Annual Statements Open main menu

FIRST COMMONWEALTH FINANCIAL CORP /PA/ - Quarter Report: 2007 September (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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   25-1428528

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

22 North Sixth Street, Indiana, PA   15701
(Address of principal executive offices)   (Zip Code)

724-349-7220

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


Indicate a 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  x    No  ¨ .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨   No  x.

The number of shares outstanding of issuer’s common stock, $1.00 Par Value as of October 31, 2007 was 73,093,497.

 



Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX

 

           PAGE
   PART I. FINANCIAL INFORMATION   

ITEM 1.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  
  

Included in Part I of this report:

  
  

First Commonwealth Financial Corporation and Subsidiaries

  
  

Consolidated Statements of Financial Condition

   3
  

Consolidated Statements of Income

   4
  

Consolidated Statements of Changes in Shareholders’ Equity

   5
  

Consolidated Statements of Cash Flows

   7
  

Notes to Consolidated Financial Statements

   8

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   12

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   29

ITEM 4.

  

CONTROLS AND PROCEDURES

   30
   PART II. OTHER INFORMATION   

ITEM 1.

  

LEGAL PROCEEDINGS

   31

ITEM 1A.

  

RISK FACTORS

   31

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   31

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

   31

ITEM 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   32

ITEM 5.

  

OTHER INFORMATION

   32

ITEM 6.

  

EXHIBITS

   32
  

Signatures

   33

 

2


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Unaudited)

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

     September 30,
2007
    December 31,
2006
 
    

(dollars in thousands,

except share data)

 

Assets

    

Cash and due from banks

   $ 86,499     $ 95,134  

Interest-bearing bank deposits

     1,060       985  

Securities available for sale, at market value

     1,460,909       1,644,690  

Securities held to maturity, at amortized cost, (Market value $74,019 in 2007 and $80,156 in 2006)

     73,024       78,501  

Loans:

    

Portfolio loans

     3,660,153       3,783,874  

Unearned income

     (30 )     (57 )

Allowance for credit losses

     (43,210 )     (42,648 )
                

Net loans

     3,616,913       3,741,169  
                

Premises and equipment, net

     70,133       68,901  

Other real estate owned

     1,803       1,507  

Goodwill

     159,956       160,366  

Amortizing intangibles, net

     14,272       16,869  

Other assets

     237,527       235,794  
                

Total assets

   $ 5,722,096     $ 6,043,916  
                

Liabilities

    

Deposits (all domestic):

    

Noninterest-bearing

   $ 522,810     $ 522,451  

Interest-bearing

     3,811,133       3,803,989  
                

Total deposits

     4,333,943       4,326,440  

Short-term borrowings

     237,734       500,014  

Other liabilities

     44,156       52,681  

Subordinated debentures

     108,250       108,250  

Other long-term debt

     435,781       485,170  
                

Total long-term debt

     544,031       593,420  
                

Total liabilities

     5,159,864       5,472,555  
                

Shareholders’ Equity

    

Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued

     -0-       -0-  

Common stock, $1 par value per share, 100,000,000 shares authorized; 75,100,431 shares issued and 73,086,247 shares outstanding in 2007; 75,100,431 shares issued and 73,916,377 shares outstanding in 2006

     75,100       75,100  

Additional paid-in capital

     207,310       208,313  

Retained earnings

     319,472       322,415  

Accumulated other comprehensive loss, net

     (6,736 )     (7,914 )

Treasury stock (2,014,184 and 1,184,054 shares at September 30, 2007 and December 31, 2006, respectively, at cost)

     (22,814 )     (14,953 )

Unearned ESOP shares

     (10,100 )     (11,600 )
                

Total shareholders’ equity

     562,232       571,361  
                

Total liabilities and shareholders’ equity

   $ 5,722,096     $ 6,043,916  
                

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Unaudited)

CONSOLIDATED STATEMENTS OF INCOME

 

     For the Quarter Ended
September 30,
   For the Nine Months Ended
September 30,
     2007    2006    2007    2006
     (dollars in thousands, except share data)

Interest Income

           

Interest and fees on loans

   $ 63,737    $ 64,575    $ 190,463    $ 183,376

Interest and dividends on investments:

           

Taxable interest

     14,259      16,859      45,293      51,610

Interest exempt from Federal income taxes

     3,424      3,215      10,222      9,664

Dividends

     753      776      2,206      2,166

Interest on Federal funds sold

     57      17      83      76

Interest on bank deposits

     8      15      29      39
                           

Total interest income

     82,238      85,457      248,296      246,931
                           

Interest Expense

           

Interest on deposits

     33,786      28,254      98,243      76,820

Interest on short-term borrowings

     1,977      7,338      9,623      20,324

Interest on subordinated debentures

     2,130      2,134      6,370      6,285

Interest on other long-term debt

     4,211      5,453      12,836      18,484
                           

Total interest on long-term debt

     6,341      7,587      19,206      24,769
                           

Total interest expense

     42,104      43,179      127,072      121,913
                           

Net Interest Income

     40,134      42,278      121,224      125,018

Provision for credit losses

     2,296      3,038      7,690      8,244
                           

Net Interest Income after provision for credit losses

     37,838      39,240      113,534      116,774
                           

Non-Interest Income

           

Net securities gains

     16      5      771      87

Trust income

     1,517      1,482      4,453      4,357

Service charges on deposit accounts

     4,609      4,361      13,291      12,374

Gain on extinguishment of debt

     -0-      1,283      -0-      1,553

Insurance commissions

     1,064      801      2,651      2,115

Income from bank owned life insurance

     1,534      1,451      4,544      4,240

Card related interchange income

     1,654      1,398      4,773      4,087

Other operating income

     1,819      1,609      5,557      4,939
                           

Total non-interest income

     12,213      12,390      36,040      33,752
                           

Non-Interest Expense

           

Salaries and employee benefits

     18,401      17,690      57,273      54,282

Net occupancy expense

     3,475      2,845      10,226      9,032

Furniture and equipment expense

     3,243      2,998      8,874      8,680

Advertising expense

     475      417      1,910      1,109

Data processing expense

     942      903      2,821      2,518

Pennsylvania shares tax expense

     1,439      1,349      4,323      4,057

Intangible amortization

     857      658      2,597      1,789

Other operating expenses

     7,648      6,582      23,108      20,790
                           

Total non-interest expense

     36,480      33,442      111,132      102,257
                           

Income before income taxes

     13,571      18,188      38,442      48,269

Applicable income taxes

     1,352      2,796      3,840      7,713
                           

Net Income

   $ 12,219    $ 15,392    $ 34,602    $ 40,556
                           

Average Shares Outstanding

     72,589,329      70,875,018      72,959,307      70,004,534

Average Shares Outstanding Assuming Dilution

     72,705,753      71,177,930      73,128,040      70,382,511

Per Share Data:

           

Basic Earnings per Share

   $ 0.17    $ 0.22    $ 0.47    $ 0.58

Diluted Earnings per Share

   $ 0.17    $ 0.22    $ 0.47    $ 0.58

Cash Dividends Declared per Common Share

   $ 0.17    $ 0.17    $ 0.51    $ 0.51

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(Unaudited)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

 

     Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss), net
    Treasury
Stock
    Unearned
ESOP
Shares
    Total
Shareholders’
Equity
 

Balance at December 31, 2006

   $ 75,100    $ 208,313     $ 322,415     $ (7,914 )   $ (14,953 )   $ (11,600 )   $ 571,361  

Comprehensive income

               

Net income

     -0-      -0-       34,602       -0-       -0-       -0-       34,602  

Other comprehensive income, net of tax:

               

Unrealized holding gains on securities arising during the period

     -0-      -0-       -0-       1,599       -0-       -0-       1,599  

Less: reclassification adjustment for gains on securities included in net income

     -0-      -0-       -0-       (501 )     -0-       -0-       (501 )

Reclassification adjustment for losses realized in net income as a result of terminated cash flow hedges

