UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2007
Or
For the transition period from to
Commission File Number 001-11138
First Commonwealth Financial Corporation
(Exact name of registrant as specified in its charter)
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 July 31, 2007 was 73,550,885.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included in Part I of this report:
First Commonwealth Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONTROLS AND PROCEDURES
LEGAL PROCEEDINGS
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
OTHER INFORMATION
EXHIBITS
Signatures
2
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Unaudited)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and due from banks
Interest-bearing bank deposits
Securities available for sale, at market value
Securities held to maturity, at amortized cost,(Market value $77,053 in 2007 and $80,156 in 2006)
Loans:
Portfolio loans
Unearned income
Allowance for credit losses
Net loans
Premises and equipment, net
Other real estate owned
Goodwill
Amortizing intangibles, net
Other assets
Total assets
Liabilities
Deposits (all domestic):
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Other liabilities
Subordinated debentures
Other long-term debt
Total long-term debt
Total liabilities
Shareholders’ Equity
Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued
Common stock, $1 par value per share, 100,000,000 shares authorized; 75,100,431 shares issued and 73,790,885 shares outstanding in 2007; 75,100,431 shares issued and 73,916,377 shares outstanding in 2006
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Treasury stock (1,309,546 and 1,184,054 shares at June 30, 2007 andDecember 31, 2006, respectively, at cost)
Unearned ESOP shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
Interest Income
Interest and fees on loans
Interest and dividends on investments:
Taxable interest
Interest exempt from Federal income taxes
Dividends
Interest on Federal funds sold
Interest on bank deposits
Total interest income
Interest Expense
Interest on deposits
Interest on short-term borrowings
Interest on subordinated debentures
Interest on other long-term debt
Total interest on long-term debt
Total interest expense
Net Interest Income
Provision for credit losses
Net Interest Income after provision for credit losses
Non-Interest Income
Net securities gains
Trust income
Service charges on deposit accounts
Insurance commissions
Income from bank owned life insurance
Card related interchange income
Other operating income
Total non-interest income
Non-Interest Expense
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Advertising expense
Data processing expense
Pennsylvania shares tax expense
Intangible amortization
Other operating expenses
Total non-interest expense
Income before income taxes
Applicable income taxes
Net Income
Average Shares Outstanding
Average Shares Outstanding Assuming Dilution
Per Share Data:
Basic Earnings per Share
Diluted Earnings per Share
Cash Dividends Declared per Common Share
4
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
Balance at December 31, 2006
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding losses on securities arising during the period
Less: reclassification adjustment for gains on securities included in net income
Reclassification adjustment for losses realized in net income as a result of terminated cash flow hedges
Total other comprehensive loss
Total comprehensive income
Cash dividends declared
Net decrease in unearned ESOP shares
Discount on dividend reinvestment plan purchases
Tax benefit of stock options exercised
Treasury stock acquired
Treasury stock reissued
Balance at June 30, 2007
5
Balance at December 31, 2005
Other comprehensive loss, net of tax:
Balance at June 30, 2006
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes
(364
)
Depreciation and amortization
Net losses (gains) on sales of securities and other assets
Net amortization of premiums and discounts on securities
Net amortization of premiums and discounts on long-term debt
Income from increase in cash surrender value of bank owned life insurance
Decrease (increase) in interest receivable
Decrease in interest payable
Increase in income taxes payable
1,600
Net increase in loans held for sale
Other-net
Net cash provided by operating activities
Investing Activities
Transactions in securities held to maturity:
Proceeds from sales
Proceeds from maturities and redemptions
Purchases
Transactions in securities available for sale:
Proceeds from sales of other assets
Net increase in interest-bearing deposits with banks
Net decrease (increase) in loans
Purchases of premises and equipment
Net cash provided by investing activities
Financing Activities
Repayments of other long-term debt
Proceeds from issuance of long-term debt
Dividends paid
Net (decrease) increase in Federal funds purchased
Net decrease in other short-term borrowings
Net increase in deposits
Proceeds from sale of treasury stock
Purchase of treasury stock
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at June 30
7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
June 30, 2007
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 six month periods ended June 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:
Unrealized gains (losses) on securities:
Unrealized holding losses arising during the period
Less: reclassification adjustment for gains realized in net income
Net unrealized losses
Other comprehensive loss
8
NOTE 3 Supplemental Cash Flow Disclosures
Cash paid during the first six months of the year for:
Interest
Income Taxes
Noncash investing and financing activities:
ESOP loan reductions
Loans transferred to other real estate owned and repossessed assets
Gross decrease in market value adjustment to securities available for sale
Treasury stock reissued for business combination
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 $3.8 million, which consists of the limited partnership investments as of June 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 June 30, 2007:
Commitments to extend credit
Financial standby letters of credit
Performance standby letters of credit
The current notional amounts outstanding above include financial standby letters of credit of $10.0 million and performance standby letters of credit of $1.6 million issued during the first six months of 2007. A liability of $296 thousand has been recorded which represents the fair value of letters of credit issued in 2007.
