(430)
169
(438)
-0-
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . .
(3,069)
(96,841)
2,439
Financing Activities
Issuance of other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on dividend reinvestment plan purchases . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from capital issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
(369)
(18)
484
(29,677)
149
-0-
4,500
-0-
(14,500)
(916)
-0-
4,360
(49,375)
184
108,830
13,500
(2,400)
(3,500)
(920)
(9,971)
1,816
(49,553)
86
-0-
Net cash (used in) provided by financing activities . . . . . . . . . . . . . .
(29,431)
53,083
(50,942)
Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,994)
23,023
22,020
1,003
685
318
Cash at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,029
$ 23,023
$ 1,003
Cash dividends declared per common share were $0.18 for 2009 and $0.68 for 2008 and 2007.
115
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007
Note 30—Condensed Financial Information of First Commonwealth Financial Corporation (parent
company only) (Continued)
During 2009, there were no special dividends included in dividends from subsidiaries. During 2008, dividends
from subsidiaries included special dividends of $15.0 million received from FCB and $3.0 million received from
FraMal Holdings Corporation, both wholly owned subsidiaries. During 2007, dividends from subsidiaries
included a special dividend of $19.5 million from FCB. After distribution of these special dividends, which were
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 2005 for the ESOP and is guaranteed by First Commonwealth. During 2005,
$8.5 million was borrowed on the line. There were no borrowings on the line during 2009, 2008 and 2007. The
loan was recorded as long-term debt and the offset was recorded as a reduction of common shareholders’ equity.
See Note 25 “Unearned ESOP Shares.” We are currently not meeting debt covenants on this loan related to
Return on Average Assets, Nonperforming Loans to Total Loans, and Allowance for Loan Loss to
Nonperforming Loans. We are working with the lender and expect to either obtain a waiver or a modification for
these covenants.
First Commonwealth has an unsecured $15.0 million line of credit with another financial institution. There are no
amounts outstanding on this line as of December 31, 2009, nor has the line been utilized since its inception in
May 2009. We are currently not meeting debt covenants on this loan related to Return on Average Assets and
Nonperforming Loans to Total Loans. We are working with the lender and expect to either obtain a waiver or a
modification for these covenants.
116
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data (Continued)
Quarterly Summary of Financial Data—Unaudited
The unaudited quarterly results of operations for the years ended December 31, 2009 and 2008 are as follows:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2009
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net interest income . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net impairment losses . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . .
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . .
Average shares outstanding . . . . . . . . . . . . . . . . . . . . .
Average shares outstanding assuming dilution . . . . . .
$
$
$
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net interest income . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net impairment losses . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . .
Average shares outstanding . . . . . . . . . . . . . . . . . . . . .
Average shares outstanding assuming dilution . . . . . .
$
$
$
117
50,599
8,242
42,357
(9,866)
24
12,582
43,348
1,749
62
1,687
0.02
0.02
84,521,266
84,582,545
(dollars in thousands, except share data)
$
$
$
73,720
22,232
72,063
21,080
74,941
24,342
51,488
48,248
50,983
23,020
3,240
(8,761)
56
15,420
45,335
(35,380)
(16,761)
27,963
(11,903)
44
12,860
41,945
(12,981)
(7,120)
72,557
19,117
53,440
21,059
32,381
(5,655)
149
14,375
40,523
727
(2,002)
$
$
$
(18,619) $
(5,861) $
2,729
(0.22) $
(0.22) $
(0.07) $
(0.07) $
84,559,889
84,559,889
84,594,952
84,594,952
0.03
0.03
84,681,199
84,681,199
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2008
(dollars in thousands, except share data)
$
$
$
82,221
35,290
81,139
33,212
81,807
40,723
41,084
3,179
37,905
-0-
501
12,955
38,856
12,505
1,384
11,121
0.15
0.15
72,452,875
72,559,668
$
$
$
46,931
5,361
41,570
(541)
90
13,540
38,885
15,774
2,861
12,913
0.18
0.18
72,624,053
72,734,711
47,927
3,913
44,014
(8,619)
910
13,983
38,997
11,291
1,127
10,164
0.14
0.14
72,715,709
72,817,216
$
$
$
$
$
$
82,429
29,773
52,656
10,642
42,014
(3,850)
15
13,847
41,877
10,149
1,260
8,889
0.11
0.11
80,076,383
80,179,260
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15
under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective
to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
applicable rules and forms of the Securities and Exchange Commission.
