First Commonwealth Announces Third Quarter 2007 Financial Results

INDIANA, Pa., Oct. 18 /PRNewswire-FirstCall/ -- First Commonwealth Financial Corporation , the holding company for First Commonwealth Bank, announced today the financial results for the third quarter ended September 30, 2007.

(Logo: http://www.newscom.com/cgi-bin/prnh/20030416/FIRSTLOGO ) Third Quarter Results

First Commonwealth reported third quarter 2007 net income of $12.2 million or $0.17 per diluted share compared to $15.4 million or $0.22 per diluted share in the same period last year. The decrease of $3.2 million in net income was due to lower net interest income, higher non-interest expenses and an $834 thousand after tax gain on extinguishment of debt recorded during the third quarter of 2006. The return on average equity and average assets was 8.59% and 0.85%, respectively, compared to 11.29% and 1.02% for the prior year period.

Significant developments during the third quarter include: -- Net interest margin improved both quarterly and year to date. -- First Commonwealth repurchased 1 million shares at an average price of $9.97 completing the share repurchase plan announced on May 15, 2007. -- A new loan production office was opened in State College, PA. -- Equipment Finance LLC ("EFI") repurchased $1.1 million in loans previously classified as non-accrual in the second quarter of 2007. (See further discussion under "Credit Quality and Provision for Credit Losses.") Year to Date Results

First Commonwealth reported year to date net income as of September 30, 2007 of $34.6 million or $0.47 per diluted share compared to $40.6 million or $0.58 per diluted share in the same period last year. The decrease in net income was due to a decline in net interest income and higher non-interest expense partly offset by an increase in non-interest income and a lower provision for credit losses. The 2006 results also included a $1.0 million after tax gain on extinguishment of debt. The return on average equity and average assets was 8.08% and 0.80%, respectively, compared to 10.23% and 0.91% for the prior year period.

John J. Dolan, President and Chief Executive Officer stated, "We are pleased to show improvement in the net interest margin both quarterly and year to date. Our strategy to make First Commonwealth the financial services organization of First Choice in our marketplace continues and new products and services are being aligned with this strategy. We recently announced "FlexChoice," a new home equity product, and we expect to implement improvements in the delivery of our services to small businesses in the fourth quarter.

We have made progress in our credit issues involving EFI and continue to work on improving our credit quality."

Net Interest Income and Margin

Net interest income for the third quarter of 2007 decreased $2.1 million, or 5.1%, to $40.1 million from $42.3 million in the third quarter of 2006. The inverted yield curve continues to be a challenge. Maturities and pay downs of investment securities have been used primarily to reduce borrowings. This balance sheet positioning reduces interest-earning assets which results in lower net interest income but stabilizes the net interest margin. First Commonwealth may reevaluate its ability to reinvest these cash flows depending on changes in the present interest rate environment.

Net interest margin (net interest income as a percentage of average earning assets on a fully tax-equivalent basis) for the third quarter 2007 increased two basis points (0.02%) to 3.36%, compared with 3.34% in the corresponding period last year. Average investment securities decreased $215.9 million, or 12.5%, and average borrowings declined $515.5 million, or 40.4%, in the third quarter of 2007 compared to the same period in 2006.

Net interest margin increased three basis points (0.03%) for the nine months ended September 30, 2007 compared to the prior year period. This improvement was due to the balance sheet positioning described above.

Non-Interest Income

Non-interest income for the third quarter of 2007 decreased $177 thousand, or 1.4%, to $12.2 million from $12.4 million in the third quarter of 2006. Increases in non-interest income during the third quarter of 2007 as detailed below were overshadowed by a $1.3 million gain on extinguishment of debt during the third quarter of 2006. Excluding this 2006 gain, non-interest income increased $1.1 million or 10.0%.

During the third quarter of 2007, service charges on deposit accounts increased $248 thousand or 5.7% and card related interchange income increased $256 thousand or 18.3% due to a larger customer base, higher volume and changes in fee structures. Insurance commissions increased $263 thousand or 32.8% due to higher sales.

For the nine months ended September 30, 2007, non-interest income increased $2.3 million or 6.8% mainly due to the reasons noted above for the three month period ended September 30, 2007 and the inclusion of a $550 thousand gain from the sale of First Commonwealth's municipal bond servicing business during the second quarter of 2007. This business generated annual trust income of approximately $100 thousand, net of expenses.