9
NOTE 6 Other-Than-Temporary Impairment of Investments
The following table presents the gross unrealized losses and fair values at June 30, 2007 by investment category and time frame for which the loss has been outstanding (dollars in thousands):
Description of Securities
Fair
Value
U.S. Government Corporations and Agencies
U.S. Government Agency CMO and MBS
Corporate Securities
Municipal Securities
Other Mortgage Backed Securities
Total Debt Securities
Equities
Total Securities
Management does not believe any individual loss as of June 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 $314 million in assets and 8 branch offices located in Allegheny and Butler counties in Pennsylvania. First Commonwealth recorded goodwill and core deposit intangibles totaling approximately $38.1 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.
10
NOTE 9 New Accounting Pronouncements
In February 2007, the 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 06-5 “Accounting for Purchases of Life Insurance—Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” Effective January 1, 2007, EITF 06-5 explains how to determine “the amount that could be realized” from a life insurance contract, for purposes of recording the cash surrender value on the balance sheet. It requires policyholders to determine the amount that could be realized under a life insurance contract assuming individual policies are surrendered instead of surrendering all policies as a group. Any adjustment to the carrying amount of cash surrender value will be recorded as a direct adjustment to retained earnings and reported as a change in accounting principle. The adoption of EITF 06-5 did not have a material impact on First Commonwealth’s financial condition or results of operations.
In September 2006, the FASB Emerging Issues Task Force issued EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods. Therefore, EITF 06-4 would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF 06-4 will be effective for fiscal years beginning after December 15, 2007. Management is currently evaluating how the provisions of EITF 06-4 will affect First Commonwealth’s financial condition or results of operations upon adoption.
In 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
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 six months ended June 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 our market areas, could increase credit-related losses and expenses and/or limit growth.
Increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and related expenses.
Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses.
The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment.
Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations.
Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers’ businesses.
Other risks and uncertainties described in this report and the other reports that we file with the Securities and Exchange Commission, including our 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
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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 longer-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 strategy reduces interest-earning assets which results in lower net interest income, but stabilizes the net interest margin.
First Commonwealth reported second quarter 2007 net income of $11.5 million or $0.16 per diluted share compared to $12.2 million or $0.17 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 a lower loan loss provision, an increase in non-interest income, and a decrease in income taxes.
Return on average assets was 0.79% and return on average equity was 8.00% during the second quarter of 2007 compared to 0.83% and 9.39%, respectively for the second quarter of 2006.
First Commonwealth reported net income of $22.4 million, or $0.31 per diluted share for the first six months ended June 30, 2007 compared to $25.2 million, or $0.36 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 which was partially offset by an increase in non-interest income.
The return on average equity and average assets was 7.82% and 0.77%, respectively, for the six months ended June 30, 2007 compared to 9.67% and 0.85%, 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 six months ending June 30, 2007 compared to the prior year periods:
Net income per diluted share, prior year period
Increase (decrease) from changes in:
Net interest income
Security transactions
Net income per diluted share
13
RESULTS OF OPERATIONS (continued)
Net interest income, the primary component of revenue for First Commonwealth, is defined as the difference between income on earning assets and the cost of funds supporting those assets. The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a fully tax equivalent basis, to average earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretax equivalent amounts based on the marginal corporate Federal tax rate of 35%. The tax equivalent adjustment to net interest income was $3.7 million and $3.6 million for the second quarter of 2007 and 2006, respectively, and $7.5 million and $7.2 million for the six months ended June 30, 2007 and 2006, respectively.
