First Commonwealth Announces Third Quarter 2014 Financial Results; Declares Quarterly Dividend

INDIANA, Pa., Oct. 29, 2014 /PRNewswire/ -- First Commonwealth Financial Corporation (NYSE: FCF) today announced financial results for the third quarter of 2014.

Third Quarter 2014 Highlights

Profitability

• Improvement in return on average assets and return on average equity, stabilization of earnings per share and net interest margin, and improved efficiency compared to the prior quarter.

Franchise Growth

• Solid loan growth of $78.6 million from the prior quarter, or 7.3% on an annualized basis.
• Launch of a new Mortgage division offering purchase and refinance solutions throughout the Western Pennsylvania market area.
• Acquisition of a local insurance agency that expands First Commonwealth's fee-based product lines and provides access to key insurance carriers, which was completed on October 1, 2014.

Expense

• Completion of a core IT systems conversion, with conversion expenses totaling $2.2 million in the third quarter, or $0.02 diluted earnings per share, and a total of $11.8 million over the life of the project.
• First Commonwealth expects to realize expense reductions of $1.5 million to $1.7 million per quarter as a result of the IT systems conversion, of which approximately $0.8 million was recognized during the third quarter of 2014.

"Our ability to deliver solid loan growth and improved operating performance while completing a major IT systems conversion could not have been accomplished without the focused dedication of our employees," noted T. Michael Price, President and Chief Executive Officer.  "With our recent conversion of nearly 40 systems, the third quarter represented the culmination of more than two years of comprehensive planning, training and testing. The technology platform that we now have in place will serve as the foundation for our company's operations for years to come.  It provides a framework for lower costs and better integration, while ensuring scalability as we grow our franchise."

Financial Summary

Financial Results Summary

For the three months ended September 30, 2014, net income was $12.5 million, or $0.13 diluted earnings per share, compared to net income of $11.9 million, or $0.13 diluted earnings per share, in the second quarter of 2014 and net income of $15.9 million, or $0.16 diluted earnings per share, in the third quarter of 2013. The decrease in net income compared to the third quarter of 2013 was driven by a decrease in noninterest income of $2.0 million and increased noninterest expense of $1.5 million when comparing the two quarters, which included $1.1 million of one-time income in the third quarter of 2013 related to the gain on sale of five OREO properties and $2.2 million of non-routine conversion-related expenses in the third quarter of 2014.

For the nine months ended September 30, 2014, net income was $36.7 million, or $0.39 diluted earnings per share, compared to net income of $32.2 million, or $0.33 diluted earnings per share, for the comparable period in 2013.  The increase in net income compared to 2013 was primarily the result of a decrease in provision expense of $9.4 million, offset by a decline of $1.4 million in net interest income. Noninterest expense remained relatively flat despite $7.3 million of non-routine technology conversion-related expenses incurred during the first nine months of 2014.

Net Interest Income and Net Interest Margin

Third quarter 2014 net interest income, on a fully taxable-equivalent basis, increased $1.2 million, or 2.5%, to $47.4 million, as compared to $46.2 million in the second quarter of 2014.  The increase from the prior quarter was primarily the result of a $96.3 million, or 1.7%, increase in average interest-earning assets.  A four basis point decline in the cost of funds more than offset a three basis point decline in the yield on average interest-earning assets. The decline in the cost of funds was due in part to the intentional runoff of $118.1 million in brokered certificates of deposit in favor of lower-cost short-term borrowings and a $26.8 million increase in average noninterest-bearing deposits.  As a result, the net interest margin was 3.26% in the third quarter, unchanged from the prior quarter.

As compared to the third quarter of 2013, net interest income decreased $0.9 million, or 1.8%, primarily the result of $1.0 million of income recognized on other-than-temporarily impaired pooled trust preferred collateralized debt obligations that received payments during the third quarter of 2013. These payments resulted in an eight basis point benefit to the net interest margin in that quarter.  The net interest margin of 3.26% in the third quarter of 2014 was 17 basis points lower than the third quarter of 2013 due to lower replacement loan yields (despite a $185.7 million, or 3.3%, increase in average interest-earning assets) which compressed the net interest margin by an additional 15 basis points compared to the year-ago quarter.  This was partially offset by a six basis point decline in funding costs.

For the nine months ended September 30, 2014, net interest income, on a fully taxable-equivalent basis, decreased $1.4 million to $140.0 million as compared to the same period of 2013 despite a $155.0 million, or 2.8%, increase in average interest-earning assets.  The decrease was primarily the result of the aforementioned $1.0 million of additional income from trust preferred securities in 2013, which resulted in a two basis point benefit to the net interest margin for the nine-month period.  Lower replacement loan yields compressed the margin by an additional 19 basis points compared to the prior-year period, partially offset by an eight basis point decline in funding costs.  The net interest margin for the nine months ended September 30, 2014 was 3.28%, 13 basis points lower than the prior-year period.

