First Commonwealth Financial Corp - 10-Q quarterly report FY

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

PART II - OTHER INFORMATION

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)

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

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)

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

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

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




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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 1 Management Representation

The consolidated financial statements include the accounts of First Commonwealth Financial Corporation and its subsidiaries ("First Commonwealth").  All significant intercompany transactions and balances have been eliminated.  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 financial position as of March 31, 2005, and the results of operations for the three month periods ended March 31, 2005 and 2004, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 2005 and 2004. 

The results of operations for the three months ended March 31, 2005 and 2004, 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 2004 Annual Report on Form 10-K which is available on the 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 and corporate governance, as well as information about products and services offered through First Commonwealth's banking, insurance, trust and financial management subsidiaries.

NOTE 2 Cash Flow Disclosures (Dollar amounts in thousands)

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 3 Comprehensive Income Disclosures

The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity (Dollar amounts in thousands):

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 4 Accounting for Stock Options Granted

Prior accounting guidelines permit two alternate methods of accounting for stock-based compensation, the intrinsic value method of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and the fair value method of FASB Statement No. 123 ("FAS No. 123"), "Accounting for Stock-Based Compensation."  In December 2002, the FASB issued Statement No. 148 ("FAS No. 148"), "Accounting for Stock-Based Compensation-Transition and Disclosure."  FAS No. 148 did not amend FAS No. 123 to require companies to account for employee stock options using the fair value method but required all companies with stock-based compensation to provide additional disclosures, regardless of whether they account for that compensation using the fair value method of FAS No. 123 or the intrinsic value method of APB 25.  As permitted under FAS No. 123, First Commonwealth had elected to use the intrinsic value method to measure stock based compensation under APB 25 and to disclose in a footnote to the financial statements, net income and earnings per share determined as if the fair value methodology of FAS No. 123 had been implemented.

No stock-based employee compensation expense is reflected in First Commonwealth's net income as reported in the Consolidated Statements of Income because all stock options granted under First Commonwealth's plan had an exercise price equal to the market value of the underlying common stock on the date of the grant.  

In December 2004, the FASB issued FASB Statement No.123 (Revised) ("FAS No. 123(R)"), "Share-Based Payment."  FAS No. 123(R) replaces FAS No. 123 and supersedes APB 25.  FAS No. 123(R) will require companies to measure compensation costs for all share-based payments including employee stock options using the fair value method.  FAS No. 123(R) applies to new awards and to awards modified, repurchased or cancelled after the required effective date.  Public companies that used the fair value based method for either recognition or disclosure under FAS No. 123, will apply FAS No. 123(R) using a modified prospective application.  Under the modified prospective application, compensation cost is recognized on or after the required effective date for the portion of the outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under FAS No. 123 for either recognition or pro forma disclosures.  For periods before the required effective date, those companies may elect to apply a modified retrospective application.  Under the modified retrospective application method, financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by FAS No. 123.  According to FAS No. 123(R), the grant-date fair value of stock options will be recognized as compensation expense in the company's income statement over the requisite service period or the vesting period.  FAS No. 123(R) will become effective at the beginning of the next fiscal year that begins after June 15, 2005, or beginning on January 1, 2006.  The adoption of FAS No. 123(R) is not expected to have a material impact on First Commonwealth's financial condition or results of operations. 



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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 4 Accounting for Stock Options Granted (continued)

The following table illustrates the effect on net income and earnings per share if First Commonwealth had applied the fair value recognition provisions of FAS No. 123 to stock-based employee compensation (Dollar amounts in thousands, except per share data):

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 5 Merger and Integration Charges

In the first quarter of 2004, First Commonwealth recorded merger and integration charges totaling $1,291 thousand ($839 thousand, net of taxes).  The merger and integration charges related to the acquisition of Pittsburgh Financial Corp. ("PFC").  The charges included $485 thousand related to the write-off of the unamortized capitalized costs for the subordinated debentures that were previously issued by PFC to Pittsburgh Home Capital Trust I and were called and paid off in January of 2004.  Also included in the merger and integration charges were $806 thousand in salary and benefit severance expenses that were accrued during the first quarter of 2004.  The severance costs were for 22 employees whose positions were eliminated as part of the acquisition.