Net interest income decreased $1.5 million, or 3.5%, for the quarter ended June 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 $343 million, average investment securities decreased $201 million, average loans increased $42 million and average borrowings decreased $538 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.
Interest income was negatively affected in the second quarter of 2007 by a reversal of $548 thousand of interest and fees on a $30 million commercial credit relationship that, as previously disclosed, has been closely monitored since the second quarter of 2006 and was transferred to non-accrual status at June 30, 2007. (See Credit Review, page 28.)
The net interest margin for the three months ended June 30, 2007 remained unchanged at 3.31% compared to the second quarter of 2006. The reversal of the aforementioned interest and fees on the $30 million non-accrual loan negatively impacted the net interest margin by five basis points (0.05%) in the second quarter of 2007.
Net interest income decreased $1.7 million, or 2.0%, for the six months ended June 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 $323 million, average investment securities decreased $188 million, average loans increased $64 million and average borrowings decreased $473 million.
The net interest margin for the six months ended June 30, 2007 was 3.34% compared to 3.31% for the same period in 2006. The net interest margin was negatively impacted two basis points (0.02%) as a result of the reversal of $548 thousand of interest income and fees on the aforementioned $30 million non-accrual loan.
Interest and fees on loans for the three and six months ended June 30, 2007 increased $2.3 million, or 3.8%, and $7.9 million, or 6.7%, respectively, compared to the same periods in 2006. The second quarter 2007 increase was a result of a $42.0 million increase in average loans combined with an 18 basis point (0.18%) increase in the yield on loans. The increase for the six months ended June 30, 2007 was the result of a $64.1 million increase in average loans combined with a 32 basis point (0.32%) rise in the yield on loans. The loan growth was primarily due to the Laurel acquisition.
14
Net Interest Income (continued)
Interest income on investments decreased $2.1 million in the second quarter of 2007 from the second quarter of 2006 mainly due to a $201 million decline in the average balance of investment securities. Interest income on investments decreased $3.3 million in the six months ended June 30, 2007 from the comparable period last year primarily from the $188 million decrease in the average balance of investment securities. The decline in average investment securities was the result of the balance sheet strategy of using pay downs and maturities to reduce borrowings. First Commonwealth holds no “High Risk” securities, nor does it own any securities of a single issuer exceeding 10% of shareholders’ equity other than U.S. Government Agency securities.
Interest on deposits for the three and six months ended June 30, 2007 increased $7.7 million, or 30.5%, and $15.9 million, or 32.7%, respectively, compared to the same periods in 2006. The average balance of interest-bearing deposits increased $343 million, or 9.8%, in the second quarter of 2007 compared to the second quarter of 2006 and $323 million, or 9.2%, in the first six months of 2007 compared to the same period in 2006. The growth was primarily due to the Laurel acquisition. The cost of deposits increased 49 basis points (0.49%) to 3.03% in the second quarter of 2007, and increased 54 basis points (0.54%) to 3.00% for the six months ended June 30, 2007 compared to the same periods 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 six months ended June 30, 2007 decreased $3.9 million, or 59.2%, and $5.3 million, or 41.1%, respectively, compared to the same periods in 2006. These decreases were primarily due to the $537.9 million decrease in average borrowings for the second quarter of 2007 compared to the second quarter of 2006 and the $261.9 million decrease in average borrowings for the six months ended June 30, 2007 compared to the same period in 2006. The decrease is primarily the result of management’s strategy of using investment pay downs and maturities to reduce borrowings.
Interest expense on long-term debt decreased $2.1 million, or 25.0%, for the second quarter of 2007 and $4.3 million, or 25.1%, for the six months ended June 30, 2007, compared to the same periods in 2006. The decreases were primarily due to the $207 million decrease in average borrowings for the second quarter of 2007 compared to the second quarter of 2006 and the $211 million decrease in average borrowings for the six months ended June 30, 2007 compared to the same period in 2006.