Based on average balances, loan growth for the third quarter of 2014 was $88.9 million over the prior quarter and $129.8 million over the year-ago quarter.  While average deposits decreased $178.7 million in the third quarter of 2014 from the prior quarter and $222.1 million from the same quarter a year ago, this decrease was due in part to the aforementioned intentional runoff of $118.1 million and $83.1 million in average brokered certificate of deposit balances over the three and 12-month periods, respectively, in favor of more cost-effective short-term borrowings.  As a result, average short-term borrowings increased $288.7 million and $392.8 million over the three and 12-month periods, respectively.  Furthermore, average noninterest-bearing demand deposits increased $26.8 million and $110.3 million over the prior quarter and the year-ago quarter, respectively.  Noninterest-bearing demand deposits currently comprise 22.5% of total deposits.

Credit Quality

The provision for credit losses totaled $2.1 million for the three months ended September 30, 2014, a decrease of $1.2 million as compared to the prior quarter and $0.6 million from the same quarter last year. For the nine-month period ending September 30, 2014, the provision for credit losses was $8.6 million, a decrease of $9.4 million as compared to the $18.0 million provision in the prior-year period.

At September 30, 2014, nonperforming loans were $45.3 million, a decrease of $1.0 million from June 30, 2014 and $26.0 million from September 30, 2013. Nonperforming loans as a percentage of total loans were 1.03%, 1.07% and 1.68% for the periods ended September 30, 2014, June 30, 2014 and September 30, 2013, respectively.

During the third quarter of 2014, net charge-offs were $2.0 million, compared to $7.1 million in the prior quarter and $5.2 million in the third quarter of 2013. There were no significant individual charge-offs in the third quarter of 2014. Second quarter 2014 charge-offs included $5.8 million for a credit that was sold during the quarter.  A loan loss provision of $4.5 million was set aside for this credit in the first quarter of 2014, with an additional $1.3 million provision in the second quarter of 2014. Third quarter 2013 charge-offs included $2.3 million to a local energy company.  For the nine months ended September 30, 2014, net charge-offs were $12.1 million, or 0.37% of average loans on an annualized basis, compared to $30.2 million, or 0.95% of average loans on an annualized basis, for the same period of 2013.

The allowance for credit losses as a percentage of total loans outstanding was 1.15%, 1.17% and 1.30% for September 30, 2014, June 30, 2014 and September 30, 2013, respectively. General reserves as a percentage of non-impaired loans were 1.06%, 1.04% and 1.12% for September 30, 2014, June 30, 2014 and September 30, 2013, respectively.

OREO acquired through foreclosure was $7.8 million at September 30, 2014 and June 30, 2014 as compared to $9.7 million at September 30, 2013.

Noninterest Income

Noninterest income decreased $2.0 million, or 11.5%, in the third quarter of 2014 as compared to the prior quarter and $2.0 million, or 11.9%, compared to the same quarter last year.  The decrease from prior quarter is primarily the result of lower gain on sale of assets of $1.4 million due to the sale of a large OREO property in the second quarter of 2014 and a $0.8 million decrease in commercial loan swap-related revenues included in other income.   The decrease from the prior-year period is primarily related to lower gain on sale of assets of $0.6 million due to five OREO properties that were sold in the third quarter of 2013, a $0.5 million decrease in commercial loan swap-related revenues and $0.2 million of securities gains in the third quarter of 2013.

For the nine months ended September 30, 2014, noninterest income was relatively flat at $47.0 million as compared to the same period of 2013. Changes in the composition of noninterest income included an increase of $2.4 million in the gain on sale of assets from the sale of an OREO property and the gain from the sale of our registered investment advisory business during 2014, together with increases of $0.6 million in service charges on deposit accounts and $0.4 million in interchange revenue compared to the year-ago period. These increases in noninterest income were offset by decreases in other income of $1.6 million in commercial loan swap-related revenues and decreases in other income of $1.5 million, primarily related to lower investment management income (due to the sale of the aforementioned advisory business) as well as a decrease of $0.2 million in letter of credit fees over the year-ago period.