     -0-      -0-       -0-       80       -0-       -0-       80  
                                                       

Total other comprehensive income

     -0-      -0-       -0-       1,178       -0-       -0-       1,178  
                                                       

Total comprehensive income

                  35,780  

Cash dividends declared

     -0-      -0-       (37,545 )     -0-       -0-       -0-       (37,545 )

Net decrease in unearned ESOP shares

     -0-      -0-       -0-       -0-       -0-       1,500       1,500  

Discount on dividend reinvestment plan purchases

     -0-      (688 )     -0-       -0-       -0-       -0-       (688 )

Tax benefit of stock options exercised

     -0-      28       -0-       -0-       -0-       -0-       28  

Treasury stock acquired

     -0-      -0-       -0-       -0-       (9,971 )     -0-       (9,971 )

Treasury stock reissued

     -0-      (343 )     -0-       -0-       2,110       -0-       1,767  
                                                       

Balance at September 30, 2007

   $ 75,100    $ 207,310     $ 319,472     $ (6,736 )   $ (22,814 )   $ (10,100 )   $ 562,232  
                                                       

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(Unaudited)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

 

     Common
Stock
   Additional
Paid-in
Capital
   

Retained

Earnings

    Accumulated
Other
Comprehensive
Income (Loss), net
    Treasury
Stock
    Unearned
ESOP
Shares
    Total
Shareholders’
Equity
 

Balance at December 31, 2005

   $ 71,978    $ 173,967     $ 318,569     $ (9,655 )   $ (20,214 )   $ (13,600 )   $ 521,045  

Comprehensive income

               

Net income

     -0-      -0-       40,556       -0-       -0-       -0-       40,556  

Other comprehensive income, net of tax:

               

Unrealized holding gains on securities arising during the period

     -0-      -0-       -0-       89       -0-       -0-       89  

Less: reclassification adjustment for gains on securities included in net income

     -0-      -0-       -0-       (54 )     -0-       -0-       (54 )

Reclassification adjustment for losses realized in net income as a result of terminated cash flow hedges

     -0-      -0-       -0-       555       -0-       -0-       555  
                                                       

Total other comprehensive income

     -0-      -0-       -0-       590       -0-       -0-       590  
                                                       

Total comprehensive income

                  41,146  

Cash dividends declared

     -0-      -0-       (36,542 )     -0-       -0-       -0-       (36,542 )

Net decrease in unearned ESOP shares

     -0-      -0-       -0-       -0-       -0-       1,500       1,500  

Discount on dividend reinvestment plan purchases

     -0-      (677 )     -0-       -0-       -0-       -0-       (677 )

Tax benefit of stock options exercised

     -0-      91       -0-       -0-       -0-       -0-       91  

Treasury stock reissued

     -0-      (1,205 )     -0-       -0-       4,043       -0-       2,838  

Stock issued for acquisition

     3,122      36,445       -0-       -0-       -0-       -0-       39,567  
                                                       

Balance at September 30, 2006

   $ 75,100    $ 208,621     $ 322,583     $ (9,065 )   $ (16,171 )   $ (12,100 )   $ 568,968  
                                                       

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Nine Months Ended
September 30,
 
            2007                     2006          
    (dollars in thousands)  

Operating Activities

   

Net income

  $ 34,602     $ 40,556  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Provision for credit losses

    7,690       8,244  

Deferred taxes

    (3,638 )     (901 )

Depreciation and amortization

    9,138       8,770  

Net gains on sales of securities and other assets

    (1,426 )     (273 )

Net amortization of premiums and discounts on securities

    587       1,522  

Net amortization of premiums and discounts on long-term debt

    (3,552 )     (5,476 )

Income from increase in cash surrender value of bank owned life insurance

    (4,544 )     (4,240 )

Decrease (increase) in interest receivable

    3,348       (1,562 )

(Decrease) increase in interest payable

    (1,946 )     1,021  

Increase in income taxes payable

    2,004       1,506  

Net decrease in loans held for sale

    -0-       1,276  

Other-net

    (5,483 )     (7,092 )
               

Net cash provided by operating activities

    36,780       43,351  
               

Investing Activities

   

Transactions in securities held to maturity:

   

Proceeds from maturities and redemptions

    5,742       7,318  

Transactions in securities available for sale:

   

Proceeds from sales

    1,087       5,566  

Proceeds from maturities and redemptions

    342,937       320,149  

Purchases

    (158,634 )     (122,168 )

Proceeds from sales of other assets

    5,273       5,332  

Acquisition, net of cash received

    -0-       60,264  

Net increase in interest-bearing deposits with banks

    (75 )     (7,513 )

Net decrease in loans

    111,737       3,051  

Purchases of premises and equipment

    (7,818 )     (10,749 )
               

Net cash provided by investing activities

    300,249       261,250  
               

Financing Activities

   

Repayments of other long-term debt

    (54,337 )     (128,324 )

Proceeds from issuance of long-term debt

    10,000       -0-  

Discount on dividend reinvestment plan purchases

    (688 )     (677 )

Dividends paid

    (37,687 )     (35,957 )

Net decrease in Federal funds purchased

    (77,800 )     (38,025 )

Net decrease in other short-term borrowings

    (184,479 )     (154,847 )

Net increase in deposits

    7,503       59,524  

Proceeds from sale of treasury stock

    1,767       2,635  

Purchase of treasury stock

    (9,971 )     -0-  

Stock option tax benefit

    28       91  
               

Net cash used in financing activities

    (345,664 )     (295,580 )
               

Net (decrease) increase in cash and cash equivalents

    (8,635 )     9,021  

Cash and cash equivalents at January 1

    95,134       86,130  
               

Cash and cash equivalents at September 30

  $ 86,499     $ 95,151  
               

The accompanying notes are an integral part of these consolidated financial statements.

 

7


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

September 30, 2007

(Unaudited)

NOTE 1 Basis of Presentation

The consolidated financial statements include the accounts of First Commonwealth Financial Corporation and its wholly owned subsidiaries (“First Commonwealth”). All material intercompany transactions have been eliminated in consolidation. The accounting and reporting policies of First Commonwealth conform with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ from those estimates. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of First Commonwealth’s financial position, results of operations, cash flows, and changes in shareholders’ equity as of and for the periods presented.

The results of operations for the three and nine month periods ended September 30, 2007 and 2006 are not necessarily indicative of the results that may be expected for the full year or any other interim period. These interim financial statements should be read in conjunction with First Commonwealth’s 2006 Annual Report on Form 10-K which is available on First Commonwealth’s website at http://www.fcbanking.com. First Commonwealth’s website also provides additional information of interest to investors and clients, including other regulatory filings made to the Securities and Exchange Commission, press releases, historical stock prices, dividend declarations, corporate governance information, policies, and documents as well as information about products and services offered by First Commonwealth. First Commonwealth includes its website address in this Quarterly Report on Form 10-Q only as an inactive textual reference and does not intend it to be an active link to First Commonwealth’s website.

NOTE 2 Supplemental Other Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity:

 

     September 30, 2007     September 30, 2006  
     (dollars in thousands)  
     Pre-tax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
    Pre-tax
Amount
    Tax
(Expense)
Benefit
    Net of
Tax
Amount
 

Unrealized gains on securities:

            

Unrealized holding gains arising during the period

   $ 2,460     $ (861 )   $ 1,599     $ 137     $ (48 )   $ 89  

Less: reclassification adjustment for gains included in net income

     (771 )     270       (501 )     (83 )     29       (54 )

Reclassification adjustment for losses realized in net income as a result of terminated cash flow hedges

     123       (43 )     80       854       (299 )     555  
                                                

Net unrealized gains

     1,812       (634 )     1,178       908       (318 )     590  
                                                

Other comprehensive income

   $ 1,812     $ (634 )   $ 1,178     $ 908     $ (318 )   $ 590  
                                                

 

8


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

September 30, 2007

(Unaudited)

 

NOTE 3 Supplemental Cash Flow Disclosures

 

     2007    2006
     (dollars in thousands)

Cash paid during the first nine months of the year for:

     

Interest

   $ 124,041    $ 126,333

Income taxes

   $ 4,450    $ 7,313

Noncash investing and financing activities:

     

ESOP loan reductions

   $ 1,500    $ 1,500

Loans transferred to other real estate owned and repossessed assets

   $ 4,502    $ 4,112

Gross increase in market value adjustment to securities available for sale

   $ 1,689    $ 54

Treasury stock reissued for business combination

   $ -0-    $ 203

NOTE 4 Variable Interest Entities

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FIN 46R, “Consolidation of Variable Interest Entities.” As defined by FIN 46R, a variable interest entity, or VIE, is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Under FIN 46R, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is subject to a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both.