In addition, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted
an evaluation of our internal controls over financial reporting to determine whether any changes occurred during
the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting. No such changes were identified in connection with this evaluation.
ITEM 9B. Other Information
None.
118
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information called for by this item concerning the identification, business experience and qualifications of First
Commonwealth’s directors will be included in First Commonwealth’s definitive Proxy Statement to be filed with
the Securities and Exchange Commission in connection with the annual meeting of shareholders to be held
April 21, 2010 (the “Proxy Statement”), under the heading “Proposal 1 – Election of Directors,” and is
incorporated herein by reference.
Information called for by this item concerning the identification and business experience of First
Commonwealth’s executive officers will be included in the Proxy Statement under the heading “Executive
Officers,” and is incorporated herein by reference.
Information called for by this item concerning First Commonwealth’s compliance with section 16(a) of the
Exchange Act will be included in the Proxy Statement under the heading “Compliance with Beneficial
Ownership Reporting,” and is incorporated herein by reference.
First Commonwealth has adopted a code of conduct and ethics that applies to all employees of the company,
including executive officers. In addition, First Commonwealth has adopted a code of ethics for the Chief
Executive Officer and all senior financial officers of the company. Both of these codes are filed as exhibits to this
annual report on Form 10-K and are posted on First Commonwealth’s website at http://www.fcbanking.com.
Refer to Item 15 of this Annual Report on Form 10-K for a list of exhibits.
There have been no material changes to the procedures by which security holders of First Commonwealth may
recommend nominees to First Commonwealth’s board of directors since First Commonwealth last disclosed
those procedures in its definitive Proxy Statement in connection with the 2009 annual meeting of shareholders.
Information called for by this item concerning First Commonwealth’s Audit Committee and the identification of
“Audit Committee financial experts” will be included in the Proxy Statement under the heading “Corporate
Governance,” and is incorporated herein by reference.
ITEM 11. Executive Compensation
Information called for by this item concerning compensation of First Commonwealth’s executive officers and the
report of the Compensation and Human Resources Committee will be included in the Proxy Statement under the
heading “Executive Compensation,” and is incorporated herein by reference.
Information called for by this item concerning compensation of First Commonwealth’s directors will be included
in the Proxy Statement under the heading “Compensation of Directors,” and is incorporated herein by reference.
Information called for this item concerning Compensation Committee Interlocks and Insider Participation will be
included in the Proxy Statement under that heading and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information called for by this item concerning security ownership of certain beneficial owners and security
ownership of management will be included in the Proxy Statement under the headings “Security Ownership of
Certain Beneficial Owners” and “Securities Owned by Directors and Management,” and is incorporated herein
by reference.
119
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters (Continued)
The following table provides information related to our existing equity compensation plans as of December 31,
2009:
Plan Category(1)
Equity compensation plans approved by security holders . . . . .
Equity compensation plans not approved by security
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
471,358
$11.82
4,997,128
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
None
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
471,358
N/A
$11.82
N/A
4,997,128
(1) The table does not include information on stock options issued by First Commonwealth in substitution for
stock options of GA Financial, Inc. and Pittsburgh Financial Corporation upon the acquisition of those
companies. At December 31, 2009, 257,194 shares of common stock are issuable upon exercise of substitute
stock options issued in connection with those acquisitions with a weighted average exercise price of $7.19.
First Commonwealth cannot grant additional stock options or other equity awards under the GA Financial or
Pittsburgh Financial equity compensation plans.