15
The following is an analysis of the average balance sheets and net interest income for the three months ended June 30:
Interest-earning assets:
Interest-bearing deposits with banks
Tax-free investment securities
Taxable investment securities
Federal funds sold
Loans, net of unearned income (b)(c)(d)
Total interest-earning assets
Noninterest-earning assets:
Cash
Total noninterest-earning assets
Total Assets
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (e)
Savings deposits (e)
Time deposits
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing liabilities and capital:
Noninterest-bearing demand deposits (e)
Shareholders’ equity
Total noninterest-bearing funding sources
Total Liabilities and Shareholders’ Equity
Net Interest Income and Net Yield on Interest-Earning Assets
16
The following is an analysis of the average balance sheets and net interest income for the six months ended June 30:
17
The following table shows the effect of changes in volumes and rates on interest income and interest expense:
Three Months Ended June 30, 2007
Compared with June 30, 2006
Six Months Ended June 30, 2007
Loans
Interest-bearing demand deposits
Savings deposits
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.
For the three months ended June 30, 2007, non-accrual loans increased $35.0 million 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 determined and disclosed that this credit had experienced deterioration. This credit relationship was previously classified as substandard and management had established adequate reserves to cover potential losses. Therefore, classification as non-accrual did not result in an additional provision for credit loss for the second quarter of 2007.
The provision for credit losses decreased $1.9 million in the second quarter of 2007 to $2.4 million from the $4.3 million reported in the second quarter of 2006. The provision was higher in 2006 primarily due to the $30 million
18
Provision for Credit Losses (continued)
commercial credit relationship discussed above. The allowance for credit losses was $44.0 million at June 30, 2007, which represents a ratio of 1.18% of average loans outstanding compared to 1.07% reported at June 30, 2006. Net credit losses for the second quarter of 2007 decreased $1.5 million compared with the second quarter of 2006.
The provision for credit losses increased $188 thousand to $5.4 million in the six months ended June 30, 2007 from the $5.2 million reported in the comparable period last year. Net credit losses decreased $1.6 million for the six months ended June 30, 2007 compared with the same period last year.
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.
Management believes that the allowance for credit losses is at a level deemed sufficient to absorb losses inherent in the loan portfolio at June 30, 2007.
Below is an analysis of the consolidated allowance for credit losses for the six months ended June 30:
Balance, beginning of year
Loans charged off:
Commercial, financial and agricultural
Loans to individuals
Real estate-construction
Real estate-commercial
Real estate-residential
Lease financing receivables
Total loans charged off
Recoveries of loans previously charged off:
Total recoveries
Net charge offs
Credit losses on loans transferred to held for sale
Net Credit Losses
Provision charged to expense
Balance, end of period
19
The following table presents the components of non-interest income for the three and six months ended June 30:
Total non-interest income for the three and six month periods ended June 30, 2007 increased $1.3 million or 12.1%, and $2.5 million or 11.5%, respectively, compared to the same periods in 2006 due to increases in insurance commissions, service charges on deposits, card related interchange income and other operating income.
Net securities gains were $150 thousand for the second quarter of 2007 and $755 thousand for the first six months of 2007 compared to $19 thousand and $82 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, which continue to be First Commonwealth’s most significant component of non-interest income, increased $373 thousand for the second quarter of 2007 and $669 thousand for the first six 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.
Income from bank owned life insurance increased $106 thousand during the second quarter of 2007 and $221 thousand during the first six months of 2007 compared to the corresponding periods in 2006. The increase was primarily due to additional policies acquired in connection with the Laurel acquisition.
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 $243 thousand during the second quarter of 2007 and $430 thousand during the first six 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 $183 thousand during the second quarter of 2007 and $138 thousand for the first six months of 2007 compared to the same periods in 2006. This increase includes a $550 thousand gain from the sale of First Commonwealth’s municipal bond servicing business during the second quarter of 2007.