As part of its community reinvestment initiatives, First Commonwealth invests in qualified affordable housing projects as a limited partner. First Commonwealth receives Federal affordable housing tax credits and rehabilitation tax credits for these limited partnership investments. First Commonwealth’s maximum potential exposure to these partnerships is $3.6 million, which consists of the limited partnership investments as of September 30, 2007. Based on FIN 46R, First Commonwealth has determined that these investments will not be consolidated but continue to be accounted for under the equity method whereby First Commonwealth’s portion of partnership losses is recognized as incurred.

NOTE 5 Commitments and Letters of Credit

Standby letters of credit are conditional commitments issued by First Commonwealth to guarantee the performance of a customer to a third party. The contract or notional amount of these instruments reflects the maximum amount of future payments that First Commonwealth could be required to pay under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. In addition, many of these commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. The following table identifies the notional amount of those instruments at September 30, 2007:

 

     (dollars in thousands)

Commitments to extend credit

   $ 1,156,276

Financial standby letters of credit

   $ 73,457

Performance standby letters of credit

   $ 17,932

The current notional amounts outstanding above include financial standby letters of credit of $18.9 million and performance standby letters of credit of $11.8 million issued during the first nine months of 2007. A liability of $444 thousand has been recorded which represents the fair value of letters of credit issued in 2007.

 

9


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

September 30, 2007

(Unaudited)

 

NOTE 6 Other-Than-Temporary Impairment of Investments

The following table presents the gross unrealized losses and fair values at September 30, 2007 by investment category and time frame for which the loss has been outstanding (dollars in thousands):

 

     Less Than 12 Months     12 Months or More     Total  

Description of Securities

  

Fair

Value

   Unrealized
Losses
   

Fair

Value

   Unrealized
Losses
   

Fair

Value

   Unrealized
Losses
 

U.S. Government Corporations and Agencies

   $ 24,899    $ (101 )   $ 84,775    $ (226 )   $ 109,674    $ (327 )

U.S. Government Agency CMO and MBS

     194,433      (958 )     559,971      (14,381 )     754,404      (15,339 )

Corporate Securities

     39,500      (438 )     11,162      (152 )     50,662      (590 )

Municipal Securities

     71,587      (1,221 )     684      (17 )     72,271      (1,238 )

Other Mortgage Backed Securities

     -0-      -0-       252      (2 )     252      (2 )
                                             

Total Debt Securities

     330,419      (2,718 )     656,844      (14,778 )     987,263      (17,496 )

Equities

     8,845      (1,010 )     133      (23 )     8,978      (1,033 )
                                             

Total Securities

   $ 339,264    $ (3,728 )   $ 656,977    $ (14,801 )   $ 996,241    $ (18,529 )
                                             

Management does not believe any individual loss as of September 30, 2007 represents an other-than-temporary impairment. The unrealized losses are predominantly attributable to changes in interest rates and not from the deterioration of the creditworthiness of the issuer. Management has both the intent and ability to hold the securities represented in the table for the time necessary to collect the contractual principal and interest.

NOTE 7 Income Taxes

At January 1, 2007, First Commonwealth had no material unrecognized tax benefits or accrued interest and penalties. First Commonwealth will record interest and penalties as a component of non-interest expense. Federal tax years 2005 through 2006 were open for examination as of January 1, 2007, while tax years 2004 through 2006 were open for examination for state income tax purposes as of January 1, 2007.

NOTE 8 Acquisitions and Dispositions

On August 28, 2006, First Commonwealth completed its acquisition of Laurel Capital Group, Inc. (“Laurel”) for a total cost of approximately $56.1 million, which was paid in common stock valued at $39.5 million and $16.6 million in cash. Laurel was the holding company for Laurel Savings Bank with approximately $313.8 million in assets and 8 branch offices located in Allegheny and Butler counties in Pennsylvania. First Commonwealth recorded goodwill and core deposit intangibles totaling approximately $37.3 million and $3.5 million, respectively, in the acquisition of Laurel. Any pre-acquisition contingency adjustments to the fair values or other purchase accounting adjustments, determinable within twelve months from the acquisition dates, would result in adjustments to goodwill.

NOTE 9 Derivative Instruments

First Commonwealth has interest rate derivatives that are not designated as hedging instruments. The 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

 

10


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

September 30, 2007

(Unaudited)

NOTE 9 Derivative Instruments (continued)

 

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 and therefore do not have an impact on First Commonwealth’s results of operations.

NOTE 10 New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board “FASB” issued Statement of Financial Accounting Standards No. 159 (“FAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” Effective for fiscal years beginning after November 15, 2007, FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Management is currently evaluating how FAS 159 will affect First Commonwealth’s financial condition or results of operations upon adoption.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, this statement simplifies and codifies related guidance within generally accepted accounting principles (“GAAP”). FAS 157 will be effective for fiscal years beginning after November 15, 2007. Management is currently evaluating how FAS 157 may affect First Commonwealth’s financial condition or results of operations upon adoption.

In September 2006, the FASB Emerging Issues Task Force issued EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods. Therefore, EITF 06-4 would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF 06-4 will be effective for fiscal years beginning after December 15, 2007. Management is currently evaluating how the provisions of EITF 06-4 will affect First Commonwealth’s financial condition or results of operations upon adoption.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 applies to all tax positions accounted for in accordance with Statement 109. FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. First Commonwealth adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on First Commonwealth’s financial condition or results of operations.

 

11


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (“First Commonwealth”) for the three and nine months ended September 30, 2007 and 2006, and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Form 10-Q.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the adequacy of First Commonwealth’s allowance for credit losses. Forward looking statements describe First Commonwealth’s future plans, strategies and expectations and can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond the control of First Commonwealth and which may cause actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Such risks and uncertainties include, among other things:

 

 

competitive pressures among depository and other financial institutions nationally and in our market areas may increase significantly;

 

 

adverse changes in the economy or business conditions, either nationally or in First Commonwealth’s market areas, which could increase credit-related losses and expenses and/or limit growth;

 

 

increases in defaults by borrowers and other delinquencies, which could result in an increased provision for losses on loans and related expenses;

 

 

fluctuations in interest rates and market prices, which could reduce our net interest margin and asset valuations and increase expenses;

 

 

the consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment;

 

 

changes in legislative or regulatory requirements applicable to First Commonwealth, which could increase costs, limit certain operations and adversely affect results of operations;

 

 

changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers’ businesses; and

 

 

other risks and uncertainties described in this report and the other reports that First Commonwealth files with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. First Commonwealth undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

12


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Earnings growth continues to be a challenge in this unusual interest rate environment, with short-term interest rates higher than intermediate-term interest rates. Financial institutions that rely on net interest income as their main source of income, such as First Commonwealth, find the inverted yield curve environment to be difficult.

As a result of this yield curve environment, funds from maturities and pay downs of investment securities have been used primarily to reduce borrowings. This balance sheet positioning reduces interest-earning assets which results in lower net interest income but stabilizes the net interest margin. First Commonwealth may reevaluate its ability to reinvest these cash flows depending on changes in the present interest rate environment.

First Commonwealth reported third quarter 2007 net income of $12.2 million or $0.17 per diluted share compared to $15.4 million or $0.22 per diluted share in the same period last year. The decrease of $3.2 million in net income was due to lower net interest income, higher non-interest expense and an $834 thousand after tax gain on extinguishment of debt recorded during the third quarter of 2006.