ITEM 13. Certain Relationships and Related Party Transactions, and Director Independence
Information called for by this item concerning transactions with related persons and review, approval or
ratification of transactions with related persons will be included in the Proxy Statement under the heading
“Related Party Transactions,” and is incorporated herein by reference.
Information called for by this item concerning director independence will be included in the Proxy Statement
under the heading “Corporate Governance,” and is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
Information called for by this item concerning fees paid to First Commonwealth’s principal accountant and First
Commonwealth’s pre-approval policies and procedures will be included in the Proxy Statement under the
heading “Annual Audit Information,” and is incorporated herein by reference.
120
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART IV
ITEM 15. Exhibits, Financial Statements and Schedules
(A) Documents Filed as Part of this Report
(1) Financial Statements
All financial statements of the registrant as set forth under Item 8 of the Report on Form 10-K.
(2) Financial Statement Schedules
Schedule
Number
Description
I
II
Indebtedness to Related Parties
Guarantees of Securities of Other Issuers
(3) Exhibits
Exhibit
Number Description
Page
N/A
N/A
Incorporated by Reference to
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Articles of Incorporation of First Commonwealth
Financial Corporation
Exhibit 3(i) to the quarterly report on Form
10-Q for the quarter ended March 31, 1994
Amended and Restated By-Laws of First
Commonwealth Financial Corporation
Exhibit 3.2 to the current report as Form 8-K
filed January 17, 2008
Change of Control Agreement dated October 18,
2005 entered into between FCFC and John J.
Dolan
Change of Control Agreement dated October 18,
2005 entered into between FCFC and Sue A.
McMurdy
Change of Control Agreement dated October 18,
2005 entered into between FCFC and R. John
Previte
Change of Control Agreement dated October 18,
2005 entered into between FCFC and
Thaddeus J. Clements
Exhibit 10.2 to the annual report on
Form 10-K filed February 29, 2008
Exhibit 10.3 to the annual report on
Form 10-K filed February 29, 2008
Exhibit 10.4 to the annual report on
Form 10-K filed February 29, 2008
Exhibit 10.2 to the annual report on
Form 10-K filed March 2, 2006
Amended and Restated Supplemental Executive
Retirement Plan
Exhibit 10.6 to the annual report on
Form 10-K filed February 26, 2009
Employment Agreement dated October 19, 2007
entered into between FCFC and T. Michael Price
Exhibit 10.9 to the annual report on
Form 10-K filed February 29, 2008
Restricted Stock Agreement dated October 19,
2007 entered into between FCFC and T. Michael
Price
Change of Control Agreement dated October 19,
2007 entered into between FCFC and T. Michael
Price
10.9
2007-2009 Long Term Cash Incentive Plan
121
Exhibit 10.10 to the annual report on
Form 10-K filed February 29, 2008
Exhibit 10.11 to the annual report on
Form 10-K filed February 29, 2008
Exhibit 10.13 to the annual report on
Form 10-K filed February 29, 2008
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 15. Exhibits, Financial Statements and Schedules (Continued)
Exhibit
Number Description
10.10
2008-2010 Long Term Incentive Plan
10.11
2009-2011 Long Term Incentive Plan
10.12
Separation Agreement and General Release
dated September 30, 2009 entered into between
FCFC and Edward J. Lipkus, III
14.1
Code of Conduct and Ethics
Incorporated by Reference to
Exhibit 10.2 to the quarterly report on
Form 10-Q filed May 8, 2008
Exhibit 10.2 to the quarterly report on
Form 10-Q filed May 7, 2009
Filed herewith
Exhibit 14.1 to the annual report on
Form 10-K filed March 2, 2006
Code of Ethics for CEO and Senior Financial
Officers
Exhibit 14.2 to the annual report on
Form 10-K filed March 2, 2006
Subsidiaries of the Registrant
Consent of KPMG LLP Independent Registered
Public Accounting Firm
Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
14.2
21.1
23.1
31.1
31.2
32.1
32.2
122
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana,
Pennsylvania.