NOTE 6 Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," and in December 2003, issued FIN 46 (Revised 2003) ("FIN 46R").  FIN 46R clarified some of the provisions of FIN 46 and exempted certain entities from the original requirements of FIN 46.  As defined by FIN 46 a variable interest entity ("VIE") is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  Under FIN 46R, an entity that holds a variable interest in a VIE is required to consolidate the VIE if the entity is subject to a majority of the risk of loss from the VIE's activities, is entitled to receive a majority of the entity's residual returns or both. 

As part of its community reinvestment initiatives, First Commonwealth invests in qualified affordable housing projects as a limited partner.  First Commonwealth receives federal affordable housing tax credits and rehabilitation tax credits for these limited partnership investments.  First Commonwealth's maximum potential exposure to these partnerships is $5,644 thousand, consisting of the limited partnership investments as of March 31, 2005.  Based on FIN 46R, First Commonwealth has determined that these investments will not be consolidated but continue to be accounted for under the equity method whereby First Commonwealth's portion of partnership losses are recognized as incurred. 














 
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 7 Guarantees

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 could be lost 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 table below identifies the notional amounts of these guarantees at March 31, 2005 (Dollar amounts in thousands):

The current notional amounts outstanding above include financial standby letters of credit of $361 thousand and performance standby letters of credit of $556 thousand issued during the first quarter of 2005.  There is currently no liability recorded on First Commonwealth's balance sheet related to the above letters of credit.

NOTE 8 Recent Developments

Pending Branch Sale

On March 8, 2005, First Commonwealth Bank, a wholly owned subsidiary of First Commonwealth Financial Corporation agreed to sell one of its branch offices located in State College, PA.  Under terms of the purchase and assumption agreement, Clearfield Bank and Trust Company will assume approximately $16.5 million of deposit liabilities that are associated with the office.  The transaction is subject to regulatory approvals and is expected to settle in June of 2005.  The transaction is expected to generate a pre-tax gain of approximately $2.8 million that includes the premium on deposits and the gain on the sale of premises and equipment.

Merchant Processing Alliance

First Commonwealth recently entered into an asset sale and merchant processing alliance with First Data Corp.   Under the terms of the agreement, First Data Corp. will acquire certain assets of First Commonwealth's merchant processing business and provide merchant payment processing services on behalf of First Commonwealth Bank.  First Commonwealth Bank will participate in future revenue related to both the existing book of merchant business as well as new business.  First Commonwealth is expected to share in approximately fourteen percent of the future revenue stream.  The transaction is expected to generate a pre-tax gain of approximately $2.0 million that will increase second quarter 2005 after-tax earnings by approximately $1.3 million.  Merchant discount and other related merchant income for the full year of 2004 was $4.0 million while associated costs were $3.3 million. 



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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 9 Post Retirement Benefit Plan of Acquired Company

Employees of the former Southwest Bank and GA Financial, Inc. were covered by a post retirement benefit plan.  The net periodic benefit cost of this plan as of March 31 was as follows (Dollar amounts in thousands):

This is an unfunded post retirement plan.  Future payments will only consist of benefit payments for life and health insurance premiums for plan participants.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") introduced a prescription drug benefit under Medicare Part D. The Act also introduced a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D.  The postretirement plans of First Commonwealth are provided through insurance coverage; therefore, First Commonwealth will not receive a direct federal subsidy.  The preceding measure of the net periodic postretirement benefit cost assumes that the insurer will receive the subsidy and pass those savings onto First Commonwealth through reduced insurance premiums.

NOTE 10 New Accounting Pronouncements

In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on the remaining issues related to Emerging Issues Task Force Issue 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments."  This guidance is applicable to debt and equity securities that are within the scope of FASB Statement No. 115 ("FAS No. 115") and certain other investments.  EITF 03-1 provides clarification guidance to determine when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss.  The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.










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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 10 New Accounting Pronouncements (continued)
 
In September 2004, the FASB issued FASB Staff Position No. EITF Issue 03-1-1 ("FSP EITF 03-1-1"), "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments"."  FSP EITF 03-1-1 delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1 from reporting periods beginning after June 15, 2004, until implementation guidance is issued.  This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature.  Once additional guidance has been released, the impact of implementation on First Commonwealth's financial condition and results of operations will be evaluated.