Non-Interest Expense

Total non-interest expense for the third quarter of 2007 increased $3.0 million, or 9.1%, to $36.5 million from $33.4 million in the corresponding quarter last year. Salaries and employee benefits increased $711 thousand or 4.0% due to the Laurel acquisition and merit salary increases. Net occupancy expenses increased $630 thousand or 22.1% due to branch expansion and building repairs and maintenance. The $199 thousand increase in intangible amortization expense was a result of the Laurel acquisition. Other operating expense increased $1.1 million or 16.2% mainly due to costs associated with strategic marketing initiatives and other professional fees.

Non-interest expense increased $8.9 million or 8.7% for the nine months ended September 30, 2007 compared to the prior year period primarily due to the same reasons noted above for the three months ended September 30, 2007 and $1.0 million of expenses recorded in connection with separation agreements with former executives of the company.

Income Tax

Income tax expense decreased $1.4 million for the third quarter of 2007 compared to the same period in 2006. First Commonwealth's effective tax rate was 10.0% in the third quarter of 2007 compared to 15.4% in the same period in 2006. Nontaxable income and tax credits had a larger impact on the effective tax rate in 2007 due to a $4.6 million decline in pretax income compared to the third quarter of 2006.

For the nine months ended September 30, 2007, income tax expense decreased $3.9 million compared to the same period in 2006. The effective tax rate was 10.0% for the first nine months of 2007 compared to 16.0% for the same period in 2006 for the same reason described above.

Credit Quality and Provision for Credit Losses

Non-accrual loans increased $35.5 million to $50.2 million at September 30, 2007 compared to $14.7 million at September 30, 2006. This increase was mainly due to a $30 million commercial credit relationship that was placed on non-accrual during the second quarter of 2007. This credit relationship had been monitored since the second quarter of 2006 when management disclosed that this credit had experienced deterioration. This credit relationship was previously classified as sub-standard and management has established reserves to cover expected losses. Loans past due in excess of 90 days and still accruing decreased $619 thousand or 4.3% to $13.7 million compared to September 30, 2006.

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

The provision for credit losses for the third quarter of 2007 decreased $742 thousand to $2.3 million from the $3.0 million reported in the third quarter of 2006. The provision was higher in 2006 primarily due to the large commercial credit discussed above that experienced deterioration during the second quarter in 2006. Management continues to monitor credit quality and rapidly respond to credit issues.

First Commonwealth's allowance for loan loss methodology resulted in a $7.7 million provision for credit losses for the first nine months of 2007 which exceeded net charge-offs by $562 thousand and was $554 thousand less than the provision for credit losses for the nine month period of 2006 mainly due to the reasons noted above for the three months ended September 30, 2007.

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

First Commonwealth is not a participant or underwriter in the sub-prime mortgage loan marketplace and therefore does not have any exposure to sub- prime mortgage loans in its loan or investment portfolio. All Mortgage Backed Securities are AAA rated and backed by U.S. Government agencies.

About First Commonwealth Financial Corporation

First Commonwealth Financial Corporation is a $5.7 billion bank holding company headquartered in Indiana, Pennsylvania. It operates 111 retail branch offices in 15 counties in western and central Pennsylvania through First Commonwealth Bank, a Pennsylvania chartered bank and trust company. Financial services and insurance products are also provided through First Commonwealth Insurance Agency and First Commonwealth Financial Advisors, Inc.

Forward-Looking Statements

This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our strategic initiatives on First Commonwealth's future financial performance, the adequacy of First Commonwealth's allowance for credit losses and the effect of the interest rate environment on First Commonwealth's future investment activities. Forward-looking statements describe First Commonwealth's future plans, strategies and expectations and 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. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Forward-looking statements speak only as of the date they are made. Such risks and uncertainties include among other things:

-- adverse changes in the economy or business conditions, either nationally or in First Commonwealth's market areas, which could increase credit-related losses and expenses and/or limit growth; -- increases in defaults by borrowers and other delinquencies, which could result in an increased provision for losses on loans and related expenses; -- fluctuations in interest rates and market prices, which could reduce net interest margin and asset valuations and increase expenses; -- changes in legislative or regulatory requirements applicable to First Commonwealth and its subsidiaries, which could increase costs, limit certain operations and adversely affect results of operations; -- the inability to successfully execute First Commonwealth's strategic growth initiatives, which could limit future revenue and earnings growth; and -- other risks and uncertainties described in First Commonwealth's reports filed with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K. FIRST COMMONWEALTH FINANCIAL CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA For the Quarter For the Nine Months Ended Ended September 30, September 30, 2007 2006 2007 2006 (dollars in thousands, except share data) Interest Income Interest and fees on loans $63,737 $64,575 $190,463 $183,376 Interest and dividends on investments: Taxable interest 14,259 16,859 45,293 51,610 Interest exempt from Federal income taxes 3,424 3,215 10,222 9,664 Dividends 753 776 2,206 2,166 Interest on Federal funds sold 57 17 83 76 Interest on bank deposits 8 15 29 39 Total interest income 82,238 85,457 248,296 246,931 Interest Expense Interest on deposits 33,786 28,254 98,243 76,820 Interest on short-term borrowings 1,977 7,338 9,623 20,324 Interest on subordinated debentures 2,130 2,134 6,370 6,285 Interest on other long-term debt 4,211 5,453 12,836 18,484 Total interest on long-term debt 6,341 7,587 19,206 24,769 Total interest expense 42,104 43,179 127,072 121,913 Net Interest Income 40,134 42,278 121,224 125,018 Provision for credit losses 2,296 3,038 7,690 8,244 Net Interest Income after provision for credit losses 37,838 39,240 113,534 116,774 Non-Interest Income Net securities gains 16 5 771 87 Trust income 1,517 1,482 4,453 4,357 Service charges on deposit accounts 4,609 4,361 13,291 12,374 Gain on extinguishment of debt 0 1,283 0 1,553 Insurance commissions 1,064 801 2,651 2,115 Income from bank owned life insurance 1,534 1,451 4,544 4,240 Card related interchange income 1,654 1,398 4,773 4,087 Other operating income 1,819 1,609 5,557 4,939 Total non-interest income 12,213 12,390 36,040 33,752 Non-Interest Expense Salaries and employee benefits 18,401 17,690 57,273 54,282 Net occupancy expense 3,475 2,845 10,226 9,032 Furniture and equipment expense 3,243 2,998 8,874 8,680 Advertising expense 475 417 1,910 1,109 Data processing expense 942 903 2,821 2,518 Pennsylvania shares tax expense 1,439 1,349 4,323 4,057 Intangible amortization 857 658 2,597 1,789 Other operating expenses 7,648 6,582 23,108 20,790 Total non-interest expense 36,480 33,442 111,132 102,257 Income before income taxes 13,571 18,188 38,442 48,269 Applicable income taxes 1,352 2,796 3,840 7,713 Net Income $12,219 $15,392 $34,602 $40,556 Average Shares Outstanding 72,589,329 70,875,018 72,959,307 70,004,534 Average Shares Outstanding Assuming Dilution 72,705,753 71,177,930 73,128,040 70,382,511 Per Share Data: Basic Earnings Per Share $0.17 $0.22 $0.47 $0.58 Diluted Earnings Per Share $0.17 $0.22 $0.47 $0.58 Cash Dividends Declared per Common Share $0.17 $0.17 $0.51 $0.51 FIRST COMMONWEALTH FINANCIAL CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA September 30, December 31, 2007 2006 (dollars in thousands, except share data) Assets Cash and due from banks $86,499 $95,134 Interest-bearing bank deposits 1,060 985 Securities available for sale, at market value 1,460,909 1,644,690 Securities held to maturity, at amortized cost, (Market value $74,019 in 2007 and $80,156 in 2006) 73,024 78,501 Loans: Portfolio loans 3,660,153 3,783,874 Unearned income (30) (57) Allowance for credit losses (43,210) (42,648) Net loans 3,616,913 3,741,169 Premises and equipment, net 70,133 68,901 Other real estate owned 1,803 1,507 Goodwill 159,956 160,366 Amortizing intangibles, net 14,272 16,869 Other assets 237,527 235,794 Total assets $5,722,096 $6,043,916 Liabilities Deposits (all domestic): Noninterest-bearing $522,810 $522,451 Interest-bearing 3,811,133 3,803,989 Total deposits 4,333,943 4,326,440 Short-term borrowings 