20
The following table presents the components of non-interest expense for the three and six months ended June 30:
Total non-interest expense was $36.9 million for the second quarter of 2007 and $74.7 million for the first six months ended June 30, 2007, reflecting an increase of $3.7 million and $5.9 million, respectively, over the corresponding periods in 2006.
Salaries and employee benefit costs increased $1.4 million for the second quarter of 2007 and $2.3 million for the six months ended June 30, 2007 compared to the same periods in 2006. The increase was mainly as a result of payments under a separation agreement with the former President and Chief Executive Officer of First Commonwealth Financial Corporation in the amount of $746 thousand, payments under a separation agreement with First Commonwealth Bank’s former President and Chief Executive Officer in the amount of $299 thousand, as well as salaries and benefits for additional branch personnel from the Laurel merger. Full time equivalent employees were 1,577 at the end of the second quarter of 2007 compared to 1,528 at the end of the second quarter of 2006.
Net occupancy expense increased $613 thousand for the second quarter of 2007 and $564 thousand during the first six months of 2007 compared to the corresponding periods in 2006 primarily due to branch expansion and building repairs and maintenance.
Advertising expense increased $743 million for the six months ended June 30, 2007 compared to the prior year period primarily due to strategic marketing initiatives.
Intangible amortization increased $304 thousand for the second quarter of 2007 and $609 thousand during the first six 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 $1.2 million for the second quarter and $1.3 million for the six month period primarily due to strategic marketing initiatives and other professional fees.
21
Income Tax
Income tax expense decreased $1.2 million for the second quarter of 2007 and $2.4 million for the first six months ended June 30, 2007 compared to the corresponding periods in 2006. First Commonwealth’s effective tax rate was 11.2% for the second quarter of 2007 and 10.0% for the first six months of 2007 compared to 17.6% and 16.3% 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 $1.9 million for the second quarter and $5.2 million for the first six months ended June 30, 2007 compared to 2006. Management expects the effective tax rate to be approximately 10.2% 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, 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:
Total interest-bearing deposits
At June 30, 2007 noninterest-bearing deposits increased $7.6 million and interest-bearing deposits increased $73.7 million compared to December 31, 2006. Savings deposits represented the largest increase in interest-bearing deposits.
At June 30, 2007, total interest-earning assets were $5.2 billion, a decrease of $304.6 million from $5.5 billion at December 31, 2006. Total investments decreased $195.8 million for the first six months of 2007 as management
22
LIQUIDITY (continued)
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 $109.1 million for the first six months of 2007 partly due to a $58.4 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 June 30, 2007, securities available for sale had an amortized cost and market value of $1.5 billion.
The following table shows a breakdown of loans by categories as of the periods presented:
Commercial, financial, agricultural and other
Real estate—construction
Real estate—residential
Real estate—commercial
Leases, net of unearned income
Gross loans and leases
Total loans and leases net of unearned income
First Commonwealth’s auto lease portfolio continues to decline since the discontinuation of its automobile leasing activities during 2003.
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.
23
Interest Sensitivity (continued)
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 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 $1.5 billion or 26.77% of total assets at June 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:
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities
Gap
ISA/ISL
Gap/Total assets
24
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 June 30, 2007, indicated that a 200 basis point (2.0%) increase in interest rates would decrease net interest income by 46 basis points (0.46%) below the base case scenario, and a 200 basis point (2.0%) decrease in interest rates would decrease net interest income by 208 basis points (2.08%) 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. First Commonwealth does not have any exposure to sub-prime mortgage loans.
25
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
The following table identifies amounts of loan losses and nonperforming loans. A loan is placed in non-accrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt.
Nonperforming Loans:
Loans on non-accrual basis
Troubled debt restructured loans
Total nonperforming loans
Loans past due in excess of 90 days and still accruing
Loans outstanding at end of period (a)
Average loans outstanding (b)
Nonperforming loans as a percentage of total loans
Reduction in allowance for credit losses due to transfer of credit to held for sale
Net credit losses
Net credit losses as a percentage of average loans outstanding (annualized)
Provision for credit losses as a percentage of net credit losses
Allowance for credit losses as a percentage of average loans outstanding
Allowance for credit losses as a percentage of end-of-period loans outstanding
Allowance for credit losses as a percentage of nonperforming loans
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.