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3 ("SOP 03-3"), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer."  SOP 03-3 requires acquired loans, including debt securities, to be recorded at the amount of the purchaser's initial investment and prohibits carrying over valuation allowances from the seller for those individually-evaluated loans that have evidence of deterioration in credit quality since origination, where it is probable that all contractual cash flows on the loan will be unable to be collected.  SOP 03-3 also requires the excess of all undiscounted cash flows expected to be collected at acquisition over the purchaser's initial investment to be recognized as interest income on a level-yield basis over the life of the loan.  Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan's yield over its remaining life, while subsequent decreases are recognized as impairment.  Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3.  This guidance was effective for loans acquired in fiscal years beginning after December 15, 2004 and did not have a material impact on First Commonwealth's financial condition or results of operations.




















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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 results of operations of First Commonwealth Financial Corporation including its subsidiaries ("First Commonwealth").  In addition to historical information, this discussion and analysis, as well as the notes to the consolidated financial statements, contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), which reflect management's beliefs and expectations based on information currently available and may contain the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," and similar expressions.  These forward-looking statements are inherently subject to significant risks and uncertainties, including but not limited to:  changes in general economic and financial market conditions, First Commonwealth's ability to effectively carry out its business plans, changes in regulatory or legislative requirements, changes in competitive conditions and continuing consolidation of the financial services industry.  Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results could differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof.  First Commonwealth undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

First Three Months of 2005 as Compared to the First Three Months of 2004

Net income for the first three months of 2005 and 2004 was $15.2 million and $13.3 million, respectively.  Basic and diluted earnings were $0.22 for the first quarter of 2005 and 2004. 

The following is an analysis of the impact of changes in net income on diluted earnings per share:

Return on average assets was 1.00% and return on average equity was 11.48% for the first quarter of 2005 compared to 1.04% and 12.12%, respectively, for the first quarter of 2004.


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Net Interest Income

Net interest income, the most significant component of earnings, is the amount by which interest income generated from earning assets exceeds interest expense on liabilities.  Net interest income increased $8.1 million for the first quarter of 2005 compared to the first quarter of 2004 as average earning assets increased by $852.1 million or 17.4% compared to 2004 averages. 

Net interest margin (net interest income, on a fully tax-equivalent basis, as a percentage of average earning assets) was 3.41% for the three months of 2005 compared to 3.27% for the same period of 2004 as earning asset yields increased faster than funding costs.

The following is an analysis of the average balance sheets and net interest income for the three months ended March 31 (Dollar amounts in thousands): 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

The following table shows the effect of changes in volumes and rates on interest income and interest expense (Dollar amounts in thousands):

(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.

Interest and fees on loans increased $11.2 million for the first quarter of 2005 compared to 2004 levels as the average balance of loans increased by $698.7 million or 24.6%.  This increase is due in large part to the inclusion of GA Financial, Inc. assets for the first quarter of 2005.  Loan yields increased 15 basis points (0.15%) for the first quarter of 2005 compared to the same period of 2004.  First Commonwealth has continued to capitalize on lending opportunities with small to mid-sized commercial borrowers, including loans generated through its preferred Small Business Administration ("SBA") lender status.  First Commonwealth has consistently been one of the top small business lenders in Pennsylvania.  Total loans increased 4.9% on an annualized basis during 2005, unrelated to acquired assets.







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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Interest income on investments increased $2.5 million for the first quarter of 2005 compared to the first quarter of 2004. Increases were due to volume increases as well as increases in interest yields.  Average investments increased $156.9 million for the first quarter of 2005 compared to the same period of 2004.  The increase was due to the acquisition of GA Financial, Inc.  The biggest increase was in U.S. government agency securities, which increased by $130.2 million.  The increases in U.S. government agency securities were slightly offset by decreases in corporate bonds and equity securities.  The total yield on investments was 4.56% for the first three months of 2005 compared to 4.34% for the same period of 2004.   

Interest on deposits increased $3.0 million for the first quarter of 2005 compared to the same period of 2004.  Deposit costs were 1.72% for the first quarter of 2005 compared to 1.66% for the first quarter of 2004, an increase of 6 basis points (0.06%).  While the yields on interest-bearing demand deposits and savings deposits increased between these two periods, the yield on time deposits recorded a slight decrease.  Increases in volume were recorded for all deposit categories for the first quarter of 2005 compared to the same period of 2004.  During its management of deposit levels and mix, First Commonwealth continues to evaluate the cost of time deposits compared to alternative funding sources as it balances its goals of providing clients with the competitive rates they are looking for while also minimizing First Commonwealth's cost of funds.