237,734 500,014 Other liabilities 44,156 52,681 Subordinated debentures 108,250 108,250 Other long-term debt 435,781 485,170 Total long-term debt 544,031 593,420 Total liabilities 5,159,864 5,472,555 Shareholders' Equity Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued 0 0 Common stock, $1 par value per share, 100,000,000 shares authorized; 75,100,431 shares issued and 73,086,247 shares outstanding in 2007; 75,100,431 shares issued and 73,916,377 shares outstanding in 2006 75,100 75,100 Additional paid-in capital 207,310 208,313 Retained earnings 319,472 322,415 Accumulated other comprehensive loss, net (6,736) (7,914) Treasury stock (2,014,184 and 1,184,054 shares at September 30, 2007 and December 31, 2006, respectively, at cost) (22,814) (14,953) Unearned ESOP shares (10,100) (11,600) Total shareholders' equity 562,232 571,361 Total liabilities and shareholders' equity $5,722,096 $6,043,916 Book value per share $7.69 $7.73 Market value per share $11.06 $13.43 FIRST COMMONWEALTH FINANCIAL CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA Loans by Categories (dollars in thousands) September 30, June 30, March 31, December 31, September 30, 2007 2007 2007 2006 2006 Commercial, financial, agricultural and other $901,679 $866,590 $854,843 $861,427 $831,040 Real estate - construction 143,680 123,844 101,719 92,192 87,050 Real estate - residential 1,268,313 1,288,089 1,312,389 1,346,503 1,374,613 Real estate - commercial 865,389 899,669 914,389 935,635 948,914 Loans to individuals 480,956 496,228 519,711 547,253 575,948 Leases, net of unearned income 136 305 494 864 1,281 Gross loans and leases 3,660,153 3,674,725 3,703,545 3,783,874 3,818,846 Unearned income (30) (37) (47) (57) (70) Total loans and leases net of unearned income $3,660,123 $3,674,688 $3,703,498 $3,783,817 $3,818,776 FIRST COMMONWEALTH FINANCIAL CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA Quarter To Date Average Balance Sheets and Net Interest Analysis at September 30, (dollars in thousands) 2007 Income/ Yield or Average Balance Expense Rate (a) Assets Interest-earning assets: Interest-bearing deposits with banks $526 $8 5.62% Tax-free investment securities 301,648 3,424 6.93% Taxable investment securities 1,210,048 15,012 4.92% Federal funds sold 4,412 57 5.20% Loans, net of unearned income (b)(c)(d) 3,653,196 63,737 7.12% Total interest-earning assets 5,169,830 82,238 6.59% Noninterest-earning assets: Cash 79,514 Allowance for credit losses (44,248) Other assets 492,612 Total noninterest-earning assets 527,878 Total Assets $5,697,708 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (e) $598,571 $2,705 1.79% Savings deposits (e) 1,097,321 6,459 2.34% Time deposits 2,121,318 24,622 4.61% Short-term borrowings 208,046 1,977 3.77% Long-term debt 553,158 6,341 4.55% Total interest-bearing liabilities 4,578,414 42,104 3.65% Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (e) 521,935 Other liabilities 32,763 Shareholders' equity 564,596 Total noninterest-bearing funding sources 1,119,294 Total Liabilities and Shareholders' Equity $5,697,708 Net Interest Income and Net Yield on Interest-Earning Assets $40,134 3.36% 2006 Income/ Yield or Average Balance Expense Rate (a) Assets Interest-earning assets: Interest-bearing deposits with banks $3,684 $15 1.60% Tax-free investment securities 280,926 3,215 6.98% Taxable investment securities 1,446,629 17,635 4.84% Federal funds sold 1,243 17 5.35% Loans, net of unearned income (b)(c)(d) 3,729,622 64,575 7.08% Total interest-earning assets 5,462,104 85,457 6.48% Noninterest-earning assets: Cash 80,791 Allowance for credit losses (40,438) Other assets 457,991 Total noninterest-earning assets 498,344 Total Assets $5,960,448 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (e) $596,874 $2,945 1.96% Savings deposits (e) 1,119,224 5,551 1.97% Time deposits 1,891,777 19,758 4.14% Short-term borrowings 606,140 7,338 4.80% Long-term debt 670,523 7,587 4.49% Total interest-bearing liabilities 4,884,538 43,179 3.51% Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (e) 503,611 Other liabilities 31,312 Shareholders' equity 540,987 Total noninterest-bearing funding sources 1,075,910 Total Liabilities and Shareholders' Equity $5,960,448 Net Interest Income and Net Yield on Interest-Earning Assets $42,278 3.34% (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate. (b) Average balance includes loans held for sale in 2006. (c) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (d) Loan income includes