The return on average equity and average assets was 8.59% and 0.85%, respectively, during the third quarter of 2007 compared to 11.29% and 1.02%, respectively, for the third quarter of 2006.

First Commonwealth reported net income of $34.6 million or $0.47 per diluted share for the first nine months ended September 30, 2007 compared to $40.6 million or $0.58 per diluted share in the same period last year. The decrease in net income was due to a decline in net interest income and higher non-interest expense partly offset by an increase in non-interest income and a lower provision for credit losses.

The return on average equity and average assets was 8.08% and 0.80%, respectively, for the nine months ended September 30, 2007 compared to 10.23% and 0.91%, respectively, for the prior year period.

The following table illustrates the impact on diluted earnings per share of changes in certain components of net income for the three and nine months ended September 30, 2007 compared to the prior year periods:

 

     Three Months Ended
September 30, 2007
    Nine Months Ended
September 30, 2007
 

Net income per diluted share, prior year period

   $ 0.22     $ 0.58  

Increase (decrease) from changes in:

    

Net interest income

     (0.04 )     (0.12 )

Provision for credit losses

     0.01       0.01  

Security transactions

     0.00       0.01  

Gain on extinguishment of debt

     (0.02 )     (0.02 )

Other operating income

     0.01       0.02  

Salaries and employee benefits

     (0.01 )     (0.01 )

Occupancy and equipment costs

     (0.01 )     (0.01 )

Intangible amortization

     0.00       (0.01 )

Other operating expenses

     (0.01 )     (0.04 )

Applicable income taxes

     0.02       0.06  
                

Net income per diluted share

   $ 0.17     $ 0.47  
                

 

13


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

 

Net Interest Income

Net interest income, the primary component of revenue for First Commonwealth, is defined as the difference between income on interest-earning assets and the cost of funds supporting those assets. The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of interest-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 interest-earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretax equivalent amounts based on the marginal corporate Federal tax rate of 35%. The tax equivalent adjustment to net interest income was $3.6 million and $3.7 million for the third quarter of 2007 and 2006, respectively, and $11.1 million and $10.9 million for the nine months ended September 30, 2007 and 2006, respectively.

Net interest income decreased $2.1 million, or 5.1%, for the quarter ended September 30, 2007 compared to the same period in 2006 primarily due to higher interest expense on deposits, lower loan balances, and lower investment balances partly offset by a decrease in borrowings. Average interest-bearing deposits increased $209.3 million, average loans decreased $76.4 million, average investment securities decreased $215.9 million, and average borrowings decreased $515.5 million. Management continues to use proceeds from maturities and pay downs in the investment portfolio to reduce borrowings based on the current yield curve environment. This balance sheet positioning reduces interest-earning assets which results in lower net interest income but stabilizes the net interest margin.

The net interest margin for the three months ended September 30, 2007 increased two basis points (0.02%) to 3.36%, compared with 3.34% in the third quarter of 2006.

Net interest income decreased $3.8 million, or 3.0%, for the nine months ended September 30, 2007 compared to the same period in 2006 primarily due to higher interest expense on deposits and lower investment balances partly offset by an increase in loans and a decrease in borrowings. Average interest-bearing deposits increased $285.0 million, average investment securities decreased $197.2 million, average loans increased $16.8 million and average borrowings decreased $487.4 million.

The net interest margin for the nine months ended September 30, 2007 was 3.35% compared to 3.32% for the same period in 2006. This improvement was due to the balance sheet positioning described above.

Interest and fees on loans for the three months ended September 30, 2007 decreased $838 thousand, or 1.3%, compared to the same period in 2006. The third quarter 2007 decrease was a result of a $76.4 million decrease in average loans offset by a four basis point (0.04%) increase in the yield on loans.

Interest and fees on loans for the nine months ended September 30, 2007 increased $7.1 million, or 3.9%, compared to the same period in 2006. The increase for the nine months ended September 30, 2007 was the result of a $16.8 million increase in average loans combined with a 23 basis point (0.23%) rise in the yield on loans.

Interest income on investments decreased $2.4 million in the third quarter of 2007 from the third quarter of 2006 mainly due to a $215.9 million decline in the average balance of investment securities. Interest income on investments decreased $5.7 million in the nine months ended September 30, 2007 from the comparable period last year primarily from the $197.2 million decrease in the average balance of investment securities. The decline in average investment securities was the result of the balance sheet positioning of using maturities and pay downs of investment securities to reduce borrowings. First Commonwealth does not own any securities of a single

 

14


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

issuer exceeding 10% of shareholders’ equity other than U.S. Government Agency securities. First Commonwealth is not a participant or underwriter in the sub-prime mortgage loan marketplace and therefore does not have any exposure to sub-prime mortgage loans in its loan or investment portfolio. All Mortgage Backed Securities are AAA rated and backed by U. S. Government Agencies.

Interest on deposits for the three and nine months ended September 30, 2007 increased $5.5 million, or 19.6%, and $21.4 million, or 27.9%, respectively, compared to the same periods in 2006. The average balance of interest-bearing deposits increased $209.3 million, or 5.8%, in the third quarter of 2007 compared to the third quarter of 2006 and $285.0 million, or 8.1%, in the first nine months of 2007 compared to the same period in 2006. The growth was primarily due to the Laurel acquisition. The cost of deposits increased 36 basis points (0.36%) to 3.09% in the third quarter of 2007, and increased 48 basis points (0.48%) to 3.03% for the nine months ended September 30, 2007 compared to the same period in 2006. As part of the management of deposit levels and mix, First Commonwealth continues to evaluate the cost of time deposits compared to alternative funding sources as it balances its goal of providing customers with competitive rates while also minimizing its cost of funds.

Interest expense on short-term borrowings for the three and nine months ended September 30, 2007 decreased $5.4 million, or 73.1%, and $10.7 million, or 52.7%, respectively, compared to the same periods in 2006. These decreases were primarily due to the $398.1 million decrease in average short-term borrowings for the third quarter of 2007 compared to the third quarter of 2006 and the $307.8 million decrease in average short-term borrowings for the nine months ended September 30, 2007 compared to the same period in 2006. The decrease is primarily the result of management’s balance sheet positioning of using investment maturities and pay downs to reduce borrowings.

Interest expense on long-term debt decreased $1.2 million, or 16.4%, for the third quarter of 2007 and $5.6 million, or 22.5%, for the nine months ended September 30, 2007, compared to the same periods in 2006. The decreases were primarily due to the $117.4 million decrease in average long-term debt for the third quarter of 2007 compared to the third quarter of 2006 and the $179.6 million decrease in average long-term debt for the nine months ended September 30, 2007 compared to the same period in 2006.