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.
27
The following table identifies impaired loans, and information regarding the relationship of impaired loans to the reserve for credit losses at June 30, 2007 and June 30, 2006:
Recorded investment in impaired loans at end of period
Allowance for credit losses related to impaired loans
Impaired loans with an allocation of the allowance for credit losses
Impaired loans with no allocation of the allowance for credit losses
Income recorded on impaired loans on a cash basis
Nonperforming loans at June 30, 2007, increased $32.9 million to $47.9 million compared to June 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 had provided reserves as part of the loan loss reserve methodology to cover expected losses. Therefore, classification as impaired did not result in an additional provision for loan loss expense for the second quarter of 2007.
Loans past due in excess of 90 days and still accruing decreased $2.1 million, or 13.0%, to $13.9 million compared to June 30, 2006 and net credit losses for the second quarter of 2007 decreased $1.5 million 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. Presently, First Commonwealth is working with both Sterling and EFI to determine which purchased loans are affected by these irregularities. At June 30, 2007, the balance in this portfolio was $6.2 million. First Commonwealth has classified $2.4 million of this portfolio as non-accrual because these loans are 90 days or more past due.
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
CAPITAL RESOURCES
At June 30, 2007, shareholders’ equity was $560.2 million, a decrease of $11.2 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.
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 June 30, 2007:
Tier I Capital to Risk Weighted Assets
Risk-Based Requirement
Total Capital to Risk Weighted Assets
Minimum Leverage Capital
Minimum Leverage Requirement
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 June 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
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”). Disclosure controls and procedures are designed to ensure that the information that First Commonwealth is required to disclose in the reports that it 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. Based upon their evaluation, First Commonwealth’s Chief Executive Officer and Chief Financial Officer concluded that First Commonwealth’s disclosure controls and procedures were not effective as of June 30, 2007, because First Commonwealth was late in filing two Current Reports on Form 8-K to report the adoption of a short term incentive compensation plan and a long term incentive compensation plan by the Compensation Committee of First Commonwealth’s Board of Directors. First Commonwealth has advised the members of the Compensation Committee and senior management in First Commonwealth’s Human Resources department of the obligation to report decisions with respect to the compensation of First Commonwealth’s Chief Executive Officer, Chief Financial Officer and other “named executive officers” and will adopt appropriate procedures to require that all such decisions be promptly reported to the Chief Executive Officer and Chief Financial Officer for evaluation and disclosure. As a result of these remedial measures, First Commonwealth’s Chief Executive Officer and Chief Financial Officer believe that the company’s disclosure controls and procedures will be effective for the timely reporting of required compensation disclosures in the future.
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
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
Purchases of Equity Securities
2007 Period
April 1 – 30
May 1 – 31
June 1 – 30
Total
All shares were acquired by First Commonwealth through a publicly announced plan. The plan to acquire the shares was announced through a press release dated May 15, 2007, which was furnished to the Securities and Exchange Commission by a Current Report on Form 8-K filed May 16, 2007. The plan authorizes the purchase of up to one million shares of First Commonwealth’s common stock in the open market. The plan does not have an expiration date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 16, 2007, the Annual Meeting of Shareholders of First Commonwealth Financial Corporation was held. A total of 57,426,195 of First Commonwealth’s shares were present or represented by proxy at the meeting. First Commonwealth’s shareholders voted upon the election of 4 persons, named in the Proxy Statement, to serve as directors of First Commonwealth for terms expiring in 2010. All directors were elected and there was no solicitation in opposition to management’s nominees as listed in the Proxy Statement. The following is a list of directors elected at the Annual Meeting with the number of votes “For” and “Withheld”. There were no abstentions in regards to the election of the directors.
Name
Julie A. Caponi
David S. Dahlmann
John J. Dolan
Julia E. Trimarchi Cuccaro
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
ExhibitNumber
Description
Incorporated by Reference to
10.1
3.1
31.1
31.2
32.1
32.2
32
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)
John J. Dolan,
President and Chief Executive Officer
Edward J. Lipkus, III,
Executive Vice President and Chief Financial Officer
33