Noninterest Expense

Noninterest expense decreased $0.8 million, or 2.0%, in the third quarter of 2014 from the prior quarter and increased $1.5 million compared to the third quarter of 2013. The decrease from prior quarter is primarily attributable to reductions of $0.4 million in IT conversion-related costs and $1.2 million in other operating expenses, primarily related to lower write-downs of assets of $0.7 million and a $0.5 million decrease in unfunded loan commitments expense, offset by a $0.3 million increase in salaries and benefits and $0.4 million in professional fees. The increase from the third quarter of 2013 is primarily attributable to $2.2 million of non-routine technology conversion charges, primarily related to accelerated depreciation of software and hardware that was replaced in the third quarter of 2014, and an increase in salaries and benefits of $1.2 million, offset by reductions of $0.5 million in Pennsylvania shares tax expense, $0.3 million in FDIC insurance expense and $1.1 million in other operating expenses primarily relating to $0.4 million in lower write-down of assets and $0.6 million in unfunded loan commitments expense.

Despite $7.3 million in non-routine technology conversion charges and accelerated depreciation for the nine months ended September 30, 2014, noninterest expense increased by only $0.4 million compared to the same period of 2013.  Improvements included $1.4 million in Pennsylvania shares tax expense, $0.3 million in amortization of intangibles, $0.9 million in loan collection costs, $0.3 million in FDIC expense, a $1.6 million charge for the early extinguishment of debt in 2013, a $0.9 million partial insurance recovery for a 2012 external fraud loss and a $0.8 million contingency accrual for client tax reporting in 2013.

Full time equivalent staff was 1,388 and 1,377 for the periods ended September 30, 2014 and 2013, respectively.  The increase is primarily attributable to the recent launch of our mortgage division and overtime relating to our core IT systems conversion.

The efficiency ratio, calculated as total noninterest expense as a percentage of total revenue (which consists of net interest income, on a fully taxable equivalent basis, plus total noninterest income, excluding net impairment losses and net securities gains), was 66.7% and 66.3% for the three and nine months ended September 30, 2014, respectively, as compared to 61.5% and 65.7% for the three and nine months ended September 30, 2013. Without IT conversion expenses of $2.2 million and $7.3 million for the three and nine months ended September 30, 2014, the efficiency ratio would have been 63.1% and 62.4%, respectively.

Dividends and Capital

First Commonwealth Financial Corporation declared a common stock quarterly dividend of $0.07 per share which is payable on November 21, 2014 to shareholders of record as of November 10, 2014. This dividend represents a 3.1% projected annual yield utilizing the October 28, 2014 closing market price of $9.16.

During the third quarter of 2014, First Commonwealth completed a previously announced $25 million common stock repurchase program under which the corporation repurchased 2,924,066 shares at an average price of $8.58 per share.

First Commonwealth's capital ratios for Total, Tier I and Leverage at September 30, 2014 were 12.8%, 11.7% and 9.8%, respectively.

Conference Call

First Commonwealth will host a quarterly conference call to discuss its financial results for the third quarter 2014 on Wednesday, October 29, 2014 at 2:00 PM (ET). The call can be accessed by dialing (toll free) 1-877-353-0037 or through the company's web page, http://ir.fcbanking.com.  A replay of the call will be available approximately two hours following the conclusion of the conference. A link to the call replay will be accessible at this web page for 30 days.

About First Commonwealth Financial Corporation

First Commonwealth Financial Corporation, headquartered in Indiana, Pennsylvania, is a financial services company with $6.4 billion in total assets and 110 banking offices in 15 counties throughout western and central Pennsylvania.  First Commonwealth provides a full range of commercial banking, consumer banking, mortgage, wealth management and insurance products and services through its subsidiaries First Commonwealth Bank and First Commonwealth Insurance Agency.

Forward-Looking Statements

This release contains forward-looking statements about First Commonwealth's future plans, strategies and financial performance.  These statements can be identified by the fact that they do not relate strictly to historical or current facts and 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."  Such statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and may cause actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements.  Global and domestic economies could fail to recover from the recent economic downturn or could experience another severe contraction, which could adversely affect our revenues, increase credit-related costs and reduce the values of our assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Continued stress in the commercial real estate markets, as well as a delay or failure of recovery in the residential real estate markets, could cause additional credit losses and deterioration in asset values. In addition, our business and financial performance is likely to be negatively impacted by effects of recently enacted and future legislation and regulation.  Our results could also be adversely affected by continued deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in our investment securities portfolio; legal and regulatory developments; increased competition from both banks and non-banks; changes in customer behavior and preferences; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management's ability to effectively manage credit risk, market risk, operational risk, compliance and legal risk, interest rate risk, and liquidity risk. Forward-looking statements speak only as of the date on which they are made. First Commonwealth undertakes no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

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