 

15


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

The following is an analysis of the average balance sheets and net interest income for the three months ended September 30:

 

    Average Balance Sheets and Net Interest Analysis  
    2007     2006  
    (dollars in thousands)  
    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

  $ 526     $ 8   5.62 %   $ 3,684     $ 15   1.60 %

Tax-free investment securities

    301,648       3,424   6.93       280,926       3,215   6.98  

Taxable investment securities

    1,210,048       15,012   4.92       1,446,629       17,635   4.84  

Federal funds sold

    4,412       57   5.20       1,243       17   5.35  

Loans, net of unearned income (b)(c)(d)

    3,653,196       63,737   7.12       3,729,622       64,575   7.08  
                               

Total interest-earning assets

    5,169,830       82,238   6.59       5,462,104       85,457   6.48  
                               

Noninterest-earning assets:

           

Cash

    79,514           80,791      

Allowance for credit losses

    (44,248 )         (40,438 )    

Other assets

    492,612           457,991      
                       

Total noninterest-earning assets

    527,878           498,344      
                       

Total Assets

  $ 5,697,708         $ 5,960,448      
                       

Liabilities and Shareholders’ Equity

           

Interest-bearing liabilities:

           

Interest-bearing demand deposits (e)

  $ 598,571     $ 2,705   1.79 %   $ 596,874     $ 2,945   1.96 %

Savings deposits (e)

    1,097,321       6,459   2.34       1,119,224       5,551   1.97  

Time deposits

    2,121,318       24,622   4.61       1,891,777       19,758   4.14  

Short-term borrowings

    208,046       1,977   3.77       606,140       7,338   4.80  

Long-term debt

    553,158       6,341   4.55       670,523       7,587   4.49  
                               

Total interest-bearing liabilities

    4,578,414       42,104   3.65       4,884,538       43,179   3.51  
                               

Noninterest-bearing liabilities and capital:

           

Noninterest-bearing demand deposits (e)

    521,935           503,611      

Other liabilities

    32,763           31,312      

Shareholders’ equity

    564,596           540,987      
                       

Total noninterest-bearing funding sources

    1,119,294           1,075,910      
                       

Total Liabilities and Shareholders’ Equity

  $ 5,697,708         $ 5,960,448      
                       

Net Interest Income and Net Yield on Interest-Earning Assets

    $ 40,134   3.36 %     $ 42,278   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) Average balance includes loans held for sale in 2006.
(c) Income on non-accrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(d) Loan income includes loan fees.
(e) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.

 

16


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

The following is an analysis of the average balance sheets and net interest income for the nine months ended September 30:

 

    Average Balance Sheets and Net Interest Analysis  
    2007     2006  
    (dollars in thousands)  
    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

  $ 568     $ 29   6.68 %   $ 1,856     $ 39   2.80 %

Tax-free investment securities

    302,037       10,222   6.96       281,099       9,664   7.07  

Taxable investment securities

    1,289,083       47,499   4.93       1,507,189       53,776   4.77  

Federal funds sold

    2,128       83   5.23       2,157       76   4.73  

Loans, net of unearned income (b)(c)(d)

    3,694,124       190,463   7.10       3,677,352       183,376   6.87  
                               

Total interest-earning assets

    5,287,940       248,296   6.56       5,469,653       246,931   6.30  
                               

Noninterest-earning assets:

           

Cash

    82,229           78,257      

Allowance for credit losses

    (43,882 )         (39,802 )    

Other assets

    490,087           440,355      
                       

Total noninterest-earning assets

    528,434           478,810      
                       

Total Assets

  $ 5,816,374         $ 5,948,463      
                       

Liabilities and Shareholders’ Equity

           

Interest-bearing liabilities:

           

Interest-bearing demand deposits (e)

  $ 594,752     $ 7,980   1.79 %   $ 578,556     $ 7,321   1.69 %

Savings deposits (e)

    1,117,308       19,013   2.28       1,142,829       15,673   1.83  

Time deposits

    2,112,628       71,250   4.51       1,818,346       53,826   3.96  

Short-term borrowings

    302,405       9,623   4.25       610,216       20,324   4.45  

Long-term debt

    570,439       19,206   4.50       750,005       24,769   4.42  
                               

Total interest-bearing liabilities

    4,697,532       127,072   3.62       4,899,952       121,913   3.33  
                               

Noninterest-bearing liabilities and capital:

           

Noninterest-bearing demand deposits (e)

    514,242           489,219      

Other liabilities

    31,719           29,018      

Shareholders’ equity

    572,881           530,274      
                       

Total noninterest-bearing funding sources

    1,118,842           1,048,511      
                       

Total Liabilities and Shareholders’ Equity

  $ 5,816,374         $ 5,948,463      
                       

Net Interest Income and Net Yield on Interest-Earning Assets

    $ 121,224   3.35 %     $ 125,018   3.32 %
                   

(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Average balance includes loans held for sale in 2006.
(c) Income on non-accrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(d) Loan income includes loan fees.
(e) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits, which were made for regulatory purposes.

 

17


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

 

The following table shows the effect of changes in volumes and rates on interest income and interest expense:

 

     Analysis of Changes in Net Interest Income  
     (dollars in thousands)  
     Three Months Ended
September 30, 2007 Compared
with September 30, 2006
   

Nine Months Ended

September 30, 2007 Compared

with September 30, 2006

 
     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

   $ (7 )   $ (13 )   $ 6     $ (10 )   $ (27 )   $ 17  

Tax-free investment securities

     209       365       (156 )     558       1,107       (549 )

Taxable investment securities

     (2,623 )     (2,886 )     263       (6,277 )     (7,781 )     1,504  

Federal funds sold

     40       43       (3 )     7       (1 )     8  

Loans

     (838 )     (1,365 )     527       7,087       862       6,225  
                                                

Total interest income

     (3,219 )     (3,856 )     637       1,365       (5,840 )     7,205  
                                                

Interest-bearing liabilities:

            

Interest-bearing demand deposits

     (240 )     8       (248 )     659       205       454  

Savings deposits

     908       (109 )     1,017       3,340       (350 )     3,690  

Time deposits

     4,864       2,397       2,467       17,424       8,711       8,713  

Short-term borrowings

     (5,361 )     (4,816 )     (545 )     (10,701 )     (10,252 )     (449 )

Long-term debt

     (1,246 )     (1,327 )     81       (5,563 )     (5,930 )     367  
                                                

Total interest expense

     (1,075 )     (3,847 )     2,772       5,159       (7,616 )     12,775  
                                                

Net interest income

   $ (2,144 )   $ (9 )   $ (2,135 )   $ (3,794 )   $ 1,776     $ (5,570 )
                                                

(a) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to interest sensitivity of consolidated assets and liabilities.

Provision for Credit Losses

To provide for the risk of loss inherent in extending credit, First Commonwealth maintains an allowance for credit losses. The determination of the allowance by management is based upon its assessment of the size and quality of the loan portfolio and the adequacy of the allowance in relation to the risks inherent within the loan portfolio. The provision for credit losses is an amount added to the allowance against which credit losses are charged.

Non-accrual loans increased $35.5 million to $50.2 million at September 30, 2007 compared to $14.7 million at September 30, 2006. This increase was mainly due to a $30.0 million commercial credit relationship that was placed on non-accrual during the second quarter of 2007. This credit relationship has been monitored since the second quarter of 2006 when management disclosed that this credit had experienced deterioration. This credit was previously classified as substandard and management has established reserves to cover the expected losses.

The provision for credit losses for the third quarter of 2007 decreased $742 thousand to $2.3 million from the $3.0 million reported in the third quarter of 2006. The provision was higher in 2006 primarily due to the $30.0 million

 

18


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

Provision for Credit Losses (continued)

 

commercial credit discussed above that experienced further deterioration during the third quarter of 2006. The allowance for credit losses was $43.2 million at September 30, 2007, which represents a ratio of 1.17% of average loans outstanding compared to 1.14% reported at September 30, 2006.

First Commonwealth’s allowance for loan loss methodology resulted in a $7.7 million provision for credit losses for the first nine months of 2007 which exceeded net charge-offs by $562 thousand and was $554 thousand less than the provision for credit losses for the nine month period of 2006 mainly due to the reasons noted above.

Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at September 30, 2007.

First Commonwealth is not a participant or underwriter in the sub-prime mortgage loan marketplace and therefore does not have any exposure to sub-prime mortgage loans in its loan or investment portfolio.