SIGNATURES
FIRST COMMONWEALTH FINANCIAL
CORPORATION
(Registrant)
By:
/s/
JOHN J. DOLAN
John J. Dolan
President and Chief Executive Officer
Dated: March 1, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/S/
JULIE A. CAPONI
Julie A. Caponi
/S/ RAY T. CHARLEY
Ray T. Charley
/S/
JULIA E. TRIMARCHI CUCCARO
Julia E. Trimarchi Cuccaro
Director
Director
Director
March 1, 2010
March 1, 2010
March 1, 2010
/S/ DAVID S. DAHLMANN
Director
March 1, 2010
David S. Dahlmann
/S/
JOHN J. DOLAN
John J. Dolan
/S/
JOHNSTON A. GLASS
Johnston A. Glass
/S/ DALE P. LATIMER
Dale P. Latimer
/S/
JAMES W. NEWILL
James W. Newill
/S/ ROBERT E. ROUT
Robert E. Rout
/S/ LAURIE S. SINGER
Laurie S. Singer
President and Chief Executive
Officer (Principal Executive
Officer) and Director
Director
Director
Director
Executive Vice President and
Chief Financial Officer
March 1, 2010
March 1, 2010
March 1, 2010
March 1, 2010
March 1, 2010
Director
March 1, 2010
/S/ DAVID R. TOMB, JR.
Director
March 1, 2010
David R. Tomb, Jr.
/S/ ROBERT J. VENTURA
Director
March 1, 2010
Robert J. Ventura
123
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(cid:27)(cid:30)(cid:31)N(cid:5)1(cid:8)(cid:9)(cid:12)(cid:8)(cid:16)(cid:22)(cid:10)(cid:5)(cid:10)(cid:7)(cid:5)(cid:14)(cid:13)*(cid:10)(cid:19)(cid:7)(cid:22)(cid:5)#(cid:30)(cid:17)(cid:5)(cid:7))(cid:5)(cid:10)(cid:11)(cid:13)(cid:5)(cid:14)(cid:16)(cid:9)+(cid:16)(cid:22)(cid:13)(cid:12)(cid:31)(cid:2)(cid:20)(cid:3)(cid:13)(cid:25)(cid:5)/*(cid:10)((cid:5)<(cid:11)(cid:13)(cid:5)(cid:14)(cid:13)*(cid:10)(cid:19)(cid:7)(cid:22)(cid:5)#(cid:30)(cid:17)(cid:5)*(cid:13)(cid:9)(cid:10)(cid:19)4*(cid:16)(cid:10)(cid:19)(cid:7)(cid:22)(cid:12)(cid:5)(cid:16)11(cid:13)(cid:16)(cid:9)(cid:5)(cid:16)(cid:12)(cid:5)(cid:13)(cid:20)(cid:11)(cid:19)+(cid:19)(cid:10)(cid:12)(cid:5)#(cid:27)((cid:27)(cid:5)(cid:16)(cid:22)(cid:4)(cid:5)#(cid:27)((cid:17)(cid:5)(cid:10)(cid:7)(cid:5)(cid:10)(cid:11)(cid:13)(cid:5)(cid:16)(cid:22)(cid:22)(cid:8)(cid:16)(cid:3)(cid:5)(cid:9)(cid:13)1(cid:7)(cid:9)(cid:10)(cid:5)
(cid:7)(cid:22)(cid:5)2(cid:7)(cid:9).(cid:5)(cid:27)(cid:30)(cid:31)N(cid:5)(cid:16)(cid:12)(cid:5)(cid:7))(cid:5)5(cid:13)*(cid:13).+(cid:13)(cid:9)(cid:5)#(cid:27)(cid:23)(cid:5)(cid:17)(cid:30)(cid:30)$((cid:5)
First Commonwealth Financial Corporation
Old Courthouse Square
22 North Sixth Street
Indiana, Pennsylvania 15701-0400
(724) 349-7220
(800) 711-2265
www.fcbanking.com
Annual Report 2009