Interest expense on short-term borrowings increased $3.8 million for the first three months of 2005 compared to the same period of 2004 as a result of increases due to volume and increasing interest rates.  The average balance of short-term borrowings for the first quarter of 2005 increased $282.2 million over averages for the prior year.  The 2005 period includes an increase due to the inclusion of short-term borrowings that were acquired with the GA Financial, Inc. acquisition on May 24, 2004.  The 2005 period also includes an increase in short-term borrowings which were used to replace a portion of the $440 million of long-term FHLB advances that were paid in the third quarter of 2004 prior to their maturity.  The cost of short-term borrowings for the 2005 period increased by 136 basis points (1.36%) compared to 2004 costs of 1.10%.  This rate increase accounted for $3.1 million of the total increase of $3.8 million in interest expense on short-term borrowings.













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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Interest expense on long-term debt decreased $1.3 million for the first quarter of 2005 compared to the corresponding period of 2004, primarily as a result of decreases in interest rates.  The yields on long-term debt were favorably impacted by First Commonwealth's repositioning of borrowings after the prepayment of Federal Home Loan Bank advances during the third quarter of 2004.  Yields on long-term debt for the first quarter of 2005 decreased by 86 basis points (0.86%) compared to the first quarter of 2004.  Average long-term debt for the first three months of 2005 increased by $47.5 million compared to 2004 averages.  $35.0 million of the increase in average long-term debt is due to additional debt in the form of subordinated debentures.  Subordinated debentures in the amount of $41.2 million were issued during March 2004.  This debt was issued to fund the acquisition of GA Financial, Inc. in May 2004.  First Commonwealth continues to analyze its exposure to any concentration of maturities of long-term debt in any one year and the associated risks.

Provision for Credit Losses

The provision for credit losses is an amount added to the allowance against which credit losses are charged.  The amount of the provision is determined by management based upon its assessment of the size and quality of the loan portfolio and the adequacy of the allowance in relation to the risks inherent within the loan portfolio.  The provision for credit losses was $1.7 million for the first three months of 2005 compared to $2.1 million for the first three months of 2004.  The decrease in the provision for credit losses reflects the favorable charge-off trends and improved quality of primary watch list credits.  Although net charge-offs against the allowance for credit losses increased by $40 thousand for the first three months of 2005 compared to the same period of 2004, net charge-offs as a percentage of average loans (annualized) improved to 0.23% for the 2005 period from 0.28% for 2004.  Increases in net charge-offs for commercial loans in the 2005 period were partially offset by decreases in all other loans categories.  The provision for credit losses as a percentage of net charge-offs was 86.64% at March 31, 2005, compared to 106.44% at March 31, 2004.  See the "Credit Review" section for any analysis of the quality of the loan portfolio.
















21

FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Below is an analysis of the consolidated allowance for credit losses for the three month periods ended March 31, 2005 and 2004 (Dollar amounts in thousands):

Noninterest Income

Net securities gains were $485 thousand during the first three months of 2005 compared to $3.9 million during the first three months of 2004.  Gains were largely due to sales of Pennsylvania bank stocks. 











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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)
 
First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Service charges on deposits continue to be First Commonwealth's most significant component of noninterest fee income and increased $340 thousand for the first three months of 2005 compared to the corresponding period of 2004.  Increases in nonsufficient funds (or "NSF") fees of $323 thousand were recorded for the first quarter of 2005 as compared to the first quarter of 2004.  The increase in NSF fees is due to the continuing growth of the High Performance Checking products for consumer and business clients as well as the inclusion of GA Financial, Inc.  Management strives to implement reasonable fees for services and closely monitors collection of those fees.
 
Other changes in noninterest income during the first three months of 2005 compared to the same period of 2004 included increases in card related interchange income in the amount of $467 thousand.  Card related interchange income includes income on debit, credit and ATM cards that are issued to consumers and/or businesses.  The increase was due in part to the inclusion of GA Financial, Inc.  The card related interchange income growth was favorably affected by additional volume related to card usage and the migration of business accounts from the consumer debit card product.  The business debit card product pays a higher rate than the consumer debit card. 

Other income for the first three months of 2005 rose $253 thousand from the $1.8 million reported for the first three months of 2004.  The largest driver of the increase in other income for the first quarter of 2005 was gains on the sale of other assets in the amount of $168 thousand. 


