Below is an analysis of the consolidated allowance for credit losses for the nine months ended September 30:

 

     2007    2006
     (dollars in thousands)

Balance, beginning of year

   $ 42,648    $ 39,492

Addition as a result of acquisition

     -0-      1,979

Loans charged off:

     

Commercial, financial and agricultural

     1,925      1,996

Loans to individuals

     2,965      3,077

Real estate-construction

     50      49

Real estate-commercial

     1,164      341

Real estate-residential

     2,089      1,924
             

Total loans charged off

     8,193      7,387
             

Recoveries of loans previously charged off:

     

Commercial, financial and agricultural

     383      678

Loans to individuals

     500      422

Real estate-commercial

     95      -0-

Real estate-residential

     87      44
             

Total recoveries

     1,065      1,144
             

Net charge offs

     7,128      6,243

Credit losses on loans transferred to held for sale

     -0-      1,387
             

Net Credit Losses

     7,128      7,630

Provision charged to expense

     7,690      8,244
             

Balance, end of period

   $ 43,210    $ 42,085
             

 

19


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

 

Non-Interest Income

The following table presents the components of non-interest income for the three and nine months ended September 30:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (dollars in thousands)    (dollars in thousands)

Non-Interest Income

           

Net securities gains

   $ 16    $ 5    $ 771    $ 87

Trust income

     1,517      1,482      4,453      4,357

Service charges on deposit accounts

     4,609      4,361      13,291      12,374

Gain on extinguishment of debt

     -0-      1,283      -0-      1,553

Insurance commissions

     1,064      801      2,651      2,115

Income from bank owned life insurance

     1,534      1,451      4,544      4,240

Card related interchange income

     1,654      1,398      4,773      4,087

Other operating income

     1,819      1,609      5,557      4,939
                           

Total non-interest income

   $ 12,213    $ 12,390    $ 36,040    $ 33,752
                           

Total non-interest income for the three and nine month periods ended September 30, 2007 decreased $177 thousand or 1.4%, and increased $2.3 million or 6.8%, respectively, compared to the same periods in 2006 primarily due to increases in insurance commissions, service charges on deposits, card related interchange income and changes in other operating income. Increases in non-interest income during the third quarter of 2007 were overshadowed by a $1.3 million gain on extinguishment of debt during the third quarter of 2006. Excluding this 2006 gain, non-interest income increased $1.1 million or 10.0% for the third quarter of 2007 compared to the third quarter of 2006.

Net securities gains were $16 thousand for the third quarter of 2007 and $771 thousand for the first nine months of 2007 compared to $5 thousand and $87 thousand for the corresponding periods in 2006. The increase in 2007 was primarily due to trust preferred investment securities that were called at a premium.

Service charges on deposits increased $248 thousand for the third quarter of 2007 and $917 thousand for the first nine months of 2007 compared to the corresponding periods of 2006. The increase was primarily due to the acquisition of Laurel in August 2006, the opening of new de novo offices and higher fees.

Insurance commissions increased $263 thousand during the third quarter of 2007 and $536 thousand during the first nine months of 2007 compared to the corresponding periods in 2006. The increase was primarily due to higher sales.

Card related interchange income includes income on debit, credit, and ATM cards that are issued to consumers and/or businesses. Card related interchange income increased $256 thousand during the third quarter of 2007 and $686 thousand during the first nine months of 2007 compared to the same periods in 2006 primarily due to additional volume from existing cards and new volume from Laurel.

Other operating income increased $210 thousand during the third quarter of 2007 and increased $618 thousand for the first nine months of 2007 compared to the same periods in 2006. The nine month increase includes a $550 thousand gain from the sale of First Commonwealth’s municipal bond servicing business during the second quarter of 2007.

 

20


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

 

Non-Interest Expense

The following table presents the components of non-interest expense for the three and nine months ended September 30:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006
     (dollars in thousands)    (dollars in thousands)

Non-Interest Expense

           

Salaries and employee benefits

   $ 18,401    $ 17,690    $ 57,273    $ 54,282

Net occupancy expense

     3,475      2,845      10,226      9,032

Furniture and equipment expense

     3,243      2,998      8,874      8,680

Advertising expense

     475      417      1,910      1,109

Data processing expense

     942      903      2,821      2,518

Pennsylvania shares tax expense

     1,439      1,349      4,323      4,057

Intangible amortization

     857      658      2,597      1,789

Other operating expenses

     7,648      6,582      23,108      20,790
                           

Total non-interest expense

   $ 36,480    $ 33,442    $ 111,132    $ 102,257
                           

Total non-interest expense was $36.5 million for the third quarter of 2007 and $111.1 million for the first nine months ended September 30, 2007, reflecting an increase of $3.0 million and $8.9 million, respectively, over the corresponding periods in 2006. These increases were primarily due to higher salaries and employee benefits, occupancy expenses and other operating expenses.

Salaries and employee benefit costs increased $711 thousand for the third quarter of 2007 and $3.0 million for the nine months ended September 30, 2007 compared to the same periods in 2006. The nine month increase was mainly due to the Laurel acquisition, merit salary increases, and $1.0 million of expenses recorded in connection with separation agreements with former executives of the company. Full time equivalent employees were 1,560 at the end of the third quarter of 2007 compared to 1,557 at the end of the third quarter of 2006.

Net occupancy expense increased $630 thousand for the third quarter of 2007 and $1.2 million during the nine months ended September 30, 2007 compared to the corresponding periods in 2006 primarily due to branch expansion and building repairs and maintenance to existing facilities.

Advertising expense increased $801 thousand for the nine months ended September 30, 2007 compared to the prior year period primarily due to increases in television and print media campaigns.

Intangible amortization increased $199 thousand for the third quarter of 2007 and $808 thousand during the first nine months of 2007 compared to the corresponding periods in 2006 due to amortization of the intangibles recorded in the acquisition of Laurel.

Other operating expenses increased $1.1 million for the third quarter and $2.3 million for the nine month period primarily due to increases in strategic marketing initiatives and other professional fees compared to the same periods in 2006.

 

21


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

 

Income Tax

Income tax expense decreased $1.4 million for the third quarter of 2007 and $3.9 million for the first nine months ended September 30, 2007 compared to the corresponding periods in 2006. First Commonwealth’s effective tax rate was 10.0% for the third quarter of 2007 and 10.0% for the first nine months of 2007 compared to 15.4% and 16.0% for the corresponding periods of 2006. Nontaxable income and tax credits had a larger impact on the effective tax rate in 2007 due to a decline in pretax income of $4.6 million for the third quarter and $9.8 million for the first nine months ended September 30, 2007 compared to 2006. Management expects the effective tax rate to be approximately 10.0% for the remainder of 2007.

LIQUIDITY

Liquidity refers to First Commonwealth’s ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from the banking subsidiary’s core deposit base and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the purchase of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements and borrowings from the Federal Reserve Bank. Additionally, First Commonwealth’s banking subsidiary is a member of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide a source of liquidity.

Liquidity risk stems from the possibility that First Commonwealth may not be able to meet current or future financial obligations or may become overly reliant on alternative funding sources. First Commonwealth maintains a liquidity management policy to manage this risk. This policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements based on board approved limits. The policy also includes a liquidity contingency plan to address funding needs to maintain liquidity under a variety of business conditions. First Commonwealth’s liquidity position is monitored by the Asset/Liability Management Committee (“ALCO”).

First Commonwealth’s long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. The following table shows a breakdown of the components of First Commonwealth’s interest-bearing deposits:

 

     September 30,
2007
   December 31,
2006
     (dollars in thousands)

Interest-bearing demand deposits

   $ 99,494    $ 105,073

Savings deposits

     1,542,671      1,597,974

Time deposits

     2,168,968      2,100,942
             

Total interest-bearing deposits

   $ 3,811,133    $ 3,803,989
             

At September 30, 2007 noninterest-bearing deposits increased by $359 thousand and interest-bearing deposits increased $7.1 million compared to December 31, 2006. The increase in time deposits for the first nine months of 2007 was substantially offset by the decrease in interest-bearing demand deposits and savings deposits.

At September 30, 2007, total interest-earning assets were $5.2 billion, a decrease of $312.9 million from $5.5 billion at December 31, 2006. Total investments decreased $189.3 million for the first nine months of 2007 as

 

22


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

LIQUIDITY (continued)

 

management continues to use proceeds from maturities and pay downs in the investment portfolio to reduce borrowings based on the current yield curve environment. Total loans decreased $123.7 million for the first nine months of 2007 partly due to a $75.9 million expected run off in the residential Mortgage portfolio.