loan fees. (e) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes. FIRST COMMONWEALTH FINANCIAL CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA Year To Date Average Balance Sheets and Net Interest Analysis at September 30, (dollars in thousands) 2007 Income/ Yield or Average Balance Expense Rate (a) Assets Interest-earning assets: Interest-bearing deposits with banks $568 $29 6.68% Tax-free investment securities 302,037 10,222 6.96% Taxable investment securities 1,289,083 47,499 4.93% Federal funds sold 2,128 83 5.23% Loans, net of unearned income (b)(c)(d) 3,694,124 190,463 7.10% Total interest-earning assets 5,287,940 248,296 6.56% Noninterest-earning assets: Cash 82,229 Allowance for credit losses (43,882) Other assets 490,087 Total noninterest-earning assets 528,434 Total Assets $5,816,374 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (e) $594,752 $7,980 1.79% Savings deposits (e) 1,117,308 19,013 2.28% Time deposits 2,112,628 71,250 4.51% Short-term borrowings 302,405 9,623 4.25% Long-term debt 570,439 19,206 4.50% Total interest-bearing liabilities 4,697,532 127,072 3.62% Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (e) 514,242 Other liabilities 31,719 Shareholders' equity 572,881 Total noninterest-bearing funding sources 1,118,842 Total Liabilities and Shareholders' Equity $5,816,374 Net Interest Income and Net Yield on Interest-Earning Assets $121,224 3.35% 2006 Income/ Yield or Average Balance Expense Rate (a) Assets Interest-earning assets: Interest-bearing deposits with banks $1,856 $39 2.80% Tax-free investment securities 281,099 9,664 7.07% Taxable investment securities 1,507,189 53,776 4.77% Federal funds sold 2,157 76 4.73% Loans, net of unearned income (b)(c)(d) 3,677,352 183,376 6.87% Total interest-earning assets 5,469,653 246,931 6.30% Noninterest-earning assets: Cash 78,257 Allowance for credit losses (39,802) Other assets 440,355 Total noninterest-earning assets 478,810 Total Assets $5,948,463 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (e) $578,556 $7,321 1.69% Savings deposits (e) 1,142,829 15,673 1.83% Time deposits 1,818,346 53,826 3.96% Short-term borrowings 610,216 20,324 4.45% Long-term debt 750,005 24,769 4.42% Total interest-bearing liabilities 4,899,952 121,913 3.33% Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (e) 489,219 Other liabilities 29,018 Shareholders' equity 530,274 Total noninterest-bearing funding sources 1,048,511 Total Liabilities and Shareholders' Equity $5,948,463 Net Interest Income and Net Yield on Interest-Earning Assets $125,018 3.32% (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate. (b) Average balance includes loans held for sale in 2006. (c) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (d) Loan income includes loan fees. (e) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes. FIRST COMMONWEALTH FINANCIAL CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA Asset Quality Data (dollars in thousands) For the Nine Months Ended September 30, 2007 2006 Loans on non-accrual basis $50,161 $14,707 Troubled debt restructured loans 150 163 Total nonperforming loans $50,311 $14,870 Loans past due in excess of 90 days and still accruing $13,677 $14,296 Loans outstanding at end of period $3,660,123 $3,818,776 Average loans outstanding (a) $3,694,124 $3,677,352 Allowance for credit losses $43,210 $42,085 Nonperforming loans as a percentage of total loans 1.37% 0.39% Net charge offs $7,128 $6,243 Reduction in allowance for credit losses due to transfer of credit to held for sale $0 $1,387 Net credit losses $7,128 $7,630 Net credit losses as a percentage of average loans outstanding (annualized) 0.26% 0.28% Allowance for credit losses as a percentage of average loans outstanding 1.17% 1.14% Allowance for credit losses as a percentage of nonperforming loans 85.89% 283.02% Other real estate owned $1,803 $1,911 (a) Includes average loans held for sale of $4.4 million in 2006. Profitability Ratios (dollars in thousands) For the Quarter Ended For the Nine Months Ended September 30, September 30, 2007 2006 2007 2006 Return on average assets 0.85% 1.02% 0.80% 0.91% Return on average equity 8.59% 11.29% 8.08% 10.23% Efficiency ratio (FTE) (b) 65.17% 57.27% 66.01% 60.27% Fully tax equivalent adjustment $3,633 $3,724 $11,093 $10,902 (b) Efficiency ratio is "total non-interest expense" as a percentage of total revenue. Total revenue consists of "net interest income, on a fully tax-equivalent basis," plus "total non-interest income."