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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Noninterest Expense

Noninterest expense was $35.4 million for the first three months of 2005 reflecting an increase of $3.7 million from the 2004 level of $31.7 million.  The most significant increase during the 2005 period was salaries and employee benefit costs which increased $1.6 million or 9.5%.  The increase was due in large part to the increase in the number of employees due to the acquisition of GA Financial, Inc.  Full time equivalent employees were 1,621 as of the end of the first quarter of 2005 compared to 1,460 for the same time in 2004.  Salaries accounted for $1.3 million of the increase while employee benefit costs rose $264 thousand for the first quarter of 2005.  First Commonwealth continues to evaluate its current menu of employee benefits to provide a competitive benefits package while also managing costs. 

Net occupancy expense increased $803 thousand for the first quarter of 2005 over 2004 levels.  Approximately $390 thousand of the increase was due to the inclusion of GA Financial, Inc. and $194 thousand was due to depreciation on leasehold improvements.  First Commonwealth continues to actively evaluate its branch delivery network to optimize client service in existing branches and to continue expansion into growth markets.  During the first quarter of 2005, First Commonwealth Bank opened two new full-service community offices in Washington County.  The execution of these initiatives may impact occupancy and other expenses in future periods.

Increases in other noninterest expenses in the first quarter of 2005 were primarily due to the addition of GA Financial, Inc.  Increases were recorded for intangible amortization ($491 thousand), furniture and equipment expense ($349 thousand), PA shares tax expense ($132 thousand) and data processing expense ($126 thousand). 

The merger and integration expenses that were incurred during the first quarter of 2004 included $485 thousand related to the write-off of the unamortized capitalized costs for the subordinated debentures that were previously issued by PFC to Pittsburgh Home Capital Trust I and were called and paid off in January of 2004.  In addition, the merger related expenses included $806 thousand of severance related salary and benefit expenses that were accrued during the first quarter of 2004 and were related to the integration of PFC into First Commonwealth.   

Other operating expenses for the 2005 period were $8.5 million reflecting an increase of $1.5 million from the 2004 amount of $7.0 million.  The first three months of 2005 included increases in telephone and dataline expenses, advertising costs, other professional fees and operational losses and charge-offs.  The increase in telephone and data line charges was largely due to the acquisition of GA Financial, Inc.  The increase in other professional services is due in part to the use of a consultant to provide targeted marketing services.  Advertising expense increases are due in large part to new promotions for a variety of deposit and loan products as well as advertising related to branches that have been newly re-built, remodeled or acquired.     

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (continued)

First Three Months of 2005 as Compared to the First Three Months of 2004
(continued)

Income tax expense increased $766 thousand for the first quarter of 2005 compared to the first quarter of 2004.  First Commonwealth's effective tax rate was 20.9% for the first three months of 2005 compared to 19.6% for the corresponding period of 2004. 

LIQUIDITY

Liquidity is a measure of First Commonwealth's ability to efficiently meet normal cash flow requirements of both borrowers and depositors.  In the ordinary course of business, funds are generated from the banking subsidiary's core deposit base and the maturity or repayment of earning assets, such as securities and loans.  As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through 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 an additional source of liquidity.  In addition to the previously described funding sources, First Commonwealth also has the ability to access the capital markets.

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

First Commonwealth's long-term liquidity source is a large core deposit base and a strong capital position.  Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer.  Total deposits increased $47.2 million for the first three months of 2005 with the largest increases being recorded in the savings deposit category.  Although an increase was recorded in total time deposits, $25 million in Brokered CD's matured during March 2005 but were not renewed.

At March 31, 2005, total interest-earning assets were $5,746.0 million, up from the $5,757.7 million recorded at December 31, 2004.  Total loans increased $39.6 million for the first three months of 2004 as commercial and agricultural loans increased by $19.4 million, loans to individuals increased by $13.7 million and residential loans secured by real estate increased by $8.5 million compared to year-end 2004.  First Commonwealth's auto lease portfolio continues to decline since the discontinuation of its automobile leasing activities during 2003. 

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

LIQUIDITY (continued)

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 March 31, 2005, securities available for sale had an amortized cost of $2,119.9 million and an approximate fair value of $2,107.4 million.

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 exceed ISA during a time period, a negative gap results.

The cumulative gap at the 365 day repricing period was negative in the amount of $1,384.7 million or 22.33% of total assets at March 31, 2005.  A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period.  A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.  In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings, and when interest rates rise, a negative gap should tend to affect earnings negatively.

The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments.  The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings.





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Interest Sensitivity (continued)
 
The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of March 31, 2005, and December 31, 2004 (Dollar amounts in thousands):