Marketable securities that First Commonwealth holds in its investment portfolio are an additional source of liquidity. These securities are classified as “securities available for sale” and while First Commonwealth does not have specific intentions to sell these securities they have been designated as “available for sale” because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of September 30, 2007, securities available for sale had a market value of $1.5 billion.

The following table shows a breakdown of loans by categories as of the periods presented:

 

     September 30,
2007
    June 30,
2007
    March 31,
2007
    December 31,
2006
    September 30,
2006
 
     (dollars in thousands)  

Commercial, financial, agricultural and other

   $ 901,679     $ 866,590     $ 854,843     $ 861,427     $ 831,040  

Real estate-construction

     143,680       123,844       101,719       92,192       87,050  

Real estate-residential

     1,268,313       1,288,089       1,312,389       1,346,503       1,374,613  

Real estate-commercial

     865,389       899,669       914,389       935,635       948,914  

Loans to individuals

     481,092       496,533       520,205       548,117       577,229  
                                        

Gross loans and leases

     3,660,153       3,674,725       3,703,545       3,783,874       3,818,846  

Unearned income

     (30 )     (37 )     (47 )     (57 )     (70 )
                                        

Total loans and leases net of unearned income

   $ 3,660,123     $ 3,674,688     $ 3,703,498     $ 3,783,817     $ 3,818,776  
                                        

Interest Sensitivity

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, currency exchange rates or equity prices. First Commonwealth’s market risk is composed primarily of interest rate risk. Interest rate risk results principally from timing differences in the repricing of assets and liabilities, changes in the relationship of rate indices and the potential exercise of free standing or embedded options.

The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or “gaps,” when measured over a variety of time periods, can be informative.

An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets (“ISA”) exceed interest-sensitive liabilities (“ISL”) during the prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results.

A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected

 

23


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

LIQUIDITY (continued)

Interest Sensitivity (continued)

 

inversely to interest rate changes. In other words, if interest rates fall, a negative gap should tend to produce a positive effect on earnings, and if interest rates rise, a negative gap should tend to affect earnings negatively. The cumulative gap at the 365 day repricing period was negative in the amount of $1.4 billion or 25.05% of total assets at September 30, 2007.

The primary components of ISA include adjustable rate loans and investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and borrowings.

The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated:

 

     September 30, 2007  
     (dollars in thousands)  
    

0-90

Days

    91-180
Days
    181-365
Days
    Cumulative
0-365 Days
 

Loans

   $ 1,342,132     $ 174,768     $ 333,184     $ 1,850,084  

Investments

     202,538       77,402       164,576       444,516  

Other interest-earning assets

     1,060       -0-       -0-       1,060  
                                

Total interest-sensitive assets

     1,545,730       252,170       497,760       2,295,660  
                                

Certificates of deposit

     503,140       486,529       723,644       1,713,313  

Other deposits

     1,642,272       -0-       -0-       1,642,272  

Borrowings

     285,804       37,970       50,144       373,918  
                                

Total interest-sensitive liabilities

     2,431,216       524,499       773,788       3,729,503  
                                

Gap

   $ (885,486 )   $ (272,329 )   $ (276,028 )   $ (1,433,843 )
                                

ISA/ISL

     0.64       0.48       0.64       0.62  

Gap/Total assets

     15.47 %     4.76 %     4.82 %     25.05 %
     December 31, 2006  
     (dollars in thousands)  
    

0-90

Days

    91-180
Days
    181-365
Days
    Cumulative
0-365 Days
 

Loans

   $ 1,278,277     $ 209,613     $ 352,700     $ 1,840,590  

Investments

     223,603       123,501       167,478       514,582  

Other interest-earning assets

     985       -0-       -0-       985  
                                

Total interest-sensitive assets

     1,502,865       333,114       520,178       2,356,157  
                                

Certificates of deposit

     542,030       484,103       554,257       1,580,390  

Other deposits

     1,703,163       -0-       -0-       1,703,163  

Borrowings

     550,284       4,464       44,022       598,770  
                                

Total interest-sensitive liabilities

     2,795,477       488,567       598,279       3,882,323  
                                

Gap

   $ (1,292,612 )   $ (155,453 )   $ (78,101 )   $ (1,526,166 )
                                

ISA/ISL

     0.54       0.68       0.87       0.61  

Gap/Total assets

     21.39 %     2.57 %     1.29 %     25.25 %

 

24


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

LIQUIDITY (continued)

Interest Sensitivity (continued)

 

Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time, and as a result may not accurately predict the impact of changes in general levels of interest rates or net interest income. Therefore, to more precisely measure the impact of interest rate changes on First Commonwealth’s net interest income, management simulates the potential effects of changing interest rates through computer modeling. The income simulation model used by First Commonwealth captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and statement of financial condition growth assumptions. The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates. First Commonwealth is then better able to implement strategies, which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase. The repricing strategies for loans would be inversely related.

First Commonwealth’s asset/liability management policy guidelines limit interest rate risk exposure for the succeeding twelve-month period. Simulations are prepared under the base case where interest rates remain flat and most likely case where interest rates are defined using projections of economic factors. Additional simulations are produced estimating the impact on net interest income of a 200 basis point (2.0%) parallel movement upward or downward over a 12 month time frame which cannot result in more than a 5.0% decline in net interest income when compared to the base case. The analysis at September 30, 2007, indicated that a 200 basis point (2.0%) increase in interest rates would increase net interest income by 4 basis points (0.04%) above the base case scenario, and a 200 basis point (2.0%) decrease in interest rates would decrease net interest income by 198 basis points (1.98%) below the base case scenario over the next twelve months, both within policy limits.

First Commonwealth’s ALCO is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that First Commonwealth’s balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide First Commonwealth with an appropriate return for the assumption of those risks. The ALCO evaluates the use of derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities. The ALCO strategies are established by First Commonwealth’s senior management.

CREDIT REVIEW

First Commonwealth maintains an allowance for credit losses at a level deemed sufficient to absorb losses inherent in the loan and lease portfolios at each 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 problem loans, delinquency and loss experience trends, and other relevant factors. While allocations are made to specific loans and pools of loans, the total allowance is available for all loan losses.

 

25


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

CREDIT REVIEW (continued)

 

While First Commonwealth consistently applies a comprehensive methodology and procedure, allowance for credit loss methodologies incorporate management’s current judgments about the credit quality of the loan portfolio, as well as collection probabilities for problem credits. Although management considers the allowance for credit losses to be adequate based on information currently available, additional allowance for credit loss provisions may be necessary due to changes in management estimates and assumptions about asset impairment, information about borrowers that indicates changes in the expected future cash flows, or changes in economic conditions. The allowance for credit losses and the provision for credit losses are significant elements of First Commonwealth’s financial statements; therefore, management periodically reviews the processes and procedures utilized in determining the allowance for credit losses to identify potential enhancements to these processes, including development of additional management information systems to ensure that all relevant factors are appropriately considered in the allowance analysis. In addition, First Commonwealth maintains a system of internal controls, which are independently monitored and tested by internal audit and loan review staff to ensure that the loss estimation model is maintained in accordance with internal policies and procedures, as well as generally accepted accounting principles.

Loans are generally placed in non-accrual status when they become contractually past due 90 days or more as to principal or interest payments. Exceptions are made for loans that are well secured and in the process of collection. Troubled debt restructured loans have terms that have been renegotiated to a below market condition to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower.

 

26


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

CREDIT REVIEW (continued)

 

The following table identifies amounts of loan losses and nonperforming loans.

