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FCF > SEC Filings for FCF > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for FIRST COMMONWEALTH FINANCIAL CORP /PA/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FIRST COMMONWEALTH FINANCIAL CORP /PA/


8-May-2013

Quarterly Report


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-months ended March 31, 2013 and 2012, and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q. Forward-Looking Statements
Certain statements contained in this report that are not historical facts may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of words such as "may," "will," "should," "could," "would," "plan," "believe," "expect," "anticipate," "intend," "estimate" or words of similar meaning. These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements:
continued weakness in economic and business conditions, both nationally and in our markets, which could cause deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;

prolonged low interest rates, which could reduce our net interest margin;

increases in defaults by borrowers and other delinquencies, which could result in increases in our provision for credit losses and related expenses;

further declines in the market value of investment securities that are considered to be other-than-temporary, which would negatively impact our earnings and capital levels;

cyber-attacks and fraud, which could disrupt our systems and services, breach the privacy of our customer and business information or result in loss of client assets;

further declines in the valuations of real estate, which could negatively affect the creditworthiness of our borrowers and the value of collateral securing our loans;

the assumptions used in calculating the appropriate amount to be placed into our allowance for credit losses may prove to be inaccurate;

restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals;

legislative and regulatory changes, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;

changes in accounting standards and compliance requirements may have an adverse affect on our operating results and financial condition;

competitive pressures among depository and other financial institutions, some of which may have greater financial resources or more attractive product or service offerings, may adversely affect growth or profitability of our products and services; and

other risks and uncertainties described in this report and in 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. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. Explanation of Use of Non-GAAP Financial Measure In addition to the results of operations presented in accordance with generally accepted accounting principles ("GAAP"), First Commonwealth management uses, and this quarterly report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis. We believe this non-GAAP financial measure provides information useful to investors in understanding our underlying operational performance and our business and performance trends as it facilitates comparison with the performance of others in the financial services industry. Although we believe that this non-GAAP financial measure enhances investors' understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP.


FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

We believe the presentation of net interest income on a fully taxable equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Condensed Consolidated Statements of Income is reconciled to net interest income adjusted to a fully taxable equivalent basis on page 38 for the three-months ended March 31, 2013 and 2012. Results of Operations
Three-Months Ended March 31, 2013 Compared to Three-Months Ended March 31, 2012 Net Income
For the three-months ended March 31, 2013, First Commonwealth had net income of $10.6 million, or $0.11 per share, compared to net income of $11.1 million or $0.11 per share in the three-months ended March 31, 2012. The slight decrease in net income was caused by declines in net interest and noninterest income as well as a slightly higher provision for credit losses all of which were partially offset by reductions in noninterest expense. Net Interest Income
Net interest income, on a fully taxable equivalent basis, was $46.4 million in the first three months of 2013 compared to $49.4 million for the same period in 2012. Net interest income comprises a majority of our operating revenue (net interest income before the provision plus noninterest income) at 75% and 73% for the three-months ended March 31, 2013 and 2012, respectively.
Net interest margin, on a fully taxable equivalent basis, was 3.45% for the three-months ended March 31, 2013 compared to 3.75% for the three-months ended March 31, 2012. Contributing to this 30 basis point decline was the recognition in 2012 of $1.0 million in interest income related to the payoff of a loan that was previously in nonaccrual status. This contributed 8 basis points to the net interest margin for the three months ended March 31, 2012. The net interest margin was also affected by both changes in the level of interest rates and the amount and composition of interest-earning assets and interest-bearing liabilities.

The low interest rate environment and resulting decline in rates earned on interest-earning assets continued to challenge the net interest margin during the three-months ended March 31, 2013. Despite a disciplined approach to pricing which has provided for maintaining the level of new volume spreads, runoff of existing assets which are earning higher interest rates has continued to provide for lower yields on earning assets. Growth in earning assets has helped to offset the impact of runoff, as average earning assets for the three-months ended March 31, 2013 increased $162.1 million, or 3%, compared to the comparable period in 2012. However, approximately one third of the growth in earning assets relates to the investment portfolio, which earns approximately 200 basis points less than if the funds were used to fund the loan portfolio. It is expected that the challenges to the net interest margin will continue as $2.8 billion in interest-sensitive assets either reprice or mature over the next twelve months. The taxable equivalent yield on interest-earning assets was 3.92% for the three-months ended March 31, 2013, a decrease of 47 basis points from the 4.39% yield for the same period in 2012. This decline can be attributed to the repricing of our variable rate assets in a declining rate environment as well as lower interest rates available on new investments and loans. Reductions in the cost of interest-bearing liabilities partially offset the impact of lower yields on interest-earning assets. The cost of interest-bearing liabilities was 0.59% for the three-months ended March 31, 2013, compared to 0.79% for the same period in 2012.
Comparing the three-months ended March 31, 2013 with the same period in 2012, changes in interest rates negatively impacted net interest income by $4.2 million. The lower yield on interest-earning assets adversely impacted net interest income by $6.7 million, while the decline in the cost of interest-bearing liabilities had a positive impact of $2.6 million. We have been able to partially mitigate the impact of lower interest rates and the effect on net interest income through improving the mix of deposit and borrowed funds, disciplined pricing strategies, loan growth and increasing our investment volumes within established interest rate risk management guidelines. As part of these strategies, on April 1, 2013, the Company redeemed $32.5 million in issued and outstanding 9.50% mandatorily redeemable capital securities and $1.1 million in common securities issued by First Commonwealth Capital Trust I and replaced the funds with lower cost funding alternatives.
While decreases in interest rates and yields compressed the net interest margin, increases in average interest-earning assets tempered the effect on net interest income. Changes in the volumes of interest-earning assets and interest-bearing liabilities positively impacted net interest income by $1.2 million in the three-months ended March 31, 2013 compared to the same period in 2012. Higher levels of interest-earning assets resulted in an increase of $1.7 million million in interest income, while volume changes primarily attributed to the mix of deposits increased interest expense by $0.5 million.


FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Positively affecting net interest income was a $99.5 million increase in average net free funds at March 31, 2013 as compared to March 31, 2012. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders' equity over noninterest-earning assets. The largest component of the increase in net free funds was an increase in noninterest-bearing demand deposit average balances as a result of marketing promotions aimed at attracting new and retaining existing customers. Additionally, higher costing time deposits continue to mature and reprice to lower costing certificates or other deposit alternatives. Average time deposits for the three-months ended March 31, 2013 decreased $62.1 million, or 5%, compared to the comparable period in 2012. The positive change in deposit mix is expected to continue as $729.7 million in certificates of deposits either mature or reprice over the next twelve months.

The following table reconciles interest income in the Condensed Consolidated Statements of Income to net interest income adjusted to a fully taxable equivalent basis for the three-months ended March 31,:

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