 

     September 30,  
     2007     2006  
     (dollars in thousands)  

Nonperforming Loans:

    

Loans on non-accrual basis

   $ 50,161     $ 14,707  

Troubled debt restructured loans

     150       163  
                

Total nonperforming loans

   $ 50,311     $ 14,870  
                

Loans past due in excess of 90 days and still accruing

   $ 13,677     $ 14,296  

Other real estate owned

   $ 1,803     $ 1,911  

Loans outstanding at end of period

   $ 3,660,123     $ 3,818,776  

Average loans outstanding (a)

   $ 3,694,124     $ 3,677,352  

Nonperforming loans as a percentage of total loans

     1.37 %     0.39 %

Provision for credit losses

   $ 7,690     $ 8,244  

Allowance for credit losses

   $ 43,210     $ 42,085  

Net charge offs

   $ 7,128     $ 6,243  

Reduction in allowance for credit losses due to transfer of credit to held for sale

   $ -0-     $ 1,387  

Net credit losses

   $ 7,128     $ 7,630  

Net credit losses as a percentage of average loans outstanding (annualized)

     0.26 %     0.28 %

Provision for credit losses as a percentage of net credit losses

     107.88 %     108.05 %

Allowance for credit losses as a percentage of average loans outstanding

     1.17 %     1.14 %

Allowance for credit losses as a percentage of end-of-period loans outstanding

     1.18 %     1.10 %

Allowance for credit losses as a percentage of nonperforming loans

     85.89 %     283.02 %

(a) Includes average loans held for sale of $4.4 million in 2006.

First Commonwealth considers a loan to be impaired when, based on current information and events, it is probable that the company will be unable to collect principal or interest that is due in accordance with the contractual terms of the loan. Impaired loans include non-accrual loans and troubled debt restructured loans.

Loan impairment is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

 

27


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

CREDIT REVIEW (continued)

 

Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that First Commonwealth expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis.

The following table identifies impaired loans, and information regarding the relationship of impaired loans to the reserve for credit losses at September 30, 2007 and September 30, 2006:

 

     2007    2006
     (dollars in thousands)

Recorded investment in impaired loans at end of period

   $ 50,311    $ 14,870

Allowance for credit losses related to impaired loans

   $ 12,138    $ 2,156

Impaired loans with an allocation of the allowance for credit losses

   $ 41,087    $ 8,467

Impaired loans with no allocation of the allowance for credit losses

   $ 9,224    $ 6,403

Income recorded on impaired loans on a cash basis

   $ 321    $ 624

Nonperforming loans at September 30, 2007, increased $35.4 million to $50.3 million compared to September 30, 2006. This increase was primarily due to the reclassification of a $30.0 million commercial credit relationship that has been monitored since the second quarter of 2006 when management disclosed that this credit had experienced deterioration. This credit relationship was previously classified as substandard and management has provided reserves as part of the loan loss reserve methodology to cover expected losses.

Loans past due in excess of 90 days and still accruing decreased $619 thousand, or 4.3%, to $13.7 million compared to September 30, 2006 and net credit losses for the first nine months of 2007 decreased $502 thousand from the comparable period in 2006.

In 2006, First Commonwealth purchased $7.0 million in loans from Equipment Finance LLC (“EFI”); a division of Sterling Financial Corporation of Lancaster, Pennsylvania (“Sterling”). EFI provides commercial financing for the soft pulp logging and land-clearing industries, primarily in the southeastern United States. On April 19, 2007, Sterling announced that it had commenced an investigation into financial irregularities related to certain financing contracts at EFI. During the third quarter of 2007, EFI agreed to repurchase eight of these loans for approximately $1.1 million. At September 30, 2007, the remaining balance in the portfolio was $4.7 million, of which $3.1 million was classified as non-accrual. Loans in this portfolio totaling $739 thousand were classified by First Commonwealth as non-accrual during the third quarter of 2007.

First Commonwealth’s loan portfolio continues to be monitored by senior management to identify potential portfolio risks and detect potential credit deterioration in the early stages. First Commonwealth has a “Watch List Committee” which includes credit workout officers of the bank. The Watch List Committee reviews watch list credits for workout progress or deterioration. Loan loss adequacy and the status of significant nonperforming credits are monitored on a quarterly basis by a committee made up of senior officers of the bank and holding company. These committees were established to provide additional internal monitoring and analysis in addition to that provided by the Credit Committees of the bank and holding company. Credit risk is mitigated during the loan origination process through the use of sound underwriting policies and collateral requirements as well as the previously described committee structure. Management also attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis. Management believes that the allowance for credit losses and nonperforming loans is appropriate for the estimated inherent losses in the loan portfolio.

 

28


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

CAPITAL RESOURCES

At September 30, 2007, shareholders’ equity was $562.2 million, a decrease of $9.1 million from December 31, 2006. A strong capital base provides First Commonwealth with a foundation to expand lending, to protect depositors, and to provide for growth while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects. In consideration of these factors, management’s primary emphasis with respect to First Commonwealth’s capital position is to maintain an adequate and stable ratio of equity to assets.

The Federal Reserve Board has issued risk-based capital adequacy guidelines, which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization’s total capital be common and other “core” equity capital (“Tier I Capital”); (2) assets and off-balance-sheet items be weighted according to risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital to average total assets of 3%.

The minimum leverage ratio is not specifically defined, but is generally expected to be three to five percent for all but the most highly rated banks, as determined by a regulatory rating system.

The table below presents First Commonwealth’s capital position at September 30, 2007:

 

     Capital
Amount
   Ratio  
     (dollars in
thousands)
      

Tier I Capital to Risk Weighted Assets

   $ 499,736    11.5 %

Risk-Based Requirement

   $ 173,567    4.0 %

Total Capital to Risk Weighted Assets

   $ 543,317    12.5 %

Risk-Based Requirement

   $ 347,134    8.0 %

Leverage Capital Ratio

   $ 499,736    9.1 %

Minimum Leverage Requirement

   $ 165,704    3.0 %

For an institution to qualify as well capitalized under regulatory guidelines, Tier I, Total and Leverage Capital ratios must be at least 6.0%, 10.0%, and 5.0%, respectively. At September 30, 2007, First Commonwealth’s banking subsidiary exceeded those requirements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information appearing in ITEM 2 of this report under the caption “Interest Sensitivity” is incorporated by reference in response to this item.

 

29


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 4. CONTROLS AND PROCEDURES

First Commonwealth carried out an evaluation, under the supervision and with the participation of First Commonwealth’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of First Commonwealth’s 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, First Commonwealth’s Chief Executive Officer and Chief Financial Officer concluded that First Commonwealth’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports that First Commonwealth files or submits 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, First Commonwealth’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of First Commonwealth’s internal control over financial reporting to determine whether any changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, First Commonwealth’s internal control over financial reporting. No such changes were identified in connection with this evaluation.

 

30


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART II – OTHER INFORMATION

ITEM 1. 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, 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 and its subsidiaries.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors described in Item 1A in First Commonwealth’s Annual Report on Form 10-K for the period ended December 31, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information concerning repurchases of equity securities by First Commonwealth during the third quarter of 2007. All of the shares referenced in the table were acquired pursuant to a share repurchase plan that First Commonwealth announced on May 15, 2007, which authorized the purchase of up to one million shares of common stock on the open market.

Purchases of Equity Securities

 

2007 Period

   Total
Number of
Shares
Purchased
   Average
Price Paid
Per Share
   Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
   Maximum
Number
of Shares that
May Yet Be
Purchased
Under the Plans
or Programs

July 1 – 31

   240,000    $ 9.64    240,000    492,164

August 1 – 31

   492,164    $ 9.46    492,164    0

September 1 – 30

   0      N/A    0    0
               

Total

   732,164    $ 9.52    732,164    0
                   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

31


Table of Contents

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART II – OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

 

Exhibit
Number
  

Description

  

Incorporated by Reference to

31.1    Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed herewith
31.2    Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed herewith
32.1    Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Filed herewith
32.2    Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Filed herewith

 

32


Table of Contents

SIGNATURES

Pursuant to the requirements 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.

FIRST COMMONWEALTH FINANCIAL CORPORATION

(Registrant)

 

DATED: November 5, 2007     /s/ John J. Dolan
    John J. Dolan,
    President and Chief Executive Officer
DATED: November 5, 2007     /s/ Edward J. Lipkus, III
    Edward J. Lipkus, III,
    Executive Vice President and Chief Financial Officer

 

33